PROSPECTUS SUPPLEMENT
(To Prospectus Dated June 17, 1996)
ASSET-BACKED FIXED RATE AND FLOATING RATE CERTIFICATES, SERIES 1996-3
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
BERKELEY FEDERAL BANK & TRUST FSB
MORTGAGE LOAN SELLER AND MASTER SERVICER
The Series 1996-3 Certificates will consist of six classes of certificates
(collectively, the "Certificates"), designated as (i) the Class A1-1
Certificates, the Class A1-2 Certificates, the Class A1-3 Certificates and the
Class A1-4 Certificates (collectively, the "Group 1 Class A Certificates"), (ii)
the Class A2-1 Certificates (the "Group 2 Class A Certificates"; the Group 1
Class A Certificates and the Group 2 Class A Certificates, together, the "Class
A Certificates") and (iii) the Class R Certificates (the "Residual
Certificates"). The rights of the holders of the Residual Certificates to
receive distributions with respect to the Mortgage Loans will be subordinate to
the rights of the holders of the Class A Certificates to the extent described
herein and in the Prospectus. Only the Class A Certificates are offered hereby.
Distributions on the Class A Certificates will be made on the 25th day of each
month or, if such day is not a business day, on the next succeeding business
day, beginning in July 1996 (each, a "Distribution Date"). As described more
fully herein, interest payable with respect to each Distribution Date will
accrue on the Group 1 Class A Certificates during the calendar month immediately
preceding the month in which such Distribution Date occurs and will accrue on
the Group 2 Class A Certificates during the period commencing on the 25th day of
the month immediately preceding the month in which such Distribution Date occurs
(or, in the case of the first period, commencing on the Closing Date) and ending
on the 24th day of the month in which such Distribution Date occurs. Interest
will be calculated, in the case of the Group 1 Class A Certificates, on the
basis of a 360-day year of twelve 30-day months, and in the case of the Group 2
Class A Certificates, on the basis of a 360-day year and the actual number of
days in the applicable accrual period, and in each case will be based on the
then-outstanding Certificate Principal Balances of the Class A Certificates and
the then-applicable Pass-Through Rates thereon, as reduced by certain interest
shortfalls.
On or before the date of issuance of the Certificates, the Depositor will obtain
from Financial Security Assurance Inc. (the "Insurer") a Financial Guaranty
Insurance Policy (the "Policy"), which will, subject to its terms, protect the
holders of the Class A Certificates against any interest shortfalls (except as
described herein) allocated to the Class A Certificates and the principal
portion of any Realized Losses allocated to the Class A Certificates. See
"Description of the Certificates--Financial Guaranty Insurance Policy" herein.
(COVER CONTINUED ON NEXT PAGE)
-----------------------------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS"
BEGINNING ON PAGE S-18 OF THIS PROSPECTUS SUPPLEMENT.
-----------------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND AND PROCEEDS FROM THE POLICY ARE THE
SOLE SOURCE OF PAYMENTS ON THE CLASS A CERTIFICATES. THE CERTIFICATES DO NOT
REPRESENT AN OBLIGATION OF OR INTEREST IN THE DEPOSITOR, THE MASTER SERVICER,
THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE CERTIFICATES NOR
THE UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================================================================
INITIAL INITIAL
CERTIFICATE CERTIFICATE
RELATED PRINCIPAL PASS-THROUGH RELATED PRINCIPAL PASS-THROUGH
CLASS SUB-POOL BALANCE(1) RATE CLASS SUB-POOL BALANCE(1) RATE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A1-1.......... 1 $24,000,000 6.85% A1-4............ 1 $8,984,887 8.10%
A1-2.......... 1 $13,000,000 7.45% A2-1............ 2 $78,617,040 Variable
A1-3.......... 1 $ 6,700,000 7.80%
</TABLE>
================================================================================
(1) Approximate
The Class A Certificates will be purchased by the Underwriter from the Depositor
and will be offered by the Underwriter from time to time to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Class A
Certificates, before deducting expenses payable by the Depositor, will be 99.95%
of the initial Certificate Principal Balance thereof, plus, in the case of the
Group 1 Class A Certificates, accrued interest thereon from the Cut-off Date.
The Class A Certificates are offered subject to receipt and acceptance by the
Underwriter, to prior sale and to the Underwriter's right to reject any order in
whole or in part and to withdraw, cancel or modify the offer without notice. It
is expected that delivery of the Class A Certificates will be made through the
facilities of The Depository Trust Company on or about June 27, 1996.
SALOMON BROTHERS INC
The date of this Prospectus Supplement is June 25, 1996.
<PAGE>
(COVER CONTINUED)
The Pass-Through Rate on each class of Group 1 Class A Certificates is the fixed
rate per annum set forth on the cover hereof, and the Pass-Through Rate on the
Group 2 Class A Certificates is adjustable and is will be calculated for each
Distribution Date as described herein. The Pass-Through Rate on the Group 2
Class A Certificates will be approximately 5.86% per annum for the first
Distribution Date. Distributions in respect of principal of the Class A
Certificates will be made as described herein under "Description of the
Certificates--Principal Distributions on the Class A Certificates."
It is a condition of the issuance of the Class A Certificates that they be rated
"AAA" by Standard & Poor's Ratings Services ("Standard & Poor's) and "Aaa" by
Moody's Investors Service, Inc. ("Moody's").
The Certificates represent in the aggregate the entire beneficial ownership
interest in a Trust Fund (the "Trust Fund") consisting primarily of a segregated
pool (the "Mortgage Pool") of conventional, one- to four-family, first lien
mortgage loans having original terms to maturity ranging from 15 years to 30
years (the "Mortgage Loans"). The Mortgage Pool consists of two separate
subpools (each a "Sub-Pool"), designated as Sub-Pool 1, which will consist of
fixed-rate Mortgage Loans having an aggregate principal balance as of June 1,
1996 (the "Cut-off Date") of approximately $52,684,887, and Sub-Pool 2, which
will consist of adjustable-rate Mortgage Loans having an aggregate principal
balance as of the Cut-off Date of approximately $78,617,040, in each case
subject to a permitted variance as described herein under "The Mortgage Pool".
Each Mortgage Loan in Sub-Pool 2 provides for semi-annual adjustment to the
mortgage rate thereon (in the case of the majority of such Mortgage Loans, after
an initial period of two years, or in the case of two such Mortgage Loans three
years, from the origination thereof) based on six-month London interbank offered
rates for United States dollar deposits (the "Index") and for corresponding
adjustments to the monthly payment amount due thereon, in each case subject to
the limitations described herein. The Group 1 Class A Certificates will
initially have an aggregate Certificate Principal Balance equal to the aggregate
principal balance as of the Cutoff Date of the Mortgage Loans in Sub-Pool 1, and
the primary source of funds for distribution to the holders of the Group 1 Class
A Certificates will be the Mortgage Loans in Sub-Pool 1. The Group 2 Class A
Certificates will initially have an aggregate Certificate Principal Balance
equal to the aggregate principal balance as of the Cut-off Date of the Mortgage
Loans in Sub-Pool 2, and the primary source of funds for distribution to the
holders of the Group 2 Class A Certificateholders will be the Mortgage Loans in
Sub-Pool 2.
The Class A Certificates initially will be represented by certificates
registered in the name of CEDE & Co., as nominee of The Depository Trust Company
("DTC"). The interests of beneficial owners of the Class A Certificates will be
represented by book entries on the records of participating members of DTC.
Definitive Certificates will be available for the Class A Certificates only
under the limited circumstances described herein. See "Description of the
Certificates--Registration of the Class A Certificates" herein.
THE YIELD TO MATURITY ON THE CLASS A CERTIFICATES WILL BE SENSITIVE TO THE RATE
AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, DEFAULTS AND
REPURCHASES) AND, IN THE CASE OF THE GROUP 2 CLASS A CERTIFICATES, TO
ADJUSTMENTS TO THE MORTGAGE RATES ON THE MORTGAGE LOANS IN SUB-POOL 2. THE
MORTGAGE LOANS GENERALLY MAY BE PREPAID IN FULL OR IN PART AT ANY TIME; HOWEVER,
WITH RESPECT TO A MAJORITY OF THE MORTGAGE LOANS IN EACH SUB-POOL, A PREPAYMENT
MAY SUBJECT THE RELATED MORTGAGOR TO A PREPAYMENT CHARGE. THE YIELD TO INVESTORS
IN THE CLASS A CERTIFICATES MAY BE ADVERSELY AFFECTED BY ANY SHORTFALLS IN
INTEREST COLLECTED ON THE MORTGAGE LOANS DUE TO PREPAYMENTS, LIQUIDATIONS OR
OTHERWISE. SHORTFALLS IN INTEREST COLLECTED ON THE MORTGAGE LOANS DUE TO
PREPAYMENTS WILL BE OFFSET BY THE MASTER SERVICER TO THE EXTENT DESCRIBED
HEREIN. SEE "SUMMARY OF THE PROSPECTUS SUPPLEMENT--SPECIAL PREPAYMENT
CONSIDERATIONS" AND "--SPECIAL YIELD CONSIDERATIONS" AND "YIELD ON THE
CERTIFICATES" HEREIN.
There is currently no secondary market for the Class A Certificates and there
can be no assurance that a secondary market for the Class A Certificates will
develop. Salomon Brothers Inc (the "Underwriter") intends to establish a market
in the Class A Certificates, but is not obligated to do so. There is no
assurance that any such market, if established, will continue. See "Secondary
Market" herein.
An election will be made to treat the Trust Fund as a "real estate mortgage
investment conduit" ("REMIC") for federal income tax purposes. As described more
fully herein and in the Prospectus, the Class A Certificates will be the
"regular interests" in the REMIC and the Residual Certificates will be the sole
class of "residual interests" in the REMIC. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
As provided herein under "The Insurer--Incorporation of Certain Documents by
Reference", the Depositor will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon oral or written request of such person,
a copy of any or all financial statements incorporated herein by reference.
Requests for such copies should be directed as provided under "The
Insurer--Incorporation of Certain Documents by Reference" herein.
-----------------------------
THE CLASS A CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT WILL CONSTITUTE A
PORTION OF A SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE DEPOSITOR
PURSUANT TO ITS PROSPECTUS DATED JUNE 17, 1996, OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND
THIS PROSPECTUS SUPPLEMENT IN FULL.
S-2
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used but not defined herein shall have the meanings assigned
thereto in the Prospectus. An Index of Principal Definitions is included at the
end of the Prospectus.
Title of Series..................... Asset-Backed Fixed and Floating Rate
Certificates, Series 1996-3, (the
"Certificates").
The Certificates represent in the aggregate
the entire beneficial ownership interest in
a Trust Fund (the "Trust Fund") consisting
primarily of a segregated pool (the
"Mortgage Pool") of conventional one- to
four-family, first lien mortgage loans (the
"Mortgage Loans"). The Mortgage Pool
consists of two separate sub-pools (each a
"Sub-Pool"), designated as Sub-Pool 1,
which will consist of fixed-rate Mortgage
Loans having an aggregate principal balance
as of June 1, 1996 (the "Cut-off Date") of
approximately $52,684,887, and Sub-Pool 2,
which will consist of adjustable-rate
Mortgage Loans having an aggregate
principal balance as of the Cut-off Date of
approximately $78,617,040, in each case
subject to a permitted variance as
described herein under "The Mortgage Pool".
The Certificates will consist of six
classes of certificates, designated as (i)
the Class A1-1 Certificates, the Class A1-2
Certificates, the Class A1-3 Certificates
and the Class A1-4 Certificates
(collectively, the "Group 1 Class A
Certificates"), (ii) the Class A2-1
Certificates (the "Group 2 Class A
Certificates"; the Group 1 Class A
Certificates and the Group 2 Class A
Certificates, together, the "Class A
Certificates") and (iii) the Class R
Certificates (the "Residual Certificates").
Only the Class A Certificates are offered
hereby. The Certificates will be issued
pursuant to a Pooling and Servicing
Agreement, to be dated as of June 1, 1996
(the "Agreement"), among the Depositor, the
Master Servicer and the Trustee.
Offered Certificates................ The Class A Certificates will have an
approximate aggregate initial Certificate
Principal Balance of approximately
$131,301,927. The Pass-Through Rate on each
class of Group 1 Class A Certificates is
the fixed rate per annum set forth on the
cover hereof. The Pass- Through Rate on the
Group 2 Class A Certificates is adjustable
and is calculated as described under
"--Pass- Through Rate" herein. The Class A
Certificates in the aggregate initially
evidence an interest of 100% in the
principal of the Trust Fund. The Group 1
Class A Certificates will initially have an
aggregate Certificate Principal Balance
equal to the aggregate principal balance of
the Mortgage Loans in Sub-Pool 1 as of the
S-3
<PAGE>
Cut-off Date, and the primary source of
funds for distribution to the holders of
the Group 1 Class A Certificates will be
the Mortgage Loans in Sub-Pool 1, as
further described herein. The Group 2 Class
A Certificates will initially have an
aggregate Certificate Principal Balance
equal to the aggregate principal balance of
the Mortgage Loans in Sub-Pool 2 as of the
Cut-off Date, and the primary source of
funds for distribution to the holders of
the Group 2 Class A Certificateholders will
be the Mortgage Loans in Sub-Pool 2, as
further described herein.
Cut-off Date........................ June 1, 1996.
Closing Date........................ On or about June 27, 1996.
Residual Certificates............... The Certificate Principal Balance of the
Residual Certificates will initially be
zero but will be subject to increase as
described herein. The Residual Certificates
will not have a Pass-Through Rate. The
Residual Certificates are not being offered
hereby.
Depositor of Mortgage Loans......... Salomon Brothers Mortgage Securities VII,
Inc., an indirect wholly-owned subsidiary
of Salomon Inc and an affiliate of Salomon
Brothers Inc. See "The Depositor" in the
Prospectus.
Mortgage Loan Seller and Master
Servicer......................... Berkeley Federal Bank & Trust FSB, a
federally chartered savings bank. See "The
Mortgage Pool--Underwriting Standards;
Representations" and "Pooling and Servicing
Agreement--The Mortgage Loan Seller and
Master Servicer" herein.
Trustee............................. The Bank of New York, a New York banking
corporation. See "Pooling and Servicing
Agreement-The Trustee" herein.
The Mortgage Pool
General.......................... The Mortgage Pool will consist of
approximately 1,219 conventional, one- to
four-family, fixed-rate and adjustable-rate
Mortgage Loans secured by first liens on
residential real properties (the "Mortgaged
Properties"). The Mortgage Loans have
original terms to maturity ranging from 15
years to 30 years. The Mortgage Pool
consists of Sub-Pool 1 and Sub-Pool 2, each
as described below.
WITH RESPECT TO THE GROUP 1 CLASS A
CERTIFICATES, SUB- POOL 1 IS SOMETIMES
REFERRED TO HEREIN AS THE RELATED SUB-POOL
AND THE MORTGAGE LOANS IN SUCH SUB-POOL ARE
SOMETIMES REFERRED TO AS THE RELATED
MORTGAGE LOANS. WITH RESPECT TO THE GROUP 2
CLASS A CERTIFICATES, SUB- POOL 2 IS
SOMETIMES REFERRED TO HEREIN AS THE RELATED
SUB-POOL AND THE MORTGAGE LOANS IN SUCH
SUB-POOL ARE SOMETIMES REFERRED TO AS THE
RELATED MORTGAGE LOANS. ALL
S-4
<PAGE>
PERCENTAGES UNLESS OTHERWISE NOTED ARE
CALCULATED BASED ON THE AGGREGATE PRINCIPAL
BALANCE OF THE MORTGAGE LOANS IN THE
RELATED SUB-POOL AS OF THE CUT-OFF DATE.
Sub-Pool 1....................... Sub-Pool 1 consists of approximately 574
fixed-rate Mortgage Loans having an
aggregate principal balance as of the
Cut-off Date, after application of
scheduled payments due whether or not
received, of approximately $52,684,887,
subject to a permitted variance of plus or
minus 5%. The Mortgage Loans in Sub-Pool 1
have annualized rates at which such
Mortgage Loans bear interest ("Mortgage
Rates") that are fixed and range from
7.990% per annum to 16.250% per annum, with
a weighted average Mortgage Rate as of the
Cut-off Date of approximately 10.7388% per
annum. As of the Cut-off Date, the Mortgage
Loans in Sub-Pool 1 will have a weighted
average remaining term to maturity of
approximately 27 years and 4 months.
Approximately 8.60% of the Mortgage Loans
in Sub-Pool 1 are Buydown Mortgage Loans.
Approximately 11.22% of the Mortgage Loans
in Sub-Pool 1 are balloon payment mortgage
loans (each, a "Balloon Mortgage Loan").
See "The Mortgage Pool herein.
Sub-Pool 2....................... Sub-Pool 2 consists of approximately 645
adjustable-rate Mortgage Loans having an
aggregate principal balance as of the
Cut-off Date, after application of
scheduled payments due whether or not
received, of approximately $78,617,040,
subject to a permitted variance of plus or
minus 5%. Each Mortgage Loan in Sub-Pool 2
provides for semi-annual adjustment to the
Mortgage Rate thereon and for corresponding
adjustments to the monthly payment amount
due thereon, in each case on each
adjustment date applicable thereto (each
such date, an "Adjustment Date"); provided,
however, that in the case of approximately
80.58% of the Mortgage Loans in Sub- Pool 2
(each a "Delayed First Adjustment Mortgage
Loan"), the first Adjustment Date for each
such Mortgage Loan will occur after an
initial period of two years, or in the case
or two such Mortgage Loans three years,
from the origination thereof. On each
Adjustment Date for each Mortgage Loan in
Sub-Pool 2, the Mortgage Rate thereon will
be adjusted to equal the sum, rounded to
the nearest multiple of 0.125%, of the
Index (as described below) and a fixed
percentage amount (the "Gross Margin"),
subject to periodic and lifetime
limitations as described herein. See "The
Mortgage Pool" herein. None of the Mortgage
Loans in Sub-Pool 2 permits the related
mortgagor to convert the adjustable
Mortgage Rate thereon to a fixed Mortgage
Rate.
S-5
<PAGE>
As of the Cut-off Date, the Mortgage Loans
in Sub-Pool 2 have Mortgage Rates ranging
from 5.750% per annum to
13.990% per annum, a weighted average
Mortgage Rate of approximately 10.2468% per
annum, a weighted average next Adjustment
Date in November 1997, Gross Margins
ranging from 3.000% to 8.250% and a
weighted average Gross Margin of
approximately 6.2831%. As of the Cut-off
Date, the Mortgage Loans in Sub-Pool 2 will
have a weighted average remaining term to
maturity of approximately 29 years and 7
months.
None of the Mortgage Loans in Sub-Pool 2
are Buydown Mortgage Loans. Approximately
0.43% of the Mortgage Loans in Sub-Pool 2
are Balloon Mortgage Loans. See "The
Mortgage Pool herein.
The Index........................... As of any Adjustment Date, the Index
applicable to the determination of the
Mortgage Rate on each Mortgage Loan in
Sub-Pool 2 will be the average of the
interbank offered rates for six-month
United States dollar deposits in the London
market as published in THE WALL STREET
JOURNAL and as most recently available
either (i) as of the first business day 45
days prior to such Adjustment Date or (ii)
as of the first business day of the month
preceding the month of such Adjustment
Date, as specified in the related Mortgage
Note. See "The Mortgage Pool-The Index"
herein.
Registration; Denomination.......... The Class A Certificates will each
initially be represented by one or more
global certificates registered in the name
of CEDE & Co., as nominee of The Depository
Trust Company ("DTC") in minimum
denominations of $1,000 and integral
multiples of $1.00 in excess thereof. No
person acquiring an interest in the Class A
Certificates (a "Certificate Owner") will
be entitled to receive a Class A
Certificate in fully registered,
certificated form (a "Definitive
Certificate"), except under the limited
circumstances described herein. See
"Description of the
Certificates--Definitive Certificates"
herein. Instead, DTC will effect payments
and transfers by means of its electronic
recordkeeping services, acting through
certain participating organizations
("Participants"). This may result in
certain delays in receipt of distributions
by an investor and may restrict an
investor's ability to pledge its
securities. All references herein to
Certificateholders of the Class A
Certificates will reflect the rights of
Certificate Owners, as such rights may be
exercised through DTC and its Participants,
except as otherwise specified herein. See
"Description of the
Certificates--Registration of the Class A
Certificates" herein.
S-6
<PAGE>
Pass-Through Rate................... The Pass-Through Rate on each class of
Group 1 Class A Certificates for each
Distribution Date is the fixed rate per
annum set forth on the cover hereof.
The Pass-Through Rate on the Group 2 Class
A Certificates on each Distribution Date
after the first Distribution Date will be a
rate per annum equal to the lesser of (i)
One-Month LIBOR (as defined herein) plus
0.38%, in the case of each Distribution
Date through and including the Distribution
Date on which the aggregate Stated
Principal Balance (as defined herein) of
the Mortgage Loans is reduced to 10% or
less of the aggregate Stated Principal
Balance of the Mortgage Loans as of the
Cut-off Date, or One-Month LIBOR plus 1.38%
per annum, in the case of any Distribution
Date thereafter and (ii) the Sub-Pool 2
Available Funds Pass-Through Rate for such
Distribution Date. For the first
Distribution Date, the Pass-Through Rate on
the Group 2 Class A Certificates will be
approximately 5.86% per annum.
The "Sub-Pool 2 Available Funds
Pass-Through Rate" for any Distribution
Date is a rate per annum equal to the
lesser of (x) the fraction, expressed as a
percentage, the numerator of which is (i)
an amount equal to (A) 1/12 of the
aggregate Scheduled Principal Balance of
the then outstanding Mortgage Loans in
Sub-Pool 2 times the weighted average of
the Expense Adjusted Mortgage Rates on the
then outstanding Mortgage Loans in Sub-
Pool 2 minus (B) the amount of the premium
with respect to the Group 2 Class A
Certificates payable to the Insurer with
respect to the Policy for such Distribution
Date, and the denominator of which is (ii)
an amount equal to (A) the then outstanding
aggregate Certificate Principal Balance of
the Group 2 Class A Certificates multiplied
by (B) the actual number of days elapsed in
the related Interest Accrual Period (as
defined herein) divided by 360 and (y) the
Maximum Group 2 Class A Pass-Through Rate.
The "Expense Adjusted Mortgage Rate" on any
Mortgage Loan in Sub-Pool 2 is equal to the
then applicable Mortgage Rate thereon minus
the sum of (i) the Minimum Spread, (ii) the
Trustee Fee Rate and (iii) the Servicing
Fee Rate. For any Distribution Date, the
Minimum Spread is equal to 0.50% per annum,
the Trustee Fee Rate is equal to 0.00625%
per annum and the Servicing Fee Rate is
equal to 0.50% per annum. See "Pooling and
Servicing Agreement--The Trustee" and
"--Servicing and Other Compensation and
Payment of Expenses" herein. The amount of
the premium payable to the Insurer with
respect to the Policy for any Distribution
Date is described
S-7
<PAGE>
under "Pooling and Servicing
Agreement--Certain Matters Regarding the
Insurer" herein.
As further described herein, with respect
to the Group 2 Class A Certificates and any
Distribution Date, to the extent that (a)
the lesser of (x) the amount payable if
clause (i) of the related definition of
Pass-Through Rate above is used to
calculate interest and (y) the amount
payable if the Maximum Group 2 Class A
Pass-Through Rate is used to calculate
interest exceeds (b) the amount payable if
clause (ii) of the related definition of
Pass- Through Rate above is used to
calculate interest (the "Basis Risk
Shortfall"), the holders of the Group 2
Class A Certificates will be entitled to
the amount of such Basis Risk Shortfall
with interest thereon at the Pass-Through
Rate for such Certificates applicable from
time to time after certain distributions to
the holders of the Class A Certificates and
the Insurer but before the Residual
Certificates are entitled to any
distributions. The "Unpaid Basis Risk
Shortfall" for the Group 2 Class A
Certificates and any Distribution Date is
equal to the aggregate of all Basis Risk
Shortfalls for any previous Distribution
Dates less all payments made to the holders
of the Group 2 Class A Certificates in
respect of such Basis Risk Shortfalls on or
prior to such Distribution Date. The Policy
will not cover Basis Risk Shortfalls or
Unpaid Basis Risk Shortfalls. See
"Description of the
Certificates--Overcollateralization
Provisions" and "--Financial Guaranty
Insurance Policy" herein.
The "Maximum Group 2 Class A Pass-Through
Rate" for any Distribution Date is a per
annum rate equal to the fraction, expressed
as a percentage, the numerator of which is
(i) an amount equal to (A) 1/12 of the
aggregate Scheduled Principal Balance of
the then outstanding Mortgage Loans in
Sub-Pool 2 times the weighted average of
the Expense Adjusted Maximum Mortgage Rates
on the then outstanding Mortgage Loans in
Sub- Pool 2 minus (B) the amount of the
premium with respect to the Group 2 Class A
Certificates payable to the Insurer with
respect to the Policy for such Distribution
Date, and the denominator of which is (ii)
an amount equal to (A) the aggregate
Scheduled Principal Balance of the then
outstanding Mortgage Loans in Sub-Pool 2
multiplied by (B) the actual number of days
elapsed in the related Interest Accrual
Period divided by 360.
The "Expense Adjusted Maximum Mortgage
Rate" on any Mortgage Loan in Sub-Pool 2 is
equal to the Maximum Mortgage Rate (as
defined herein) thereon minus the sum of
(i) the Minimum Spread, (ii) the Trustee
Fee Rate and (iii) the Servicing Fee Rate.
S-8
<PAGE>
Distributions--General...............The Due Period with respect to any
Distribution Date commences on the second
day of the month immediately preceding the
month in which such Distribution Date
occurs and ends on the first day of the
month in which such Distribution Date
occurs. The Prepayment Period with respect
to any Distribution Date is the calendar
month immediately preceding the month in
which such Distribution Date occurs. The
Determination Date with respect to any
Distribution Date is on the 15th day of the
month in which such Distribution Date
occurs or, if such day is not a business
day, then on the immediately preceding
business day. The Interest Accrual Period
for any Distribution Date and the Group 1
Class A Certificates is the calendar month
immediately preceding the month in which
such Distribution Date occurs, and all
distributions of interest on the Group 1
Class A Certificates will be based on a
360-day year consisting of twelve 30-day
months. The Interest Accrual Period for any
Distribution Date and the Group 2 Class A
Certificates is the period commencing on
the 25th day of the month immediately
preceding the month in which such
Distribution Date occurs (or, in the case
of the first period, commencing on the
Closing Date) and ending on the 24th day of
the month in which such Distribution Date
occurs, and all distributions of interest
on the Group 2 Class A Certificates will be
based on a 360-day year and the actual
number of days in the applicable Interest
Accrual Period. See "Description of the
Certificates" herein.
Interest Distributions.............. On each Distribution Date, holders of the
Class A Certificates of each class will be
entitled to receive interest distributions
(with respect to each such class, the
"Interest Distribution Amount") in an
amount equal to interest accrued during the
related Interest Accrual Period on the
Certificate Principal Balance thereof at
the then- applicable Pass-Through Rate,
subject to reduction only in the event of
shortfalls caused by the Relief Act (as
defined herein) and any Prepayment Interest
Shortfalls (as defined herein) to the
extent not covered by the Master Servicer,
allocated as described herein.
Notwithstanding the foregoing, if payments
were not made as required under the Policy,
additional interest shortfalls may be
allocated to the Class A Certificates, as
described herein. See "Description of the
Certificates--Interest Distributions"
herein.
Principal Distributions............. Holders of the Class A Certificates will be
entitled to receive on each Distribution
Date an amount equal to the Group 1 Class A
Principal Distribution Amount or Group 2
Class A Principal Distribution Amount, as
applicable (each as defined herein). The
Group 1 Class A Principal
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Distribution Amount and Group 2 Class A
Principal Distribution Amount,
respectively, will include, to the extent
of available funds from the related
Sub-Pool and except as otherwise described
herein, the principal portion of all
scheduled monthly payments due on the
Mortgage Loans in the related Sub-Pool to
the extent received or advanced during the
related Due Period, all unscheduled amounts
received in respect of the Mortgage Loans
in the related Sub-Pool during the related
Prepayment Period that are allocable to
principal (including proceeds of
repurchases, prepayments, liquidations and
insurance (excluding payments made under
the Policy) and shortfalls relating to
substitution) and certain other amounts
described herein allocable to Realized
Losses on the Mortgage Loans in the related
Sub-Pool, and will be adjusted as a result
of the related required level of
subordination, all as described herein.
In addition, on each Distribution Date,
funds received as a result of a claim under
the Policy in respect of the principal
portion of Realized Losses allocated to the
Class A Certificates will be distributed by
or on behalf of the Trustee to the holders
of the related Class A Certificates. See
"Description of the Certificates--Financial
Guaranty Insurance Policy" herein.
Except in the limited circumstances
described herein, all amounts distributed
in respect of principal on the Group 1
Class A Certificates will be paid first to
the holders of the Class A1-1 Certificates,
second to the holders of the Class A1-2
Certificates, third to the holders of the
Class A1-3 Certificates and fourth to the
holders of the Class A1-4 Certificates, in
each case in reduction of the Certificate
Principal Balance of such class and in each
case until the Certificate Principal
Balance of such class has been reduced to
zero.
The Certificate Principal Balance of a
Class A Certificate as of any date of
determination is equal to the initial
Certificate Principal Balance thereof,
reduced by the aggregate of (a) all amounts
allocable to principal previously
distributed with respect to such
Certificate and (b) any reductions in the
Certificate Principal Balance thereof
deemed to have occurred in connection with
allocations of Realized Losses in the
manner described herein. The Certificate
Principal Balance of the Residual
Certificates in the aggregate as of any
date of determination is equal to the
excess, if any, of (a) the then aggregate
Stated Principal Balance of the Mortgage
Loans over (b) the then aggregate
Certificate Principal Balance of the Class
A Certificates.
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<PAGE>
The subordination and cash flow provisions
of the Residual Certificates will, to the
extent of available funds, result in a
limited acceleration of the principal
payments to the holders of the Class A
Certificates to the extent the amount of
overcollateralization provided by the
related Sub-Pool is less than the then
current related required amount. As of the
Closing Date, the aggregate Certificate
Principal Balance of the Group 1 Class A
Certificates will equal the aggregate
principal balance as of the Cut-off Date of
the Mortgage Loans in Sub-Pool 1 and the
aggregate Certificate Principal Balance of
the Group 2 Class A Certificates will equal
the aggregate principal balance as of the
Cut-off Date of the Mortgage Loans in
Sub-Pool 2, and therefore as of the Closing
Date, the amount of overcollateralization
provided by either Sub- Pool will be zero,
which is less than the required levels. The
subordination provisions are more fully
described under "--Credit Enhancement"
below and "Description of the
Certificates--Overcollateralization
Provisions" herein. Such subordination
provisions may have the effect of
shortening the weighted average life of the
Group 1 Class A Certificates or Group 2
Class A Certificates by increasing the rate
at which principal is distributed to the
related Certificateholders.
Credit Enhancement.................. The Credit Enhancement provided for the
benefit of the Class A Certificateholders
consists of the overcollateralization and
the Policy, each as described below and
herein.
OVERCOLLATERALIZATION: As described
above, as of the Closing Date, the
aggregate Certificate Principal Balance
of the Group 1 Class A Certificates will
equal the aggregate principal balance as
of the Cut-off Date of the Mortgage
Loans in Sub-Pool 1, and the aggregate
Certificate Principal Balance of the
Group 2 Class A Certificates will equal
the aggregate principal balance as of
the Cut-off Date of the Mortgage Loans
in Sub-Pool 2, and therefore as of the
Closing Date, the amount of
overcollateralization provided by either
Sub- Pool will be zero. However, the
required level of overcollateralization
for Sub-Pool 1 is a level at which the
principal balance of the Mortgage Loans
in Sub- Pool 1 would exceed the
aggregate Certificate Principal Balance
of the Group 1 Class A Certificates by
an amount equal to approximately 2.00%
of the aggregate Stated Principal
Balance of such Mortgage Loans as of the
Cut-off Date, and for Sub-Pool 2 is a
level at which the principal balance of
the Mortgage Loans in Sub- Pool 2 would
exceed the aggregate Certificate
Principal Balance of the Group 2 Class A
Certificates by an amount equal to
approximately 2.75% of the aggregate
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<PAGE>
Stated Principal Balance of the such
Mortgage Loans as of the Cut-off Date.
Until the actual level of
overcollateralization for each Sub-Pool
increases to the required level for such
Sub-Pool, to the extent of available funds,
a temporary period of accelerated
amortization of the Class A Certificates
relating to each such Sub-Pool will occur.
The Agreement provides that, subject to
certain trigger tests set forth therein,
the required level of overcollateralization
for either Sub-Pool may increase or
decrease over time. An increase would
result in a further temporary period of
accelerated amortization of the related
Class A Certificates to increase the actual
level of overcollateralization to its
increased required level; a decrease would
result in a temporary period of decelerated
amortization of the related Class A
Certificates to achieve an actual level of
overcollateralization equal to its
decreased required level. See "Description
of the Certificates--Overcollateralization
Provisions" herein.
THE FINANCIAL GUARANTY INSURANCE POLICY:
The Class A Certificates will be
entitled to the benefit of a certificate
guaranty insurance policy (the "Policy")
to be issued by Financial Security
Assurance Inc. (the "Insurer"),
discussed more fully under "--Financial
Guaranty Insurance Policy" below. See
also "Description of the Certificates"
herein.
Financial Guaranty Insurance
Policy............................ The Insurer will issue the Policy as a
means of providing additional credit
enhancement to the Class A Certificates.
Under the Policy, the Insurer will
irrevocably and unconditionally guarantee
payment to the Trustee, for the benefit of
the holders of the Class A Certificates, on
each Distribution Date, as further
described herein, of an amount that will
cover any interest shortfalls (except for
shortfalls in respect of the Relief Act,
Prepayment Interest Shortfalls, Basis Risk
Shortfalls and Unpaid Basis Risk
Shortfalls) allocated to any class of Class
A Certificates plus the principal portion
of any Realized Losses allocated to any
class of Class A Certificates. A payment by
the Insurer under the Policy is referred to
herein as an "Insured Payment." The Policy
does not guarantee the holders of the Class
A Certificates any specified rate of
principal payments. See "Description of the
Certificates--Financial Guaranty Insurance
Policy" herein.
Allocation of Losses;
Subordination..................... Except as otherwise described herein,
Realized Losses on the Mortgage Loans in
either Sub-Pool will be
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allocated first to the Net Monthly Excess
Cashflow (as defined herein), second to the
Residual Certificates until the Certificate
Principal Balance thereof has been reduced
to zero and third to the related Class A
Certificates, in each case to the extent
described in "Description of the
Certificates--Allocation of Losses;
Subordination" herein. Any Realized Losses
so allocated to the Group 1 Class A
Certificates will be allocated among the
classes of Group 1 Class A Certificates on
a PRO RATA basis. Subject to the terms of
the Policy, all Realized Losses allocated
to the Class A Certificates of any class
will be covered by the Policy. See
"Description of the Certificates--Financial
Insurance Policy" herein.
Neither the Class A Certificates nor the
Mortgage Loans are insured or guaranteed by
any governmental agency or instrumentality
or by the Depositor, the Master Servicer,
the Trustee or any of their respective
affiliates.
P&I Advances........................ The Master Servicer is required to make
advances in respect of delinquent payments
of principal and interest on the Mortgage
Loans, subject to the limitations described
herein. As further described herein, the
credit enhancement will provide protection
to the holders of the Class A Certificates
against any shortfalls resulting from
delinquencies as to which a P&I Advance is
not made or is determined to be
non-recoverable. See "Description of the
Certificates--P&I Advances" herein and
"Description of the Certificates--Advances
in respect of Delinquencies" in the
Prospectus.
Record Date......................... The Record Date for each Distribution Date
will be the close of business on the last
business day of the month preceding the
month in which such Distribution Date
occurs. See "Description of the
Certificates--General" herein.
Optional Termination................ At its option, the majority holder of the
Residual Certificates (or if such holder
does not exercise such option, the Master
Servicer or the Insurer) may purchase all
of the Mortgage Loans, together with any
properties in respect thereof acquired by
the Trustee, and thereby effect termination
and early retirement of the Certificates,
on any Distribution Date on which the
aggregate principal balance of the Mortgage
Loans and such properties remaining is 10%
or less of the aggregate principal balance
of the Mortgage Loans as of the Cut-off
Date. See "Pooling and Servicing
Agreement--Termination" herein and
"Description of the
Certificates--Termination" in the
Prospectus.
Special Prepayment
Considerations.................... The rate and timing of distributions
allocable to principal on the Class A
Certificates will depend, in general, on
the
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rate and timing of principal payments
(including prepayments and collections upon
defaults, liquidations and repurchases) on
the Mortgage Loans in the related Sub-Pool
and the allocation thereof to pay principal
on the Class A Certificates as provided
herein. As is the case with mortgage
pass-through certificates generally, the
Class A Certificates are subject to
substantial inherent cash-flow
uncertainties because the related Mortgage
Loans may be prepaid at any time; however,
with respect to a majority of the Mortgage
Loans in each Sub-Pool, a prepayment may
subject the related mortgagor to a
prepayment charge. See "The Mortgage Pool"
herein.
Generally, when prevailing interest rates
are increasing, prepayment rates on
mortgage loans tend to decrease; a decrease
in the prepayment rates on the Mortgage
Loans in either Sub-Pool will result in a
reduced rate of return of principal to
investors in the related Class A
Certificates at a time when reinvestment at
such higher prevailing rates would be
desirable. Conversely, when prevailing
interest rates are declining, prepayment
rates on mortgage loans tend to increase;
an increase in the prepayment rates on the
Mortgage Loans in either Sub-Pool will
result in a greater rate of return of
principal to investors in the related Class
A Certificates at a time when reinvestment
at comparable yields may not be possible.
The multiple class structure of the Group 1
Class A Certificates causes the yield of
certain classes to be particularly
sensitive to changes in the rates of
prepayment of the related Mortgage Loans,
as follows:
SEQUENTIALLY PAYING CLASSES. Because
distributions of principal will be made
to the holders of the classes of Group 1
Class A Certificates according to the
priorities described herein, the timing
of commencement of principal
distributions and the weighted average
life of each class of Group 1 Class A
Certificates will be affected by the
rates of prepayment on the Mortgage
Loans in Sub-Pool 1 experienced both
before and after the commencement of
principal distributions on such class.
Special Yield Considerations........ The yield to maturity on the Class A
Certificates will depend, in general, on
(i) the applicable Pass-Through Rates
thereon, (ii) the applicable purchase price
and (iii) the rate and timing of principal
payments (including payments by the
Insurer, prepayments and collections upon
defaults, liquidations and repurchases) on
the Mortgage Loans in the related Sub-Pool
and the allocation thereof to reduce the
Certificate Principal Balance of such
Certificates, as well as other factors.
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<PAGE>
The yield to investors in the Class A
Certificates will be adversely affected by
any allocation thereto of any interest
shortfalls not covered by the Insurer.
In general, if the Class A Certificates are
purchased at a premium and principal
distributions thereon occur at a rate
faster than anticipated at the time of
purchase, the investor's actual yield to
maturity will be lower than that assumed at
the time of purchase. Conversely, if the
Class A Certificates are purchased at a
discount and principal
distributions thereon occur at a rate
slower than that assumed at the time of
purchase, the investor's actual yield to
maturity will be lower than that originally
anticipated.
The proceeds to the Depositor from the sale
of the Class A Certificates were determined
based on a number of assumptions, including
a prepayment assumption of 100% of the
Prepayment Vector (as defined herein), in
the case of the Mortgage Loans in Sub-Pool
1, or 20% CPR (as defined herein), in the
case of the Mortgage Loans in Sub-Pool 2,
and weighted average lives corresponding
thereto. No representation is made that the
Mortgage Loans will prepay at either such
rate or at any other rate, or that the
Mortgage Loans in each Sub-Pool will prepay
at the same rate. The yield assumptions for
the Class A Certificates will vary as
determined at the time of sale.
In addition, with respect to the Group 1
Class A Certificates as described above,
because distributions of principal will be
made to the holders of the classes of Group
1 Class A Certificates according to the
priorities described herein, the timing of
commencement of principal distributions and
the weighted average life of each class of
Group 1 Class A Certificates will be
affected by the rates of prepayment on the
Mortgage Loans in Sub-Pool 1 experienced
both before and after the commencement of
principal distributions on such class. See
"Yield on the Certificates" herein.
Certain Federal Income Tax
Consequences...................... A real estate mortgage investment conduit
("REMIC") election will be made with
respect to the Trust Fund for federal
income tax purposes. Upon the issuance of
the Certificates, Thacher Proffitt & Wood,
counsel to the Depositor, will deliver its
opinion generally to the effect that,
assuming compliance with all provisions of
the Agreement, for federal income tax
purposes, the Trust Fund will qualify as a
REMIC under Sections 860A through 860G of
the Internal Revenue Code of 1986 (the
"Code").
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<PAGE>
For federal income tax purposes, (i) the
Residual Certificates will be the sole
class of "residual interests" in the REMIC
and (ii) the Class A Certificates will be
"regular interests" in, and generally will
be treated as debt instruments of, the
REMIC.
The Class A Certificates will be treated as
"qualifying real property loans" under
Section 593(d) of the Code, assets
described in Section 7701(a)(19)(C) of the
Code and "real estate assets, under Section
856(c)(5)(A) of the Code, generally in the
same proportion that the assets in the
Trust Fund would be so treated. In
addition, interest on
the Class A Certificates will be treated as
"interest on obligations secured by
mortgages on real property" under Section
856(c)(3)(B) of the Code generally to the
extent that the Class A Certificates are
treated as "real estate assets" under
Section 856(c)(5)(A) of the Code. The Class
A Certificates also will be treated as
"qualified mortgages" under Section
860G(a)(3) of the Code. See "Certain
Federal Income Tax
Consequences--Characterization of
Investments in REMIC Certificates" in the
Prospectus.
For federal income tax reporting purposes,
the Class A Certificates will not be
treated as having been issued with original
issue discount. The Class A Certificates
may be treated for federal income tax
purposes as having been issued at a
premium. The prepayment assumption that
will be used in determining the rate of
accrual of original issue discount, premium
and market discount, if any, for federal
income tax purposes is 100% of the
Prepayment Vector, in the case of the
Mortgage Loans in Sub-Pool 1, or 20% CPR,
in the case of the Mortgage Loans in Sub-
Pool 2. No representation is made that the
Mortgage Loans will prepay at that rate or
at any other rate. See "Yield on the
Certificates" herein.
For further information regarding the
federal income tax consequences of
investing in the Class A Certificates, see
"Certain Federal Income Tax Consequences"
herein and in the Prospectus.
Ratings............................. It is a condition to the issuance of the
Certificates that the Class A Certificates
be rated "AAA" by Standard & Poor's and
"Aaa" by Moody's. The ratings on the Class
A Certificates are based in part on the
ratings of the claims- paying ability of
the Insurer by Standard & Poor's and
Moody's. Any change in the ratings of the
Insurer by Standard & Poor's and Moody's
may result in a change in the ratings on
the Class A Certificates. The Depositor has
not requested that any rating agency rate
the Class A Certificates other than as
stated above. If another rating agency were
to rate the Class A Certificates, such
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<PAGE>
rating agency may assign a rating different
from the ratings described above. 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 assigning rating organization.
A security rating does not address the
frequency of prepayments on the Mortgage
Loans or the corresponding effect on yield
to investors. The ratings on the Class A
Certificates do not address the likelihood
of receipt by the holders of the Class A
Certificates of any amounts in respect of
Basis Risk Shortfalls or Unpaid Basis Risk
Shortfalls. See "Yield on the Certificates"
and "Ratings" herein and "Yield
Considerations" in the Prospectus.
Legal Investment.................... The Class A 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 not lower than the
second highest rating category by a Rating
Agency (as defined in the Prospectus) and,
as such, will be legal investments for
certain entities to the extent provided in
SMMEA. SMMEA, however, provides for state
limitation on the authority of such
entities to invest in "mortgage related
securities", provided that such restricting
legislation was enacted prior to October 3,
1991. Institutions whose investment
activities are subject to legal investment
laws and regulations or to review by
regulatory authorities may be subject to
restrictions on investment in the Class A
Certificates. Any such institution should
consult with their own legal advisors in
determining whether and to what extent the
Class A Certificates constitute legal
investments or are subject to restrictions
on investment. See "Legal Investment"
herein and in the Prospectus.
ERISA Considerations................ The U.S. Department of Labor has issued an
individual exemption, Prohibited
Transaction Exemption 89-89, to Salomon
Brothers Inc that generally exempts from
the application of certain of the
prohibited transaction provisions of
Section 406 of the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), and the excise taxes imposed on
such prohibited transactions by Section
4975(a)and (b) of the Code and Section
502(i) of ERISA, transactions relating to
the purchase, sale and holding of
pass-through certificates underwritten by
Salomon Brothers Inc such as the Class A
Certificates and the servicing and
operation of asset pools such as the
Mortgage Pool, provided that certain
conditions are satisfied. See "ERISA
Considerations" herein and in the
Prospectus.
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<PAGE>
RISK FACTORS
In addition to the matters described elsewhere in this Prospectus
Supplement and the Prospectus, prospective investors should carefully consider
the following factors before deciding to invest in the Class A Certificates.
UNDERWRITING STANDARDS, LIMITED OPERATING HISTORY AND POTENTIAL DELINQUENCIES
THE MORTGAGE LOAN SELLER'S UNDERWRITING STANDARDS ARE PRIMARILY INTENDED
TO ASSESS THE VALUE OF THE MORTGAGED PROPERTY AND TO EVALUATE THE ADEQUACY OF
SUCH PROPERTY AS COLLATERAL FOR THE MORTGAGE LOAN. THE MORTGAGE LOAN SELLER
PROVIDES LOANS PRIMARILY TO BORROWERS WHO DO NOT QUALIFY FOR LOANS CONFORMING TO
FNMA AND FHLMC GUIDELINES BUT WHO HAVE EQUITY IN THEIR PROPERTY. WHILE THE
MORTGAGE LOAN SELLER'S PRIMARY CONSIDERATION IN UNDERWRITING A MORTGAGE LOAN IS
THE VALUE OF THE MORTGAGED PROPERTY, THE MORTGAGE LOAN SELLER ALSO CONSIDERS,
AMONG OTHER THINGS, A MORTGAGOR'S CREDIT HISTORY, REPAYMENT ABILITY AND DEBT
SERVICE-TO-INCOME RATIO, AS WELL AS THE TYPE AND USE OF THE MORTGAGED PROPERTY.
AS A RESULT OF THE MORTGAGE LOAN SELLER'S UNDERWRITING STANDARDS, THE
MORTGAGE LOANS ARE LIKELY TO EXPERIENCE RATES OF DELINQUENCY, FORECLOSURE AND
BANKRUPTCY THAT ARE HIGHER, AND THAT MAY BE SUBSTANTIALLY HIGHER, THAN THOSE
EXPERIENCED BY MORTGAGE LOANS UNDERWRITTEN IN A MORE TRADITIONAL MANNER.
Furthermore, changes in the values of Mortgaged Properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Mortgage Loans than on mortgage loans originated in a more traditional
manner. No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at the levels in effect on the dates of origination
of the related Mortgage Loans. Approximately 53.87% of the Mortgage Loans in
Sub-Pool 1 and approximately 46.78% of the Mortgage Loans in Sub-Pool 2, each by
aggregate principal balance of the related Mortgage Loans as of the Cut-off
Date, are secured by Mortgaged Properties located in the State of California. If
the California residential real estate market should experience an overall
decline in property values after the dates of origination of the Mortgage Loans,
the rates of delinquencies, foreclosures, bankruptcies and losses on the
Mortgage Loans may be expected to increase, and may increase substantially. See
"The Mortgage Pool--Underwriting Standards; Representations" herein.
As described below under "Pooling and Servicing Agreement--The Mortgage
Loan Seller and Master Servicer", the Mortgage Loan Seller commenced receiving
applications for mortgage loans under its regular lending program in December
1994. Accordingly, the Mortgage Loan Seller (whether as an originator or
acquirer of mortgage loans or as a servicer of such mortgage loans) does not
have representative historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of the Mortgage Loans.
ADDITIONAL RISKS ASSOCIATED WITH THE MORTGAGE LOANS
Approximately 3.22% of the Mortgage Loans in Sub-Pool 1 and approximately
8.95% of the Mortgage Loans in Sub-Pool 2, each by aggregate principal balance
of the Mortgage Loans in such Sub-Pool as of the Cut-off Date, had a
Loan-to-Value Ratio at origination in excess of 80% but will not be covered by a
primary mortgage insurance policy. Mortgage Loans with higher Loan-to-Value
Ratios may present a greater risk of loss. See "The Mortgage Pool--General"
herein.
Approximately 11.22% of the Mortgage Loans in Sub-Pool 1 and approximately
0.43% of the Mortgage Loans in Sub-Pool 2, each by aggregate principal balance
of the Mortgage Loans in such Sub-Pool as of the Cut-off Date, are Balloon
Mortgage Loans. The Balloon Mortgage Loans in the Trust Fund will not be fully
amortizing over their terms to maturity, and will require substantial
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<PAGE>
principal payments at their stated maturity. Balloon Mortgage Loans involve a
greater degree of risk than self-amortizing loans because the ability of a
mortgagor to make a Balloon Payment typically will depend upon its ability
either to fully refinance the Balloon Mortgage Loan or to sell the related
Mortgaged Property at a price sufficient to permit the mortgagor to make the
Balloon Payment. The ability of a mortgagor to accomplish either of these goals
will be affected by a number of factors. See "The Mortgage Pool--General" and
"Yield on the Certificates--Balloon Mortgage Loans" herein.
Approximately 8.66% of the Mortgage Loans in Sub-Pool 1 and approximately
13.86% of the Mortgage Loans in Sub-Pool 2, each by aggregate principal balance
of the Mortgage Loans in such Sub-Pool as of the Cut-off Date, have a first Due
Date (as defined herein) on July 1, 1996. The Mortgage Loan Seller has
represented and warranted with respect to a majority of such Mortgage Loans that
the first monthly payment thereon will be made by the related Mortgagor on or
before August 31, 1996, and the Mortgage Loan Seller will be required to
repurchase (or substitute for) any of such Mortgage Loans with respect to which
it has made such representation and warranty and with respect to which such
first monthly payment is not so made.
LIMITED OBLIGATIONS
The Class A Certificates will not represent an interest in or obligation
of the Depositor, the Master Servicer, the Trustee or any of their respective
affiliates. The only obligations of the foregoing entities with respect to the
Certificates or any Mortgage Loan will be the obligations of the Depositor and
of the Master Servicer (in its capacity as Mortgage Loan Seller) pursuant to
certain limited representations and warranties made with respect to the Mortgage
Loans and of the Master Servicer with respect to its servicing obligations under
the Agreement (including the limited obligation to make certain P&I Advances).
Neither the Certificates nor the underlying Mortgage Loans will be guaranteed or
insured by any governmental agency or instrumentality, or by the Depositor, the
Master Servicer, the Trustee or any of their respective affiliates. The Class A
Certificates are covered by the Policy, as and to the extent described under the
caption "Description of the Certificates--Financial Guaranty Insurance Policy"
herein. Proceeds of the assets included in the Trust Fund (including the
Mortgage Loans) and of the Policy will be the sole source of payments on the
Class A Certificates, and there will be no recourse to the Depositor, the Master
Servicer, the Trustee or any other entity in the event that such proceeds are
insufficient or otherwise unavailable to make all payments provided for under
the Class A Certificates.
YIELD CONSIDERATIONS WITH RESPECT TO THE GROUP 2 CLASS A CERTIFICATES
The yield to maturity on the Group 2 Class A Certificates may be affected
by the resetting of the Mortgage Rates on the Mortgage Loans on the related
Adjustment Dates. In addition, because the Mortgage Rate for each Mortgage Loan
is based on the Index plus the related Gross Margin, such rate could be higher
than prevailing market interest rates, and this may result in an increase in the
rate of prepayments on the Mortgage Loans after such adjustment. Finally,
because the Mortgage Rates on the Mortgage Loans are based on the Index while
the Pass-Through Rate on the Group 2 Class A Certificates is based on One-Month
LIBOR and a substantial number of the Mortgage Loans are Delayed First
Adjustment Mortgage Loans, any resulting Basis Risk Shortfalls or Unpaid Basis
Risk Shortfalls, to the extent not covered by amounts otherwise payable to the
Residual Certificates, as described herein, will adversely affect the yield to
maturity on the Group 2 Class A Certificates. The Policy will not cover Basis
Risk Shortfalls or Unpaid Basis Risk Shortfalls.
THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of approximately 1,219 conventional, one-
to four-family, fixed-rate and adjustable-rate Mortgage Loans secured by first
liens on residential real properties (the
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"Mortgaged Properties"). The Mortgage Loans have original terms to maturity
ranging from 15 years to 30 years. The Mortgage Pool consists of two separate
sub-pools (each a "Sub-Pool"), designated as Sub-Pool 1, which will consist of
approximately 574 Mortgage Loans having an aggregate principal balance as of
June 1, 1996 (the "Cut-off Date") of approximately $52,684,887, and Sub-Pool 2,
which will consist of approximately 645 Mortgage Loans having an aggregate
principal balance as of the Cut-off Date of approximately $78,617,040, in each
case after application of scheduled payments due on or before the Cut-off Date
whether or not received, and in each case subject to a permitted variance of
plus or minus 5%. Each Mortgage Loan in Sub-Pool 1 is a fixed-rate mortgage
loan. Each Mortgage Loan in Sub-Pool 2 provides for semi-annual adjustment to
the mortgage rate thereon (in the case of a majority of such Mortgage Loans,
after an initial period of two years, or in the case of two such Mortgage Loans
three years, from the origination thereof) based on six-month London interbank
offered rates for United States dollar deposits (the "Index") and for
corresponding adjustments to the monthly payment amount due thereon, in each
case subject to the limitations described under "--Sub-Pool 2" herein.
WITH RESPECT TO THE GROUP 1 CLASS A CERTIFICATES, SUB-POOL 1 IS SOMETIMES
REFERRED TO HEREIN AS THE RELATED SUB-POOL AND THE MORTGAGE LOANS IN SUCH
SUB-POOL ARE SOMETIMES REFERRED TO AS THE RELATED MORTGAGE LOANS. WITH RESPECT
TO THE GROUP 2 CLASS A CERTIFICATES, SUB-POOL 2 IS SOMETIMES REFERRED TO HEREIN
AS THE RELATED SUB-POOL AND THE MORTGAGE LOANS IN SUCH SUB-POOL ARE SOMETIMES
REFERRED TO AS THE RELATED MORTGAGE LOANS. ALL PERCENTAGES UNLESS OTHERWISE
NOTED ARE CALCULATED BASED ON THE AGGREGATE PRINCIPAL BALANCE OF THE MORTGAGE
LOANS IN THE RELATED SUB-POOL AS OF THE CUT-OFF DATE.
The Mortgage Loans are secured by first mortgages or deeds of trust or
other similar security instruments creating first liens on one- to four-family
residential properties consisting of detached or semi-detached one- to
four-family dwelling units, townhouses, individual condominium units and
individual units in planned unit developments. The Mortgage Loans to be included
in the Mortgage Pool will be acquired by the Depositor from the Mortgage Loan
Seller. See "--Underwriting Standards; Representations" herein. The Mortgage
Loan Seller will act as the master servicer for the Mortgage Loans pursuant to
the Agreement (in such capacity, the "Master Servicer").
Approximately 3.22% of the Mortgage Loans in Sub-Pool 1 and approximately
8.95% of the Mortgage Loans in Sub-Pool 2 had a Loan-to-Value Ratio at
origination in excess of 80% but will not be covered by a primary mortgage
insurance policy. No Mortgage Loan will have a Loan-to-Value Ratio at
origination exceeding 85%. There can be no assurance that the Loan-to-Value
Ratio of any Mortgage Loan determined at any time after origination is less than
or equal to its original Loan-toValue Ratio.
All of the Mortgage Loans have scheduled monthly payments due on the first
day of the month (with respect to each Mortgage Loan, a "Due Date"). Each
Mortgage Loan will contain a customary "due-on-sale" clause.
Approximately 90.00% of the Mortgage Loans in Sub-Pool 1 and approximately
91.02% of the Mortgage Loans in Sub-Pool 2 provide for payment by the mortgagor
of a prepayment charge in limited circumstances on certain prepayments.
Generally, each such Mortgage Loan provides for payment of a prepayment charge
on certain partial prepayments and all prepayments in full made within one year,
two years, three years or five years from the date of origination of such
Mortgage Loan. The amount of the prepayment charge is as provided in the related
Mortgage Note but is generally equal to six month's interest on any amounts
prepaid in excess of 20% of the then outstanding principal balance of the
related Mortgage Loan in any 12 month period. The Master Servicer will be
entitled to all prepayment charges received on the Mortgage Loans and such
amounts will not be available for distribution on the Certificates.
Approximately 8.60% of the Mortgage Loans in Sub-Pool 1 are Buydown
Mortgage Loans. None of the Mortgage Loans in Sub-Pool 2 are Buydown Mortgage
Loans.
S-20
<PAGE>
Approximately 11.22% of the Mortgage Loans in Sub-Pool 1 and approximately
0.43% of the Mortgage Loans in Sub-Pool 2 are balloon payment mortgage loans
(each, a "Balloon Mortgage Loan"). Each Balloon Mortgage Loan generally
amortizes over 360 months, but the final payment (the "Balloon Payment") on each
Balloon Mortgage Loan is due and payable on the 180th month. The amount of the
Balloon Payment on each Balloon Payment Loan is substantially in excess of the
amount of the scheduled monthly payment on Mortgage Loan for the period prior to
the Due Date of such Balloon Payment.
The Mortgage Loans in each Sub-Pool are expected to have the additional
characteristics described below under "--Sub-Pool 1" or "--"Sub-Pool 2", as
applicable.
SUB-POOL 1
Each Mortgage Loan in Sub-Pool 1 is a fixed-rate mortgage loan. Each
Mortgage Loan in SubPool 1 had a Mortgage Rate of not less than 7.990% per annum
and not more than 16.250% per annum and as of the Cut-off Date the weighted
average Mortgage Rate was approximately 10.7388% per annum.
The weighted average remaining term to maturity of the Mortgage Loans in
Sub-Pool 1 will be approximately 27 years and 4 months as of the Cut-off Date.
None of the Mortgage Loans in SubPool 1 will have a first Due Date prior to
April 1995 or after July 1996, or will have a remaining term to maturity of less
than 13 years and 9 months or greater than 30 years as of the Cut-off Date. The
latest maturity date of any Mortgage Loan in Sub-Pool 1 is June 2026.
The average principal balance of the Mortgage Loans in Sub-Pool 1 at
origination was approximately $92,069. No Mortgage Loan in Sub-Pool 1 had a
principal balance at origination of greater than $900,000 or less than $25,000.
The average principal balance of the Mortgage Loans in Sub-Pool 1 as of the
Cut-off Date was approximately $91,786. No Mortgage Loan had a principal balance
as of the Cut-off Date of greater than approximately $895,423 or less than
approximately $24,972.
The Mortgage Loans in Sub-Pool 1 are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS IN SUB-POOL 1 AT ORIGINATION
% OF
NUMBER AGGREGATE ORIGINAL AGGREGATE ORIGINAL
RANGE ($) OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- -------- ------------------- ------------------
<S> <C> <C> <C>
0.01 -50,000.00 ........................................ 124 $ 4,844,019.00 9.17%
50,000.01 -100,000.00 ........................................ 285 21,059,422.00 39.85
100,000.01 -150,000.00 ........................................ 113 13,542,990.00 25.63
150,000.01 -200,000.00 ........................................ 28 4,821,700.00 9.12
200,000.01 -250,000.00 ........................................ 9 2,067,000.00 3.91
250,000.01 -300,000.00 ........................................ 6 1,627,275.00 3.08
300,000.01 -350,000.00 ........................................ 1 337,500.00 0.64
350,000.01 -400,000.00 ........................................ 1 384,000.00 0.73
450,000.01 -500,000.00 ........................................ 2 941,250.00 1.78
500,000.01 -550,000.00 ........................................ 2 1,061,000.00 2.01
550,000.01 -600,000.00 ........................................ 1 560,000.00 1.06
700,000.01 -750,000.00 ........................................ 1 701,250.00 1.33
850,000.01 -900,000.00 ........................................ 1 900,000.00 1.70
--- --------------- ------
Total.......................................................... 574 $52,847,406.00 100.00%
=== ============== ======
</TABLE>
The average principal balance of the Mortgage Loans in Sub-Pool 1 at
origination was approximately $92,069. No Mortgage Loan in Sub-Pool 1 had a
principal balance at origination greater than $900,000 or less than $25,000.
S-21
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS IN SUB-POOL 1 AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE ($) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------- -------- ------------------ -----------------
<S> <C> <C> <C>
0.01 -50,000.00 ..................................... 126 $ 4,925,875.42 9.35%
50,000.01 -100,000.00 ..................................... 283 20,888,872.56 39.65
100,000.01 -150,000.00 ..................................... 113 13,506,886.35 25.64
150,000.01 -200,000.00 ..................................... 28 4,812,402.58 9.13
200,000.01 -250,000.00 ..................................... 9 2,062,204.33 3.91
250,000.01 -300,000.00 ..................................... 6 1,624,468.47 3.08
300,000.01 -350,000.00 ..................................... 1 336,350.94 0.64
350,000.01 -400,000.00 ..................................... 1 383,429.50 0.73
450,000.01 -500,000.00 ..................................... 2 937,541.67 1.78
500,000.01 -550,000.00 ..................................... 2 1,059,389.69 2.01
550,000.01 -600,000.00 ..................................... 1 559,188.48 1.06
650,000.01 -700,000.00 ..................................... 1 692,854.20 1.32
850,000.01 -900,000.00 ..................................... 1 895,422.69 1.70
--- -------------- ------
Total.......................................................... 574 $52,684,886.88 100.00%
=== ============== ======
</TABLE>
The average principal balance of the Mortgage Loans in Sub-Pool 1 as of
the Cut-off Date was approximately $91,786. No Mortgage Loan in Sub-Pool 1 had a
principal balance as of the Cut-off Date greater than $895,423 or less than
$24,972.
<TABLE>
<CAPTION>
SUB-POOL 1 PROPERTY TYPES
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------- -------- ------------------ -----------------
<S> <C> <C> <C>
Single-Family............................... 509 $46,191,015.37 87.67%
Two- to Four-Family......................... 41 3,916,751.49 7.43
Condo (Low Rise)............................ 8 429,794.57 0.82
Planned Unit Development.................... 16 2,147,325.45 4.08
--- -------------- ------
Total................................. 574 $52,684,886.88 100.00%
=== ============== ======
</TABLE>
<TABLE>
<CAPTION>
SUB-POOL 1 OCCUPANCY STATUS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------- -------- ----------------- ----------------
<S> <C> <C> <C>
Owner-Occupied............................. 501 $47,833,973.91 90.79%
Non Owner-Occupied......................... 73 4,850,912.97 9.21
--- -------------- ------
Total................................ 574 $52,684,886.88 100.00%
=== ============== ======
</TABLE>
The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
S-22
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES OF THE MORTGAGE LOANS IN SUB-POOL 1
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------- -------- ---------------- ----------------
<S> <C> <C> <C>
7.500- 7.999.................................. 1 $ 67,853.55 0.13%
8.000- 8.499.................................. 1 62,779.47 0.12
8.500- 8.999.................................. 34 3,643,585.84 6.92
9.000- 9.499.................................. 19 1,606,419.91 3.05
9.500- 9.999.................................. 92 8,981,848.54 17.05
10.000-10.499.................................. 45 4,886,679.24 9.28
10.500-10.999.................................. 149 15,076,525.14 28.62
11.000-11.499.................................. 91 7,596,399.63 14.42
11.500-11.999.................................. 65 5,766,852.34 10.95
12.000-12.499.................................. 22 1,402,426.05 2.66
12.500-12.999.................................. 32 2,166,148.74 4.11
13.000-13.499.................................. 6 336,449.38 0.64
13.500-13.999.................................. 5 353,088.95 0.67
14.000-14.499.................................. 4 213,690.29 0.41
14.500-14.999.................................. 5 313,058.60 0.59
15.000-15.499.................................. 1 29,400.00 0.06
15.500-15.999.................................. 1 107,088.14 0.20
16.000-16.499.................................. 1 74,593.07 0.14
--- -------------- ------
Total.................................... 574 $52,684,886.88 100.00%
=== ============== ======
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans in Sub-Pool 1 was approximately 10.7388% per annum.
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS IN SUB-POOL 1
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN-TO-VALUE RATIO (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------- -------- ---------------- ----------------
<S> <C> <C> <C>
Less than or equal to 25.00..................... 7 $ 346,521.42 0.66%
25.01-30.00..................................... 2 104,893.75 0.20
30.01-35.00..................................... 7 344,401.24 0.65
35.01-40.00..................................... 10 562,554.15 1.07
40.01-45.00..................................... 21 1,187,190.80 2.25
45.01-50.00..................................... 24 1,842,593.42 3.50
50.01-55.00..................................... 23 1,467,041.24 2.78
55.01-60.00..................................... 46 3,500,527.63 6.64
60.01-65.00..................................... 84 6,681,035.84 12.68
65.01-70.00..................................... 148 14,462,810.18 27.45
70.01-75.00..................................... 124 13,444,329.84 25.52
75.01-80.00..................................... 62 7,043,691.35 13.37
80.01-85.00..................................... 16 1,697,296.02 3.22
--- -------------- -------
Total..................................... 574 $52,684,886.88 100.00%
=== ============== ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans in Sub-Pool 1 was approximately 68.19%. No Mortgage Loan in Sub-Pool 1 had
a Loan-to-Value Ratio at origination greater than 85.00% or less than 11.39%.
S-23
<PAGE>
<TABLE>
<CAPTION>
SUB-POOL 1 GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------- -------- ---------------- ----------------
<S> <C> <C> <C>
Arizona........................................ 28 $ 2,185,730.61 4.15%
California..................................... 279 28,380,687.03 53.87
Colorado....................................... 28 2,394,368.44 4.54
Connecticut.................................... 2 221,693.56 0.42
Florida........................................ 48 4,342,138.29 8.24
Georgia........................................ 3 206,445.35 0.39
Idaho.......................................... 6 363,993.00 0.69
Illinois....................................... 12 897,745.91 1.70
Indiana........................................ 22 1,017,293.09 1.93
Maryland....................................... 5 1,562,296.69 2.97
Massachusetts.................................. 2 209,240.99 0.40
Michigan....................................... 13 792,589.93 1.50
Nevada......................................... 5 311,900.68 0.59
New Jersey..................................... 6 704,779.08 1.34
New Mexico..................................... 2 168,032.19 0.32
New York....................................... 1 107,088.14 0.20
North Carolina................................. 1 62,933.82 0.12
Oregon......................................... 38 3,242,366.65 6.15
Texas.......................................... 3 122,315.18 0.23
Utah........................................... 39 2,678,661.13 5.08
Virginia....................................... 2 188,168.54 0.36
Washington..................................... 28 2,474,485.24 4.70
Wisconsin...................................... 1 49,933.34 0.09
---- -------------- ------
Total.................................... 574 $52,684,886.88 100.00%
=== ============== ======
</TABLE>
The aggregate principal balance of Mortgage Loans in Sub-Pool 1 in the
California zip code with the largest amount of such Mortgage Loans, by aggregate
principal balance as of the Cut-off Date, was approximately $757,974.
<TABLE>
<CAPTION>
PURPOSE OF THE MORTGAGE LOANS IN SUB-POOL 1
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------ -------- ---------------- ----------------
<S> <C> <C> <C>
Purchase....................................... 44 $ 4,427,173.75 8.40%
Refinance...................................... 67 6,023,535.06 11.43
Equity-out Refinance........................... 463 42,234,178.07 80.16
--- -------------- ------
Total.................................... 574 $52,684,886.88 100.00%
=== ============== ======
</TABLE>
<TABLE>
<CAPTION>
SUB-POOL 1 LOAN PROGRAMS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PROGRAM OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------ -------- ---------------- ----------------
<S> <C> <C> <C>
Full Documentation Program..................... 361 $31,068,536.91 58.97%
Lite Documentation Program..................... 21 1,373,175.27 2.61
Stated Income Documentation Program............ 192 20,243,174.70 38.42
--- -------------- ------
Total.................................... 574 $52,684,886.88 100.00%
=== ============== ======
</TABLE>
S-24
<PAGE>
<TABLE>
<CAPTION>
SUB-POOL 1 RISK CATEGORIES
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------- -------- ---------------- ----------------
<S> <C> <C> <C>
A.............................................. 41 $ 3,419,497.35 6.49%
A-............................................. 254 26,353,593.45 50.02
B.............................................. 122 10,446,503.28 19.83
C.............................................. 60 5,337,878.26 10.13
D.............................................. 97 7,127,414.54 13.53
--- -------------- ------
Total.................................... 574 $52,684,886.88 100.00%
=== ============== ======
</TABLE>
SUB-POOL 2
Each Mortgage Loan in Sub-Pool 2 provides for semi-annual adjustment to
the Mortgage Rate thereon and for corresponding adjustments to the monthly
payment amount due thereon, in each case on each adjustment date applicable
thereto (each such date, an "Adjustment Date"); provided, however, that in the
case of approximately 80.58% of the Mortgage Loans in Sub-Pool 2 (each a
"Delayed First Adjustment Mortgage Loan"), the first Adjustment Date for each
such Mortgage Loan will occur after an initial period of two years, or in the
case of two such Mortgage Loans three years, from the origination thereof. On
each Adjustment Date for each Mortgage Loan in Sub-Pool 2, the Mortgage Rate
thereon will be adjusted to equal the sum, rounded to the nearest multiple of
0.125%, of the Index (as described below) and a fixed percentage amount (the
"Gross Margin"); provided, however, that the Mortgage Rate on each such Mortgage
Loan generally will not increase or decrease by more than 1% per annum on any
related Adjustment Date (the "Periodic Rate Cap") and will not exceed a
specified maximum Mortgage Rate over the life of such Mortgage Loan (the
"Maximum Mortgage Rate") or be less than a specified minimum Mortgage Rate over
the life of such Mortgage Loan (the "Minimum Mortgage Rate"). Notwithstanding
the foregoing, the Delayed First Adjustment Mortgage Loans have a weighted
average Periodic Rate Cap of approximately 2.92% per annum for their first
Adjustment Date. Effective with the first monthly payment due on each Mortgage
Loan in Sub-Pool 2 after each related Adjustment Date, the monthly payment
amount will be adjusted to an amount that will amortize fully the outstanding
principal balance of the related Mortgage Loan over its remaining term (or, in
the case of a Balloon Mortgage Loan, over its hypothetical remaining amortizing
term), and pay interest at the Mortgage Rate as so adjusted. Due to the
application of the Periodic Rate Caps and the Maximum Mortgage Rates, the
Mortgage Rate on each such Mortgage Loan, as adjusted on any related Adjustment
Date, may be less than the sum of the Index and Gross Margin, rounded as
described herein. See "-The Index" herein. None of the Mortgage Loans in
Sub-Pool 2 permits the related mortgagor to convert the adjustable Mortgage Rate
thereon to a fixed Mortgage Rate.
The Mortgage Loans in Sub-Pool 2 had Mortgage Rates as of the Cut-off Date
of not less than 5.750% per annum and not more than 13.990% per annum and the
weighted average Mortgage Rate was approximately 10.2468% per annum. As of the
Cut-off Date, the Mortgage Loans in Sub-Pool 2 had Gross Margins ranging from
3.000% to 8.250%, Minimum Mortgage Rates ranging from 6.750% per annum to
14.500% per annum and Maximum Mortgage Rates ranging from 12.250% per annum to
21.000% per annum. As of the Cut-off Date, the weighted average Gross Margin was
approximately 6.2831%, the weighted average Minimum Mortgage Rate was
approximately 10.2817% per annum and the weighted average Maximum Mortgage Rate
was approximately 16.7084% per annum. The latest first Adjustment Date following
the Cut-off Date on any Mortgage Loan in SubPool 2 occurs in June 1999 and the
weighted average next Adjustment Date for all of the Mortgage Loans in Sub-Pool
2 following the Cut-off Date is November 1997.
The weighted average remaining term to maturity of the Mortgage Loans in
Sub-Pool 2 will be approximately 29 years and 7 months as of the Cut-off Date.
None of the Mortgage Loans in Sub-
S-25
<PAGE>
Pool 2 will have a first Due Date prior to February 1995 or after July 1996, or
will have a remaining term to maturity of less than 14 years and 4 months or
greater than 30 years as of the Cut-off Date. The latest maturity date of any
Mortgage Loan in Sub-Pool 2 is June 2026.
The average principal balance of the Mortgage Loans in Sub-Pool 2 at
origination was approximately $122,195. No Mortgage Loan in Sub-Pool 2 had a
principal balance at origination of greater than $980,000 or less than $30,000.
The average principal balance of the Mortgage Loans in Sub-Pool 2 as of the
Cut-off Date was approximately $121,887. No Mortgage Loan had a principal
balance as of the Cut-off Date of greater than $978,980 or less than $29,971.
The Mortgage Loans in Sub-Pool 2 are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS IN SUB-POOL 2 AT ORIGINATION
% OF
NUMBER AGGREGATE ORIGINAL AGGREGATE ORIGINAL
RANGE ($) OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- -------- ------------------- ------------------
<S> <C> <C> <C>
0.01 -50,000.00 ...................... 56 $ 2,354,020.00 2.99%
50,000.01 -100,000.00 ...................... 298 22,426,165.00 28.45
100,000.01 -150,000.00 ...................... 161 19,826,234.00 25.16
150,000.01 -200,000.00 ...................... 60 10,405,755.00 13.20
200,000.01 -250,000.00 ...................... 28 6,161,360.00 7.82
250,000.01 -300,000.00 ...................... 14 3,864,450.00 4.90
300,000.01 -350,000.00 ...................... 8 2,653,400.00 3.37
350,000.01 -400,000.00 ...................... 6 2,329,550.00 2.96
400,000.01 -450,000.00 ...................... 4 1,724,450.00 2.19
450,000.01 -500,000.00 ...................... 3 1,452,500.00 1.84
550,000.01 -600,000.00 ...................... 1 577,500.00 0.73
600,000.01 -650,000.00 ...................... 1 626,500.00 0.79
750,000.01 -800,000.00 ...................... 2 1,593,000.00 2.02
900,000.01 -950,000.00 ...................... 2 1,841,100.00 2.34
950,000.01 -1,000,000.00 ...................... 1 980,000.00 1.24
--- -------------- ------
Total..................................... 645 $78,815,984.00 100.00%
=== ============== ======
</TABLE>
The average principal balance of the Mortgage Loans in Sub-Pool 2 at
origination was approximately $122,195. No Mortgage Loan in Sub-Pool 2 had a
principal balance at origination greater than $980,000 or less than $30,000.
S-26
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS IN SUB-POOL 2 AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE ($) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------- -------- ------------------ ----------------
<S> <C> <C> <C>
0.01 -50,000.00 ................ 57 $2,390,334.04 3.04%
50,000.01 -100,000.00 ............... 298 22,405,317.52 28.50
100,000.01 -150,000.00 ............... 160 19,676,708.77 25.03
150,000.01 -200,000.00 ............... 61 10,583,036.54 13.46
200,000.01 -250,000.00 ............... 27 5,951,843.94 7.57
250,000.01 -300,000.00 ............... 14 3,859,519.25 4.91
300,000.01 -350,000.00 ............... 8 2,649,009.03 3.37
350,000.01 -400,000.00 ............... 6 2,326,944.81 2.96
400,000.01 -450,000.00 ............... 4 1,719,401.87 2.19
450,000.01 -500,000.00 ............... 3 1,449,352.07 1.84
550,000.01 -600,000.00 ............... 1 575,785.99 0.73
600,000.01 -650,000.00 ............... 1 625,560.02 0.80
750,000.01 -800,000.00 ............... 2 1,589,036.54 2.02
900,000.01 -950,000.00 ............... 2 1,836,209.83 2.34
950,000.01 -1,000,000.00 ............. 1 978,979.98 1.25
--- ------------- ------
Total................................. 645 $78,617,040.20 100.00%
=== ============== ======
</TABLE>
The average principal balance of the Mortgage Loans in Sub-Pool 2 as of
the Cut-off Date was approximately $121,887. No Mortgage Loan in Sub-Pool 2 had
a principal balance as of the Cut-off Date greater than $978,980 or less than
$29,971.
<TABLE>
<CAPTION>
SUB-POOL 2 PROPERTY TYPES
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------- -------- ------------------ -----------------
<S> <C> <C> <C>
Single Family............................... 575 $68,673,533.22 87.35%
Two- to Four-Family......................... 32 3,895,352.24 4.96
Condo (Low Rise)............................ 17 2,057,657.57 2.62
Planned Unit Development.................... 21 3,989,897.17 5.08
--- -------------- ------
Total................................. 645 $78,617,040.20 100.00%
=== ============== ======
</TABLE>
<TABLE>
<CAPTION>
SUB-POOL 2 OCCUPANCY STATUS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------- -------- ------------------ -----------------
<S> <C> <C> <C>
Owner-Occupied.............................. 587 $72,761,594.38 92.55%
Non Owner-Occupied.......................... 58 5,855,445.82 7.45
--- -------------- ------
Total................................. 645 $78,617,040.20 100.00%
=== ============== ======
</TABLE>
The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
S-27
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES OF THE MORTGAGE LOANS IN SUB-POOL 2 AT ORIGINATION
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------- -------- ---------------- ----------------
<S> <C> <C> <C>
5.500- 5.999.................................... 1 $ 84,822.08 0.11%
6.500- 6.999.................................... 3 301,212.70 0.38
7.000- 7.499.................................... 5 913,497.46 1.16
7.500- 7.999.................................... 19 2,458,318.39 3.13
8.000- 8.499.................................... 19 2,165,374.54 2.75
8.500- 8.999.................................... 57 8,086,330.04 10.29
9.000- 9.499.................................... 46 6,230,129.12 7.92
9.500- 9.999.................................... 138 17,386,568.13 22.12
10.000-10.499..................................... 69 8,926,752.66 11.35
10.500-10.999..................................... 124 14,952,585.97 19.02
11.000-11.499..................................... 44 4,976,769.02 6.33
11.500-11.999..................................... 56 6,981,187.12 8.88
12.000-12.499..................................... 14 1,012,473.53 1.29
12.500-12.999..................................... 36 3,069,635.13 3.90
13.000-13.499..................................... 8 629,908.34 0.80
13.500-13.999..................................... 6 441,475.97 0.56
--- -------------- ------
Total....................................... 645 $78,617,040.20 100.00%
=== ============== ======
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE RATES OF THE MORTGAGE LOANS IN SUB-POOL 2 AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------- -------- ---------------- ----------------
<S> <C> <C> <C>
5.500- 5.999.................................... 1 $ 84,822.08 0.11%
6.500- 6.999.................................... 3 301,212.70 0.38
7.000- 7.499.................................... 4 496,357.64 0.63
7.500- 7.999.................................... 18 2,366,990.58 3.01
8.000- 8.499.................................... 19 2,165,374.54 2.75
8.500- 8.999.................................... 56 8,040,944.05 10.23
9.000- 9.499.................................... 44 6,147,109.57 7.82
9.500- 9.999.................................... 134 16,634,303.64 21.16
10.000-10.499..................................... 67 8,378,489.22 10.66
10.500-10.999..................................... 125 15,293,907.26 19.45
11.000-11.499..................................... 49 5,897,854.09 7.50
11.500-11.999..................................... 58 7,277,810.49 9.26
12.000-12.499..................................... 15 1,071,944.64 1.36
12.500-12.999..................................... 33 2,857,047.35 3.63
13.000-13.499..................................... 10 898,900.95 1.14
13.500-13.999..................................... 9 703,971.40 0.90
---- -------------- ------
Total....................................... 645 $78,617,040.20 100.00%
=== ============== ======
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans in Sub-Pool 2 was approximately 10.2468% per annum.
S-28
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS IN SUB-POOL 2
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN-TO-VALUE RATIO (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------------- -------- ---------------- ----------------
<S> <C> <C> <C>
Less than or equal to 25.00................. 3 $ 169,188.82 0.22%
25.01-30.00................................. 1 978,979.98 1.25
30.01-35.00................................. 3 278,485.80 0.35
35.01-40.00................................. 13 1,129,285.75 1.44
40.01-45.00................................. 8 648,924.98 0.83
45.01-50.00................................. 23 1,817,968.84 2.31
50.01-55.00................................. 22 2,618,961.21 3.33
55.01-60.00................................. 37 3,705,606.55 4.71
60.01-65.00................................. 93 10,603,330.16 13.49
65.01-70.00................................. 117 12,854,353.62 16.35
70.01-75.00................................. 168 22,161,768.81 28.19
75.01-80.00................................. 111 14,612,726.86 18.59
80.01-85.00................................. 46 7,037,458.82 8.95
--- -------------- ------
Total................................. 645 $78,617,040.20 100.00%
=== ============== ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans in Sub-Pool 2 was approximately 70.2868%. No Mortgage Loan in Sub-Pool 2
had a Loan-to-Value Ratio at origination greater than 85.00% or less than
23.33%.
<TABLE>
<CAPTION>
SUB-POOL 2 GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------- -------- ---------------- ----------------
<S> <C> <C> <C>
Arizona .................. 28 $2,859,992.73 3.64%
California ............... 243 36,778,911.68 46.78
Colorado ................. 34 3,630,587.78 4.62
Connecticut .............. 1 49,830.86 0.06
District of Columbia ..... 1 625,560.02 0.80
Florida .................. 38 4,018,249.83 5.11
Georgia .................. 1 256,521.15 0.33
Idaho .................... 5 333,970.86 0.42
Illinois ................. 6 583,232.44 0.74
Indiana .................. 25 1,702,445.07 2.17
Maryland ................. 2 693,657.20 0.88
Michigan ................. 9 911,187.08 1.16
New Hampshire ............ 1 41,001.52 0.05
New Jersey ............... 7 1,024,224.42 1.30
New Mexico ............... 3 290,734.28 0.37
New York ................. 3 356,685.44 0.45
Oklahoma ................. 1 56,408.05 0.07
Oregon ................... 88 7,824,407.57 9.95
Texas .................... 3 343,404.60 0.44
Utah ..................... 76 7,297,423.26 9.28
Virginia ................. 2 315,688.86 0.40
Washington ............... 68 8,622,915.50 10.97
--- ----------- ------
Total .................... 645 $78,617,040.20 100.00%
=== =========== ======
</TABLE>
The aggregate principal balance of Mortgage Loans in Sub-Pool 2 in the
California zip code with the largest amount of such Mortgage Loans, by aggregate
principal balance as of the Cut-off Date, was approximately $1,509,361.
S-29
<PAGE>
<TABLE>
<CAPTION>
PURPOSE OF THE MORTGAGE LOANS IN SUB-POOL 2
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------ -------- ------------------ -----------------
<S> <C> <C> <C>
Purchase ................. 101 $14,046,083.81 17.87%
Refinance ................ 75 8,846,446.23 11.25
Equity-out Refinance ..... 469 55,724,510.16 70.88
--- -------------- -------
Total .................... 645 $78,617,040.20 100.00%
=== ============== =======
</TABLE>
<TABLE>
<CAPTION>
SUB-POOL 2 LOAN PROGRAMS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PROGRAM OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------ -------- ------------------ -----------------
<S> <C> <C> <C>
Full Documentation Program 391 $44,007,509.80 55.98%
Lite Documentation Program 34 5,007,090.19 6.37
Stated Income Documentation Program 220 29,602,440.21 37.65
--- ------------- ------
Total .................... 645 $78,671,040.20 100.00%
=== ============= ======
</TABLE>
<TABLE>
<CAPTION>
SUB-POOL 2 RISK CATEGORIES
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------- -------- ---------------- ----------------
<S> <C> <C> <C>
A ........................ 53 $7,786,570.51 9.90%
A- ....................... 240 33,254,641.47 42.30
B ........................ 184 20,537,166.74 26.12
C ........................ 76 8,364,273.32 10.64
D ........................ 92 8,674,388.16 11.03
--- -------------- ------
Total .................... 645 $78,617,040.20 100.00%
=== ============== =======
</TABLE>
<TABLE>
<CAPTION>
MAXIMUM MORTGAGE RATES OF THE MORTGAGE LOANS IN SUB-POOL 2
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MAXIMUM NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------- -------- ---------------- ----------------
<S> <C> <C> <C>
12.000-12.499 ............ 1 $84,822.08 0.11%
13.000-13.499 ............ 4 390,987.82 0.50
13.500-13.999 ............ 4 762,412.51 0.97
14.000-14.499 ............ 17 2,208,568.39 2.81
14.500-14.999 ............ 20 2,379,972.88 3.03
15.000-15.499 ............ 52 7,256,814.10 9.23
15.500-15.999 ............ 43 5,721,633.22 7.28
16.000-16.499 ............ 137 18,213,095.16 23.17
16.500-16.999 ............ 73 9,234,098.12 11.75
17.000-17.499 ............ 128 15,015,610.94 19.10
17.500-17.999 ............ 45 5,021,362.90 6.39
18.000-18.499 ............ 58 7,140,541.54 9.08
18.500-18.999 ............ 21 1,693,276.41 2.15
19.000-19.499 ............ 33 2,732,885.11 3.48
19.500-19.999 ............ 4 388,319.77 0.49
20.000-20.499 ............ 4 252,663.74 0.32
21.000-21.499 ............ 1 119,975.51 0.15
--- ------------- ------
Total .................... 645 $78,617,040.20 100.00%
=== ============= ======
</TABLE>
The weighted average Maximum Mortgage Rate of the Mortgage Loans in
Sub-Pool 2 as of the Cut-off Date was approximately 16.7084% per annum.
S-30
<PAGE>
<TABLE>
<CAPTION>
MINIMUM MORTGAGE RATES OF THE MORTGAGE LOANS IN SUB-POOL 2
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MINIMUM NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------- -------- ---------------- ----------------
<S> <C> <C> <C>
6.500-6.999 .............. 2 $180,584.15 0.23%
7.000-7.499 .............. 3 672,569.55 0.86
7.500-7.999 .............. 13 1,689,892.41 2.15
8.000-8.499 .............. 13 1,653,794.16 2.10
8.500-8.999 .............. 54 7,288,953.12 9.27
9.000-9.499 .............. 45 5,882,683.82 7.48
9.500-9.999 .............. 141 18,349,755.74 23.34
10.000-10.499 ............ 76 9,832,216.22 12.51
10.500-10.999 ............ 128 15,320,177.06 19.49
11.000-11.499 ............ 44 4,920,850.76 6.26
11.500-11.999 ............ 56 7,009,011.57 8.92
12.000-12.499 ............ 16 1,262,881.82 1.61
12.500-12.999 ............ 40 3,482,285.51 4.43
13.000-13.499 ............ 8 629,908.34 0.80
13.500-13.999 ............ 5 321,500.46 0.41
14.500-14.999 ............ 1 119,975.51 0.15
--- ------------- ------
Total .................... 645 $78,617,040.20 100.00%
=== ============= ======
</TABLE>
The weighted average Minimum Mortgage Rate of the Mortgage Loans as of the
Cut-off Date was approximately 10.2817% per annum.
<TABLE>
<CAPTION>
GROSS MARGINS OF THE MORTGAGE LOANS IN SUB-POOL 2
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------- -------- ---------------- ----------------
<S> <C> <C> <C>
3.000-3.249 .............. 3 $318,825.00 0.41%
3.750-3.999 .............. 1 95,762.07 0.12
4.500-4.749 .............. 2 185,863.60 0.24
4.750-4.999 .............. 5 511,723.71 0.65
5.000-5.249 .............. 16 2,026,344.55 2.58
5.250-5.499 .............. 11 1,172,821.97 1.49
5.500-5.749 .............. 37 4,657,029.23 5.92
5.750-5.999 .............. 161 20,596,928.28 26.20
6.000-6.249 .............. 36 6,617,550.38 8.42
6.250-6.499 .............. 80 10,217,137.89 13.00
6.500-6.749 .............. 120 13,852,383.32 17.62
6.750-6.999 .............. 74 8,064,885.69 10.26
7.000-7.249 .............. 28 2,886,632.74 3.67
7.250-7.499 .............. 23 2,455,414.24 3.12
7.500-7.749 .............. 24 3,011,728.37 3.83
7.750-7.999 .............. 22 1,865,080.78 2.37
8.250-8.499 .............. 2 80,928.38 0.10
--- ------------- ------
Total .................... 645 $78,617,040.20 100.00%
=== ============= ======
</TABLE>
The weighted average Gross Margin of the Mortgage Loans in Sub-Pool 2 as
of the Cut-off Date was approximately 6.2831%.
S-31
<PAGE>
<TABLE>
<CAPTION>
NEXT ADJUSTMENT DATES FOR THE MORTGAGE LOANS IN SUB-POOL 2
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MONTH OF NEXT ADJUSTMENT DATE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------------------- -------- ----------------- ----------------
<S> <C> <C> <C>
July 1996 ................ 12 $1,842,173.12 2.34%
August 1996 .............. 24 2,878,637.84 3.66
September 1996 ........... 17 1,655,676.70 2.11
October 1996 ............. 16 1,413,247.61 1.80
November 1996 ............ 21 3,492,393.81 4.44
December 1996 ............ 30 3,983,974.39 5.07
January 1997 ............. 3 342,327.16 0.44
February 1997 ............ 5 466,605.81 0.59
March 1997 ............... 5 650,261.86 0.83
April 1997 ............... 2 212,538.09 0.27
May 1997 ................. 2 326,450.62 0.42
June 1997 ................ 10 983,254.23 1.25
July 1997 ................ 7 585,226.84 0.74
September 1997 ........... 6 860,028.56 1.09
October 1997 ............. 11 1,405,782.63 1.79
November 1997 ............ 8 2,213,215.81 2.82
December 1997 ............ 7 1,567,718.07 1.99
January 1998 ............. 23 3,356,138.21 4.27
February 1998 ............ 79 9,347,928.51 11.89
March 1998 ............... 79 10,539,998.82 13.41
April 1998 ............... 95 10,194,460.90 12.97
May 1998 ................. 94 11,121,243.62 14.15
June 1998 ................ 87 8,829,079.00 11.23
May 1999 ................. 1 191,177.99 0.24
June 1999 ................ 1 157,500.00 0.20
--- ------------- ------
Total .................... 645 $78,617,040.20 100.00%
=== ============= ======
</TABLE>
As of the Cut-off Date, the weighted average next Adjustment Date of the
Mortgage Loans in SubPool 2 was November 1997.
THE INDEX
As of any Adjustment Date, the Index applicable to the determination of
the Mortgage Rate on each Mortgage Loan in Sub-Pool 2 will be the average of the
interbank offered rates for six-month United States dollar deposits in the
London market as published in THE WALL STREET JOURNAL and as most recently
available either (i) as of the first business day 45 days prior to such
Adjustment Date or (ii) as of the first business day of the month preceding the
month of such Adjustment Date, as specified in the related Mortgage Note.
In the event that the Index becomes unavailable or otherwise unpublished,
the Master Servicer will select a comparable alternative index over which it has
no direct control and which is readily verifiable.
The table below sets forth historical average rates of six-month LIBOR for
the months indicated as made available from FNMA, which rates may differ from
the rates of the Index, which is six-month LIBOR as published in the WALL STREET
JOURNAL as described above. The table does not purport to be representative of
the subsequent rates of the Index which will be used to determine the Mortgage
Rate on each Mortgage Loan in Sub-Pool 2.
S-32
<PAGE>
<TABLE>
<CAPTION>
MONTH YEAR
- ----- ---------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
January...............5.34% 6.69% 3.39% 3.44% 4.25% 7.13% 8.44%
February..............5.29 6.44 4.00 3.33 4.38 6.89 8.44
March.................5.52 6.44 4.25 3.38 4.55 6.53 8.69
April................. 6.31 4.63 3.31 4.27 6.31 9.00
May................... 6.06 5.00 3.44 4.25 6.19 8.50
June.................. 5.88 5.25 3.56 4.13 6.56 8.44
July.................. 5.88 5.33 3.56 3.63 6.31 8.05
August................ 5.94 5.33 3.44 3.63 5.88 8.19
September............. 5.99 5.69 3.38 3.31 5.69 8.42
October............... 5.95 6.00 3.50 3.64 5.36 8.06
November.............. 5.74 6.44 3.52 3.89 4.94 8.38
December.............. 5.56 7.00 3.50 3.64 4.25 7.56
</TABLE>
UNDERWRITING STANDARDS; REPRESENTATIONS
The Mortgage Loans will be acquired by the Depositor from the Mortgage
Loan Seller. All of the Mortgage Loans were originated or acquired by the
Mortgage Loan Seller, generally in accordance with the underwriting criteria
described herein.
The Mortgage Loan Seller's underwriting standards are primarily intended
to assess the value of the mortgaged property and to evaluate the adequacy of
such property as collateral for the mortgage loan. All of the Mortgage Loans
were also underwritten with a view toward the resale thereof in the secondary
mortgage market. While the Mortgage Loan Seller's primary consideration in
underwriting a mortgage loan is the value of the mortgaged property, the
Mortgage Loan Seller also considers, among other things, a mortgagor's credit
history, repayment ability and debt service-to-income ratio ("Debt Ratio"), as
well as the type and use of the mortgaged property. Second lien financing of the
mortgaged properties may be provided by lenders at any time (including at
origination), in which case the combined loan-to-value ratios of such the
related mortgage loans may not exceed 90%. The Mortgage Loan Seller, however,
will not itself provide second lien financing on a mortgaged property. The
Mortgage Loans generally bear higher rates of interest than mortgage loans that
are originated in accordance with FNMA and FHLMC standards which is likely to
result in rates of delinquencies and foreclosures that are higher, and that may
be substantially higher, than those experienced by portfolios of mortgage loans
underwritten in a more traditional manner. Unless prohibited by state law or
otherwise waived by the Mortgage Loan Seller upon the payment by the related
mortgagor of higher origination fees and a higher Mortgage Rate a majority of
the Mortgage Loans provide for the payment by the mortgagor of a prepayment
charge in limited circumstances on certain full or partial prepayments made
within one year, two years, three years or five years from the date of
origination of the related Mortgage Loan as described under "--General" above.
The amount of the prepayment charge is as provided in the related Mortgage Note
but is generally equal to six month's interest on any amounts prepaid in excess
of 20% of the then outstanding principal balance of the related Mortgage Loan in
any 12 month period.
As a result of the Mortgage Loan Seller's underwriting criteria, changes
in the values of Mortgaged Properties may have a greater effect on the Mortgage
Loan Seller's delinquency, foreclosure and loss experience than on those of
lenders whose mortgage loans are originated in a more traditional manner. No
assurance can be given that the values of the Mortgaged Properties have remained
or will remain at the levels in effect on the dates of origination of the
related Mortgage Loans. Approximately 53.87% of the Mortgage Loans in Sub-Pool 1
and approximately 46.78% of the Mortgage Loans in Sub-Pool 2, each by aggregate
principal balance of the related Mortgage Loans as of the Cut-off Date, are
secured by Mortgaged Properties located in the State of California. If the
California residential real estate markets should experience an overall decline
in property values after
S-33
<PAGE>
the dates of origination of the Mortgage Loans, the rates of delinquencies,
foreclosures and losseson the Mortgage Loans may increase over historical levels
of comparable type loans, and may increase substantially.
As described below under "Pooling and Servicing Agreement--The Mortgage
Loan Seller and Master Servicer", the Mortgage Loan Seller commenced receiving
applications for mortgage loans under its regular lending program in December
1994. Accordingly, the Mortgage Loan Seller (whether as an originator or
acquirer of mortgage loans or as a servicer of such mortgage loans) does not
have representative historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of the Mortgage Loans.
All originations by the Mortgage Loan Seller of one- to four-family
residential mortgage loans are based on loan application packages submitted
through approved correspondents. Such loan application packages, which generally
contain relevant credit, property and underwriting information on the loan
request, are compiled by the applicable correspondent and submitted to the
Mortgage Loan Seller for approval and purchase. The correspondents receive all
or a portion of the loan origination fee charged to the borrower at the time the
loan is made. As part of its quality control procedures, the Mortgage Loan
Seller maintains a file with respect to each correspondent including a copy of
such correspondent's license and reports of any complaints received with respect
to such correspondent or its brokers.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history,
employment history and personal information. The Mortgage Loan Seller requires a
credit report on each applicant from a credit reporting company. The report
typically contains information relating to such matters as credit history with
local and national merchants and lenders, installment debt payments and any
record of defaults, bankruptcies, repossessions, or judgments. Properties that
are to secure single-family (otherwise referred to herein as one- to
four-family) mortgage loans are appraised or reviewed by qualified independent
appraisers who are approved by the Mortgage Loan Seller's internal appraisal
department. Such appraisers inspect the interior and/or exterior and appraise
the subject property and report the property condition. Following each
inspection, the appraiser prepares a report which includes a market value
analysis based on recent sales of comparable homes in the area and, when deemed
appropriate, replacement cost analysis based on the current cost of constructing
a similar home. All appraisals are required to conform to the Uniform Standards
of Professional Appraisal Practice adopted by the Appraisal Standards Board of
the Appraisal Foundation and must be on forms acceptable to FNMA and FHLMC.
Every independent appraisal is reviewed by either a Mortgage Loan Seller staff
appraiser who is supervised by the Mortgage Loan Seller's chief appraiser, or by
another independent appraiser approved by the Mortgage Loan Seller's chief
appraiser before the mortgage loan is made and to the extent that such review
appraisal determines a market value more than ten percent less than the market
value determined by the initial appraisal, such review appraisal is used in
place of the initial appraisal.
The Mortgage Loans were underwritten by the Mortgage Loan Seller's regular
lending division pursuant to the Mortgage Loan Seller's "Full Documentation",
"Lite Documentation", and "Stated Income Documentation" residential loan
programs. Under each of the programs, the Mortgage Loan Seller's regular lending
division reviews the loan applicant's source of income, calculates the amount of
income from sources indicated on the loan application or similar documentation,
reviews the credit history of the applicant, calculates the Debt Ratio to
determine the applicant's ability to repay the loan, reviews the type and use of
the property being financed and reviews the property for compliance with the
Mortgage Loan Seller's standards. In determining the ability of the applicant to
repay the loan, the Mortgage Loan Seller uses the interest rate of the loan
being applied for (the "Qualifying Rate"). The Mortgage Loan Seller's
underwriting standards are applied in a standardized procedure which complies
with applicable federal and state laws and regulations and requires its
underwriters and/or the in-house appraiser to be satisfied that the value of the
property being financed, as
S-34
<PAGE>
indicated by an appraisal and a review appraisal, currently supports the
outstanding loan balance.In general, the maximum loan amount for mortgage loans
originated under the regular lending program is $750,000; however, mortgage
loans on a case by case basis may be originated higher. One Mortgage Loan in
Sub-Pool 1 and five Mortgage Loans in Sub-Pool 2 have principal balances at
origination higher than $750,000. The Mortgage Loan Seller underwrites one- to
four-family loans with Loan-to-Value Ratios at origination of generally up to
85%, depending on, among other things, the purpose of the mortgage loan, a
mortgagor's credit history, repayment ability and Debt Ratio, as well as the
type and use of the property. Under each class of underwriting criteria, the
maximum combined loan-to-value ratio at origination, including any then existing
second deeds of trust subordinate to the Mortgage Loan Seller's first deed of
trust, is 90%. The Mortgage Loan Seller, however, will not itself provide second
lien financing on a mortgaged property. Generally, none of the mortgage loans
originated or acquired by the Mortgage Loan Seller will be covered by a primary
mortgage insurance policy.
The Mortgage Loan Seller verifies the income of each borrower and the
source of funds under its various programs as follows: under the Full
Documentation program, borrowers are generally required to submit verification
of stable income for a two year period. Under the Lite Documentation program,
borrowers are generally required to submit verification of stable employment for
the past six months. Under the Stated Income program, the borrowers may be
qualified based upon the monthly income stated on the mortgage application,
without verification. The income stated must be reasonable and customary for the
borrower's line of work and a copy of the business license is required or other
generally acceptable evidence of business conduct. Under all of the programs,
the correspondent generally performs a telephone verification of the borrower's
employment. For self-employed borrowers the business location and telephone
number must be confirmed through an independent source, such as directory
assistance or a published telephone directory.
The Mortgage Loan Seller uses the following categories and characteristics
as guidelines to grade the mortgage loans:
"A" RISK. Under the "A" risk category, account ratings cannot be greater
than 30-days past due. A maximum of 0x30-day late payment in the last 12
months and 1x30 day late payment in the last 24 months is acceptable (or
0x30 for mortgage loans originated under the Lite Documentation and Stated
Income Documentation programs). No 60-day late payments within the last 24
months is acceptable on an existing mortgage loan. For purposes of
determining whether a prospective mortgagor has been 30-days late, the
Mortgage Loan Seller uses a "rolling 30-day period", i.e. the Mortgage
Loan Seller generally will consider a continuous sequence of 30-day late
payments as a single 30-day late payment. All judgments, garnishments and
liens of records must be paid in full at funding. No bankruptcies may have
occurred during the preceding 24 months and no notice of default may have
occurred in the preceding 36 months. All bankruptcies must have been
discharged or dismissed. Two years re-established excellent credit since
discharge or dismissal is required. A maximum Loan-to-Value Ratio of 85%
(or 75% for mortgage loans originated under the Lite Documentation and
Stated Income Documentation programs) is permitted for a mortgage loan on
a single family owner occupied property. A maximum of 80% Loan-to-Value
Ratio is permitted for a mortgage loan on an owner occupied condominium or
two to four family residential property originated under the Full
Documentation program. All nonowner occupied loans have a maximum
Loan-to-Value Ratio of 75% (or 70% and 65% for mortgage loans originated
under the Lite Documentation or Stated Income Documentation programs,
respectively.) The required Debt Ratio is 42% or less.
"A-" RISK. Under the "A-" risk category, account ratings cannot be greater
than 30-days past due. All derogatory credit greater than 30 days must
relate to an isolated life event. A maximum of 2x30-day late payments in
the last 12 months is acceptable on a mortgage loan. No 60-day late
payments within the last 24 months is acceptable on an existing mortgage
loan. For purposes of determining whether a prospective mortgagor has been
30-days late, the Mortgage Loan Seller uses a "rolling 30-day period",
i.e. the Mortgage Loan Seller generally will consider a continuous
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sequence of 30-day late payments as a single 30-day late payment. An
existing mortgage loan is not required to be current at the time the
application is submitted. All judgments, garnishments and liens of records
must be paid in full at funding. When the Loan-to-Value Ratio is equal to
70% or less, judgments, charge offs and collections that do not appear in
the public records need not be paid on rate/term refinances (no cash to
borrowers) and purchases only. No bankruptcies may have occurred in the
preceding 24 months. All bankruptcies must have been discharged or
dismissed. No notice of default may have occurred in the preceding 24
months. Two years reestablished excellent credit since discharge or
dismissal is required. A maximum Loan-to-Value Ratio of 85% (or 75% for
mortgage loans originated under the Lite Documentation and Stated Income
Documentation programs) is permitted for a mortgage loan on a single
family owner occupied property. A maximum of 80% Loan-to-Value Ratio is
permitted for a mortgage loan on an owner occupied condominium or two to
four family residential property under the Full Documentation program
only. Non-owner occupied loans have a maximum Loan-to-Value Ratio of 70%
under the Full Documentation and Lite Documentation programs (or 60% for
mortgage loans originated under the Stated Income program). The maximum
Debt Ratio generally ranges from 45% or less to 50% depending on the
Loan-to-Value Ratio. Debt Ratio concessions are allowed on loans with
Loan-to-Value Ratios of 75% or less. Debt Ratio concessions allow an
inverse relationship between the Debt Ratio and the Loan-to-Value ratio.
Beginning at 75% Loanto-Value Ratio there can be a corresponding 5%
increase in Debt Ratio for every 5% incremental decline in Loan-to-Value
Ratio below the program maximum. In no event can the Debt Ratio exceed
60%.
"B" RISK. Under the "B" risk category, account ratings cannot be greater
than 60-days past due. All derogatory credit greater than 60 days must
relate to an isolated life event. A maximum of 4x30 or 2x30 and 1x60 day
late payments in the last 12 months is acceptable on a mortgage loan. For
purposes of determining whether a prospective mortgagor has been 30-days
late, the Mortgage Loan Seller uses a "rolling 30-day period", i.e. the
Mortgage Loan Seller generally will consider a continuous sequence of
30-day late payments as a single 30-day late payment. An existing mortgage
loan is not required to be current at the time the application is
submitted. All judgments, garnishments and liens of records must be paid
in full at funding. When the Loan-toValue Ratio is equal to 70% or less,
judgments, charge offs and collections that do not appear in the public
records need not be paid on rate/term refinances (no cash to borrowers)
and purchases only. No bankruptcies may have occurred in the preceding 24
months. All bankruptcies must have been discharged or dismissed. Two
year's re-established good credit since discharge or dismissal is
required. No notice of default may have occurred in the preceding 24
months. A maximum Loan-to-Value Ratio of 80% (or 75% for mortgage loans
originated under the Lite Documentation and Stated Income Documentation
programs) is permitted for an owner occupied mortgage loan regardless of
the property type. Non-owner occupied loans have a maximum Loan-to-Value
Ratio of 70% under the Full Documentation and 65% under the Lite
Documentation programs. Non-owner occupied properties are not allowed
under the Stated Income Documentation program. The maximum Debt Ratio
generally ranges from 50% or less to 55% depending on the Loan-to-Value
Ratio and the documentation level. Debt Ratio concessions are allowed on
loans with Loan-to-Value Ratios of 75% or less. Debt Ratio concessions
allow an inverse relationship between the debt ratio and the Loan-to-Value
ratio. Beginning at 75% Loan-to-Value Ratio there can be a corresponding
5% increase in Debt Ratio for every 5% incremental decline in
Loan-to-Value Ratio below the program maximum. In no event can the Debt
Ratio exceed 60%.
"C" RISK. Under the "C" risk category, account ratings cannot be greater
than 90-days past due. The majority of the credit must not be currently
delinquent. A maximum of 6x30 or 3x30 and 1x60 or 2x60 or 2x30 and 1x90
day late payments in the last 12 months is acceptable. For purposes of
determining whether a prospective mortgagor has been 30-days late, the
Mortgage Loan Seller uses a "rolling 30-day period", i.e. the Mortgage
Loan Seller generally will consider a continuous sequence of 30-day late
payments as a single 30-day late payment. An existing
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mortgage loan is not required to be current at the time the application is
submitted. When the Loan-to-Value Ratio is equal to 70% or less,
judgments, charge offs and collections that do not appear in the public
records need not be paid on rate/term refinances (no cash to borrowers)
and purchases only. No bankruptcies may have occurred in the preceding 24
months and all bankruptcies must have been discharged or dismissed. Two
years re-established credit since discharge or dismissal is required. No
notice of default may have occurred in the preceding 12 months. A maximum
Loan-to-Value Ratio of 75% is permitted for an owner occupied mortgage
loan regardless of the property type. Non-owner occupied loans have a
maximum Loan-to-Value Ratio of 65% under the Full Documentation and 60%
under the Lite Documentation programs. Non-owner occupied properties are
not allowed under the Stated Income Documentation program. The required
Debt Ratio is 60% or less. Debt Ratio concessions are allowed on loans
with Loanto-Value Ratios of 75% or less. Debt Ratio concessions allow an
inverse relationship between the Debt Ratio and the Loan-to-Value ratio.
Beginning at 75% Loan-to-Value Ratio there can be a corresponding 5%
increase in Debt Ratio for every 5% incremental decline in Loan-to-Value
Ratio below the program maximum. In no event can the Debt Ratio exceed
60%.
"D" RISK. Under the "D" risk category, account ratings cannot be greater
than 180-days past due in the last 12 months. A maximum 120 days past due
(or over 120 days with a Loan-to-Value ratio of 60% or less) in the last
12 months is acceptable. No notice of sale can be filed on any notice of
default. For purposes of determining whether a prospective mortgagor has
been 30- days late, the Mortgage Loan Seller uses a "rolling 30-day
period", i.e. the Mortgage Loan Seller generally will consider a
continuous sequence of 30-day late payments as a single 30-day late
payment. An existing mortgage loan is not required to be current at the
time the application is submitted. Judgments, charge-offs and collections
that do not appear in the public records need not be paid on rate/term
refinances (no cash to borrowers) and purchases only. Mortgagor cannot be
currently in bankruptcy on a purchase but a recent discharge or dismissal
is allowed. On refinances the mortgagor can be currently in a Chapter 11
or 13 bankruptcy. The proceeds can be used to obtain the bankruptcy
discharge if the Loan-to-Value Ratio does not exceed 65%, the mortgagor
has paid at least 2/3rds of the required amount, the mortgagor occupies
the subject property and will continue to do so, the property condition is
stated to be average to good by the appraiser, there are no other liens
against the property except the Mortgage Loan Seller, the mortgagor
receives no cash proceeds from the refinance transaction, the settlement
agent disburses the funds required to obtain the discharge of the debtor
directly to the bankruptcy court, all liens and judgments and past due
taxes are paid at the time of closing and the trustee provides an
affidavit indicating the amount required to obtain the discharge and the
estimated discharge date after receipt of funds. A maximum Loan-to-Value
Ratio of 70% is permitted for an owner occupied mortgage loan regardless
of the property type. Non-owner occupied loans have a maximum
Loan-to-Value Ratio of 60% under the Full Documentation and 55% under the
Lite Documentation programs. Non-owner occupied properties are not allowed
under the Stated Income Documentation program. The required Debt Ratio is
60% or less.
EXCEPTIONS. As described above the Mortgage Loan Seller uses the foregoing
categories and characteristics as guidelines only. On a case by case basis
only, the Mortgage Loan Seller may determine that the prospective
mortgagor warrants a risk upgrade or an exception from certain
requirements of a particular risk category. A one level credit upgrade in
"B" and "C" risk grade loans only may be allowed if the application
reflects certain compensating factors, among others: low Loan-to-Value
Ratio, stable employment, ownership of current residence of 5 or more
years and condition of the property. An exception may also be granted if
the applicant has tendered a minimum down payment of 20% or more, the new
loan reduces the applicant's housing expense by more than 25% and if the
mortgage credit history is rated 0x30 or 1x30 in the last 12 months.
The Mortgage Loan Seller will make representations and warranties with
respect to the Mortgage Loans as of the Closing Date. The Mortgage Loan Seller
will be obligated to repurchase Mortgage Loans in respect of which a material
breach of the representations and warranties it has made has
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occurred (other than those breaches which have been cured). For a discussion of
the representationsand warranties made and the repurchase obligation, see
"Mortgage Loan Program-Representations by or on behalf of the Mortgage Loan
Seller; Repurchases" in the Prospectus.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Certificates,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise if the Depositor deems such removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the Mortgage Pool prior to the issuance of the
Certificates unless including such mortgage loans would materially alter the
characteristics of the Mortgage Pool as described herein. The Depositor believes
that the information set forth herein will be representative of the
characteristics of the Mortgage Pool as it will be constituted at the time the
Certificates are issued, although the range of Mortgage Rates and maturities and
certain other characteristics of the Mortgage Loans may vary.
YIELD ON THE CERTIFICATES
DELAY IN DISTRIBUTIONS ON THE GROUP 1 CLASS A CERTIFICATES
The effective yield to holders of the Group 1 Class A Certificates of each
class will be less than the yields otherwise produced by their respective
Pass-Through Rates and purchase prices because (i) on each Distribution Date the
interest payable thereon is the interest accrued during the calendar month
preceding the month of such Distribution Date, which ends 24 days prior to such
Distribution Date and (ii) during each Interest Accrual Period, interest accrues
on a Certificate Principal Balance that is less than the Certificate Principal
Balance of such class of Group 1 Class A Certificates actually outstanding for
the first 24 days of such Interest Accrual Period.
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of such prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan, the
mortgagor is not charged interest on the amount of such prepayment for the month
in which such prepayment is made. In addition, the application of the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"), to any
Mortgage Loan will adversely affect, for an indeterminate period of time, the
ability of the Master Servicer to collect full amounts of interest on such
Mortgage Loan. See "Certain Legal Aspects of the Mortgage Loans--Soldiers' and
Sailors' Civil Relief Act of 1940" in the Prospectus. The Master Servicer is
obligated to pay from its own funds only those interest shortfalls attributable
to full and partial prepayments by the mortgagors on the Mortgage Loans, but
only to the extent of its total servicing compensation for the related Due
Period. See "Pooling and Servicing Agreement--Servicing and Other Compensation
and Payment of Expenses" herein. Accordingly, the effect of (i) any principal
prepayments on the Mortgage Loans, to the extent that any resulting shortfall (a
"Prepayment Interest Shortfall") exceeds any payments made by the Master
Servicer from its own funds ("Compensating Interest") or (ii) any shortfalls
resulting from the application of the Relief Act, will be to reduce the
aggregate amount of interest collected that is available for distribution to
Certificateholders. Any such shortfalls will be allocated among the Certificates
as provided herein under "Description of the Certificates--Interest
Distributions" and "--Overcollateralization Provisions". The Policy will not
cover any such shortfalls.
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GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Class A Certificates, the aggregate
amount of distributions on the Class A Certificates and the yield to maturity of
the Class A Certificates will be related to the rate and timing of payments of
principal on the related Mortgage Loans. The rate of principal payments on the
Mortgage Loans will in turn be affected by the amortization schedules of such
Mortgage Loans and by the rate of principal prepayments thereon (including for
this purpose payments resulting from refinancings, liquidations of the Mortgage
Loans due to defaults, casualties, condemnations and repurchases, whether
optional or required, by the Depositor or the Mortgage Loan Seller, as the case
may be). The Mortgage Loans generally may be prepaid by the mortgagors at any
time; however, as described under "The Mortgage Pool" herein, with respect to a
majority of the Mortgage Loans in each Sub-Pool, a prepayment may subject the
related mortgagor to a prepayment charge.
Prepayments, liquidations and repurchases of the Mortgage Loans will
result in distributions in respect of principal to the holders of the Class A
Certificates then entitled to receive such distributions that otherwise would be
distributed over the remaining terms of the Mortgage Loans. See "Maturity and
Prepayment Considerations" in the Prospectus. Since the rates of payment of
principal on the Mortgage Loans will depend on future events and a variety of
factors (as described more fully herein and in the Prospectus under "Yield
Considerations" and "Maturity and Prepayment Considerations"), no assurance can
be given as to such rate or the rate of principal prepayments. The extent to
which the yield to maturity of the Class A Certificates may vary from the
anticipated yield will depend upon the degree to which such Certificates are
purchased at a discount or premium and the degree to which the timing of
payments thereon is sensitive to prepayments on the related Mortgage Loans.
Further, in the case of Class A Certificates purchased at a discount, an
investor should consider the risk that a slower than anticipated rate of
principal payments on the related Mortgage Loans could result in an actual yield
to such investor that is lower than the anticipated yield and, in the case of
Class A Certificates purchased at a premium, an investor should consider the
risk that a faster than anticipated rate of principal payments could result in
an actual yield to such investor that is lower than the anticipated yield. In
general, the earlier a prepayment of principal on the Mortgage Loans, the
greater will be the effect on the yield to maturity of an investor in the
related Class A Certificates. As a result, in the case of Class A Certificates
of any class, the effect on an investor's yield of principal payments occurring
on the related Mortgage Loans at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of such class of Class A Certificates would not be fully offset by a subsequent
like reduction (or increase) in the rate of principal payments.
It is highly unlikely that the Mortgage Loans will prepay at any constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate, and the prepayment charges imposed in connection with prepayments on
certain of the Mortgage Loans will have an uncertain effect on the rate and
timing of prepayments on the Mortgage Loans in the related Sub-Pool. Moreover,
the timing of prepayments on the Mortgage Loans in each Sub-Pool may
significantly affect the actual yield to maturity on the related Class A
Certificates, even if the average rate of principal payments experienced over
time is consistent with an investor's expectation. With respect to the Group 1
Class A Certificates, because distributions of principal will be made to the
holders of the classes of Group 1 Class A Certificates according to the
priorities described herein, the timing of commencement of principal
distributions and the weighted average life of each class of Group 1 Class A
Certificates will be affected by the rates of prepayment on the Mortgage Loans
in Sub-Pool 1 experienced both before and after the commencement of principal
distributions on such class.
The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment (and refinancing) would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans would be
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expected to decrease. Other factors affecting prepayment of mortgage loans
include changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgaged properties and servicing decisions.
There can be no certainty as to the rate of prepayments on the Mortgage Loans
during any period or over the life of the Certificates. See "Yield
Considerations" and "Maturity and Prepayment Considerations" in the Prospectus.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years. In addition, default rates generally are higher
for mortgage loans used to refinance an existing mortgage loan. In the event of
a mortgagor's default on a Mortgage Loan, other than as provided by the Policy
as described herein, there can be no assurance that recourse will be available
beyond the specific Mortgaged Property pledged as security for repayment. See
"The Mortgage Pool--Underwriting Standards; Representations" herein.
BALLOON MORTGAGE LOANS
The Balloon Mortgage Loans in the Trust Fund will not be fully amortizing
over their terms to maturity, and will require substantial principal payments at
their stated maturity. Balloon Mortgage Loans involve a greater degree of risk
than self-amortizing loans because the ability of a mortgagor to make a Balloon
Payment typically will depend upon its ability either to fully refinance the
Balloon Mortgage Loan or to sell the related Mortgaged Property at a price
sufficient to permit the mortgagor to make the Balloon Payment. The ability of a
mortgagor to accomplish either of these goals will be affected by a number of
factors, including the value of the related Mortgaged Property, the level of
available mortgage rates at the time of sale or refinancing, the mortgagor's
equity in the related Mortgaged Property, tax laws, prevailing general economic
conditions and the availability of credit for loans secured by residential
property. Because the ability of a mortgagor to make a Balloon Payment typically
will depend upon its ability either to refinance the Balloon Mortgage Loan or to
sell the related Mortgaged Property, there is a risk that the Balloon Mortgage
Loans may default at maturity. Any defaulted Balloon Payment that extends the
maturity of a Balloon Mortgage Loan may delay distributions of principal on the
related Class A Certificates and thereby extend the weighted average life of the
related Class A Certificates and, if the related Class A Certificates were
purchased at a discount, reduce the yield thereon.
SPECIAL YIELD CONSIDERATIONS WITH RESPECT TO THE GROUP 1 CLASS A CERTIFICATES
Because the Mortgage Rates on the Mortgage Loans in Sub-Pool 1 are fixed,
such rates will not change in response to changes in market interest rates.
Accordingly, if mortgage market interest rates or market yields for securities
similar to the Group 1 Class A Certificates were to rise, the market value of
the Group 1 Class A Certificates may decline. In addition, because distributions
of principal will be made to the holders of the classes of Group 1 Class A
Certificates according to the priorities described herein, the timing of
commencement of principal distributions and the weighted average life of each
class of Group 1 Class A Certificates will be affected by the rates of
prepayment on the Mortgage Loans in Sub-Pool 1 experienced both before and after
the commencement of principal distributions on such class.
SPECIAL YIELD CONSIDERATIONS WITH RESPECT TO THE GROUP 2 CLASS A CERTIFICATES
The Mortgage Rates on the Mortgage Loans in Sub-Pool 2 adjust
semi-annually based upon the Index, whereas the Pass-Through Rate on the Group 2
Class A Certificates adjusts monthly based upon One-Month LIBOR as described
under "Description of the Certificates--Calculation of OneMonth LIBOR" herein,
subject to the Sub-Pool 2 Available Funds Pass-Through Rate and the Maximum
Group 2 Class A Pass Through Rate, with the result that increases in the
Pass-Through Rate on the Group 2 Class A Certificates may be limited for
extended periods in a rising interest rate environment. Investors should note
that approximately 80.58% of the Mortgage Loans in Sub-Pool 2 are Delayed First
Adjustment Mortgage Loans. The interest due on the Mortgage Loans in Sub-
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Pool 2 during any Due Period may not equal the amount of interest that would
accrue at One-Month LIBOR plus the applicable spread on the Group 2 Class A
Certificates during the related Interest Accrual Period, however, any such
shortfall will be payable to the holders of the Group 2 Class A Certificates as
limited by the Maximum Group 2 Class A Pass-Though Rate to the extent and in the
priority provided herein. In addition, the Index and One-Month LIBOR may respond
differently to economic and market factors. Thus, it is possible, for example,
that if both One-Month LIBOR and the Index rise during the same period,
One-Month LIBOR may rise more rapidly than the Index or may rise higher than the
Index, potentially resulting in a Basis Risk Shortfall to holders of the Group 2
Class A Certificates. The Policy does not cover Basis Risk Shortfalls or Unpaid
Basis Risk Shortfalls.
WEIGHTED AVERAGE LIVES
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average lives of the Class
A Certificates will be influenced by the rate at which principal on the related
Mortgage Loans is paid, which may be in the form of scheduled payments or
prepayments (including prepayments of principal by the borrower as well as
amounts received by virtue of condemnation, insurance or foreclosure with
respect to the Mortgage Loans), and the timing thereof.
Distributions of principal to the holders of the Group 1 Class A
Certificates will be made in the priority described herein, rather than on a PRO
RATA basis among such classes. The timing of commencement of principal
distributions to each class of the Class A Certificates and the weighted average
life of each such class will be affected by the rates of prepayment on the
related Mortgage Loans experienced both before and after the commencement of
principal distributions on each such class.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") assumes a prepayment rate for the Mortgage Loans in
Sub-Pool 1 of 100% of the Prepayment Vector, and a prepayment rate for the
Mortgage Loans in Sub-Pool 2 of 20% CPR. A 100% Prepayment Vector assumes that
the outstanding balance of a pool of mortgage loans prepays at a rate of 6.25%
CPR in the first month of the life of such pool, such rate increasing by an
additional approximate 1.70% CPR each month thereafter through the twelfth month
of the life of such pool, and such rate thereafter remaining at 25% CPR for the
remainder of the life of such pool. An 80% Prepayment Vector assumes, for
example, that the outstanding balance of a pool of mortgage loans prepays at a
rate of 5.00% CPR in the first month of the life of such pool, such rate
increasing by an additional approximate 1.36% CPR each month thereafter through
the twelfth month of the life of such pool, and such rate thereafter remaining
at 20% CPR for the remainder of the life of such pool. No representation is made
that the Mortgage Loans in Sub-Pool 1 will prepay at the above-described rates
or any other rate. The Constant Prepayment Rate model ("CPR"), assumes that the
outstanding principal balance of a pool of mortgage loans prepays at a specified
constant annual rate or CPR. In generating monthly cash flows, this rate is
converted to an equivalent constant monthly rate. To assume 20% CPR or any other
CPR percentage is to assume that the stated percentage of the outstanding
principal balance of the pool is prepaid over the course of a year. No
representation is made that the Mortgage Loans in Sub-Pool 2 will prepay at 20%
CPR or any other rate.
The table following the next paragraph indicates the percentage of the
initial Certificate Principal Balance of the Class A Certificates of each class
that would be outstanding after each of the dates shown at various percentages
of the Prepayment Assumption and the corresponding weighted average lives of
such classes of Certificates. The table is based on the following assumptions
(the "Modeling Assumptions"): (i) the Mortgage Pool consists of four Mortgage
Loans with the characteristics set forth in the table below, (ii) distributions
on such Certificates are received, in cash, on the 25th day of each month,
commencing in July 1996, (iii) the Mortgage Loans prepay at the percentages of
the Prepayment Assumption indicated, (iv) no defaults or delinquencies occur in
the
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payment by mortgagors of principal and interest on the Mortgage Loans and
no shortfalls due to the application of the Relief Act are incurred, (v)
none of the Depositor, the Mortgage Loan Seller, the majority holder of the
Residual Certificates, the Insurer, the Master Servicer or any other person
purchases from the Trust Fund any Mortgage Loan pursuant to any obligation
or option under the Agreement, except as indicated in footnote two in the
tables, (vi) scheduled monthly payments on the Mortgage Loans are received
on the first day of each month commencing in July 1996, and are computed
prior to giving effect to any prepayments received in the prior month,
(vii) prepayments representing payment in full of individual Mortgage Loans
are received on the last day of each month commencing in June 1996, and
include 30 days' interest thereon, (viii) the scheduled monthly payment for
each Mortgage Loan is calculated based on its principal balance, Mortgage
Rate, original term to maturity and remaining term to maturity such that
the Mortgage Loan will amortize in amounts sufficient to repay the
remaining principal balance of such Mortgage Loan by its remaining term to
maturity (ix) the Certificates are purchased on June 27, 1996, (x) the
Index remains constant at 5.75% per annum and the Mortgage Rate on each
Group 2 Mortgage Loan is adjusted on the next Adjustment Date (and on
subsequent Adjustment Dates if necessary) to equal the Index plus the
applicable Gross Margin, subject to the applicable Periodic Rate Cap, (xi)
one-month LIBOR remains constant at 5.48% per annum, (xii) the monthly
payment on each Group 2 Mortgage Loan is adjusted on the Due Date
immediately following the next Adjustment Date (and on subsequent
Adjustment Dates, if necessary) to equal a fully amortizing monthly payment
as described in clause (viii) above and (xiii) the Servicing Fee Rate is
equal to 0.50% per annum, the Trustee Fee Rate is equal to 0.00625% per
annum, the Minimum Spread is equal to 0.50% per annum and the amount of the
premium payable to the Insurer is as described under the heading "Pooling
and Servicing Agreement--Certain Matters Regarding the Insurer".
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
PRINCIPAL BALANCE ORIGINAL TERM REMAINING TERM MAXIMUM MINIMUM
AS OF THE SUB- MORTGAGE TO MATURITY TO MATURITY NEXT GROSS MORTGAGE MORTGAGE PERIODIC
CUT-OFF DATE POOL RATE(%) (MONTHS) (MONTHS) ADJUSTMENT DATE MARGIN(%) RATE(%) RATE(%) RATE CAP(%)
- ------------------ ---- -------- ------------- -------------- --------------- --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$46,773,926.99 1 10.6920 352 348 N/A N/A N/A N/A N/A
$ 5,910,959.89 1 11.1130 180 173 N/A N/A N/A N/A N/A
$15,383,974.68 2 9.9074 356 351 Oct. 1996 6.377 16.217 10.086 1.011
$63,233,065.52 2 10.3290 359 356 March 1998 6.260 16.828 10.329 1.000
</TABLE>
The first hypothetical Mortgage Loan above is a Mortgage Loan in Sub-Pool 1 that
IS NOT a Balloon Mortgage Loan. The second hypothetical Mortgage Loan above is a
Mortgage Loan in Sub-Pool 1 that IS a Balloon Mortgage Loan with an original
amortization of 360 months and a remaining amortization of 353 months. The third
hypothetical Mortgage Loan above is a Mortgage Loan in SubPool 2 that IS NOT a
Delayed First Adjustment Mortgage Loan. The fourth hypothetical Mortgage Loan
above is a Mortgage Loan in Sub-Pool 2 that IS a Delayed First Adjustment
Mortgage Loan.
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the table. Any such
discrepancy may have an effect upon the percentages of the initial Certificate
Principal Balance outstanding (and the weighted average life) of each class of
the Class A Certificates set forth in the table. In addition, since the actual
Mortgage Loans included in the each Sub-Pool will have characteristics that
differ from those assumed in preparing the table set forth below and, with
respect to the Group 2 Class A Certificates, since it is not likely the level of
the Index will remain constant as assumed, the Class A Certificates of each
class may mature earlier or later than indicated by the table. Based on the
foregoing assumptions, the table indicates the weighted average life of the each
class of the Class A Certificates and sets forth the percentages of the initial
Certificate Principal Balance of each such class of the Class A Certificates
that would be outstanding after each of the Distribution Dates shown, at various
percentages of the Prepayment Assumption. Neither the prepayment model used
herein nor any other prepayment model or assumption purports to be an historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans included
in the either Sub-Pool. Variations in the prepayment experience and the balance
of the related Mortgage Loans that prepay may increase or decrease the
percentages of initial Certificate Principal Balances (and weighted average
lives) shown in the following table. Such
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<PAGE>
variations may occur even if the average prepayment experience of all such
Mortgage Loans equals any of the specified percentages of the prepayment
assumption.
S-43
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A1-1 CERTIFICATES CLASS A1-2 CERTIFICATES CLASS A1-3 CERTIFICATES
-------------------------------- -------------------------------- -------------------------
DISTRIBUTION
DATE 0% 80% 100% 120% 160% 0% 80% 100% 120% 160% 0% 80% 100% 120% 160%
- ----------- -- --- ---- ---- ---- -- --- ---- ---- ---- -- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 1997 94 57 48 38 19 100 100 100 100 100 100 100 100 100 100
June 25, 1998 93 20 4 0 0 100 100 100 80 29 100 100 100 100 100
June 25, 1999 92 0 0 0 0 100 82 47 16 0 100 100 100 100 33
June 25, 2000 90 0 0 0 0 100 40 5 0 0 100 100 100 53 0
June 25, 2001 88 0 0 0 0 100 7 0 0 0 100 100 47 0 0
June 25, 2002 86 0 0 0 0 100 0 0 0 0 100 62 1 0 0
June 25, 2003 84 0 0 0 0 100 0 0 0 0 100 21 0 0 0
June 25, 2004 82 0 0 0 0 100 0 0 0 0 100 0 0 0 0
June 25, 2005 79 0 0 0 0 100 0 0 0 0 100 0 0 0 0
June 25, 2006 76 0 0 0 0 100 0 0 0 0 100 0 0 0 0
June 25, 2007 73 0 0 0 0 100 0 0 0 0 100 0 0 0 0
June 25, 2008 69 0 0 0 0 100 0 0 0 0 100 0 0 0 0
June 25, 2009 65 0 0 0 0 100 0 0 0 0 100 0 0 0 0
June 25, 2010 60 0 0 0 0 100 0 0 0 0 100 0 0 0 0
June 25, 2011 34 0 0 0 0 100 0 0 0 0 100 0 0 0 0
June 25, 2012 29 0 0 0 0 100 0 0 0 0 100 0 0 0 0
June 25, 2013 23 0 0 0 0 100 0 0 0 0 100 0 0 0 0
June 25, 2014 17 0 0 0 0 100 0 0 0 0 100 0 0 0 0
June 25, 2015 10 0 0 0 0 100 0 0 0 0 100 0 0 0 0
June 25, 2016 2 0 0 0 0 100 0 0 0 0 100 0 0 0 0
June 25, 2017 0 0 0 0 0 87 0 0 0 0 100 0 0 0 0
June 25, 2018 0 0 0 0 0 69 0 0 0 0 100 0 0 0 0
June 25, 2019 0 0 0 0 0 50 0 0 0 0 100 0 0 0 0
June 25, 2020 0 0 0 0 0 29 0 0 0 0 100 0 0 0 0
June 25, 2021 0 0 0 0 0 5 0 0 0 0 100 0 0 0 0
June 25, 2022 0 0 0 0 0 0 0 0 0 0 58 0 0 0 0
June 25, 2023 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0
June 25, 2024 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2025 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2026 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted
Average Life
in Years(1) 12.96 1.27 1.04 0.88 0.68 22.94 3.85 3.04 2.50 1.82 26.17 6.37 5.03 4.11 2.89
Weighted
Average Life
in Years(2) 12.96 1.27 1.04 0.88 0.68 22.94 3.85 3.04 2.50 1.82 26.17 6.37 5.03 4.11 2.89
</TABLE>
- -----------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
years from the date of issuance of the Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial Certificate Principal Balance of the Certificate.
(2) Calculated pursuant to footnote one but assumes the majority holder of the
Residual Certificates exercises its option to purchase the Mortgage Loans.
See "Pooling and Servicing Agreement--Termination" herein.
(TABLE CONTINUED ON NEXT PAGE.)
S-44
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A1-4 CERTIFICATES CLASS A2-1 CERTIFICATES
--------------------------------------- ----------------------------------------
DISTRIBUTION DATE 0% 80% 100% 120% 160% 0% 80% 100% 120% 160%
- ----------------- -- --- ---- ---- ---- -- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date 100 100 100 100 100 100 100 100 100 100
June 25, 1997 100 100 100 100 100 97 81 77 73 65
June 25, 1998 100 100 100 100 100 96 67 61 54 43
June 25, 1999 100 100 100 100 100 96 56 48 40 28
June 25, 2000 100 100 100 100 78 95 46 38 31 20
June 25, 2001 100 100 100 97 45 95 38 30 23 13
June 25, 2002 100 100 100 67 26 94 32 24 18 9
June 25, 2003 100 100 75 46 14 93 27 19 13 6
June 25, 2004 100 92 55 31 7 92 22 15 10 4
June 25, 2005 100 72 40 20 3 91 18 12 7 2
June 25, 2006 100 56 29 13 1 90 15 9 5 1
June 25, 2007 100 44 20 8 0 89 13 7 4 1
June 25, 2008 100 34 14 5 0 87 11 6 3 0
June 25, 2009 100 26 10 2 0 86 9 4 2 0
June 25, 2010 100 19 6 1 0 84 7 3 1 0
June 25, 2011 100 13 3 0 0 82 6 2 1 0
June 25, 2012 100 9 1 0 0 80 5 2 1 0
June 25, 2013 100 6 0 0 0 77 4 1 0 0
June 25, 2014 100 4 0 0 0 74 3 1 0 0
June 25, 2015 100 2 0 0 0 71 2 1 0 0
June 25, 2016 100 1 0 0 0 67 2 0 0 0
June 25, 2017 100 0 0 0 0 63 1 0 0 0
June 25, 2018 100 0 0 0 0 59 1 0 0 0
June 25, 2019 100 0 0 0 0 53 1 0 0 0
June 25, 2020 100 0 0 0 0 47 0 0 0 0
June 25, 2021 100 0 0 0 0 41 0 0 0 0
June 25, 2022 100 0 0 0 0 34 0 0 0 0
June 25, 2023 100 0 0 0 0 26 0 0 0 0
June 25, 2024 52 0 0 0 0 17 0 0 0 0
June 25, 2025 0 0 0 0 0 6 0 0 0 0
June 25, 2026 0 0 0 0 0 0 0 0 0 0
Weighted
Average Life
in Years(1) 28.06 11.33 9.04 7.41 5.28 21.35 5.17 4.12 3.38 2.43
Weighted
Average Life
in Years(2) 27.99 10.20 8.10 6.63 4.72 21.28 4.68 3.71 3.04 2.18
</TABLE>
- ------------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
years from the date of issuance of the Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial Certificate Principal Balance of the Certificate.
(2) Calculated pursuant to footnote one but assumes the majority holder of the
Residual Certificates exercises its option to purchase the Mortgage Loans.
See "Pooling and Servicing Agreement--Termination" herein.
S-45
<PAGE>
There is no assurance that prepayments of the Mortgage Loans will
conform to any of the levels of the Prepayment Assumption indicated in the table
above, or to any other level, or that the actual weighted average life of the
Class A Certificates of any class will conform to any of the weighted average
live set forth in the table above. Furthermore, the information contained in the
table with respect to the weighted average life of the Class A Certificates of
each class is not necessarily indicative of the weighted average life that might
be calculated or projected under different or varying prepayment or Index level
assumptions.
The characteristics of the Mortgage Loans in each Sub-Pool will differ
from those assumed in preparing the table above. In addition, it is unlikely
that any Mortgage Loan will prepay at any constant percentage until maturity,
that all of the Mortgage Loans will prepay at the same rate or that, in the case
of Sub-Pool 2, the level of the Index will remain constant or at any level for
any period of time. The timing of changes in the rate of prepayments may
significantly affect the actual yield to maturity to investors, even if the
average rate of principal prepayments and, in the case of Sub-Pool 2, the level
of the Index is consistent with the expectations of investors.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will consist of six classes of certificates, designated
as (i) the Class A1-1 Certificates, the Class A1-2 Certificates, the Class A1-3
Certificates and the Class A1-4 Certificates (collectively, the "Group 1 Class A
Certificates"), (ii) the Class A2-1 Certificates (the "Group 2 Class A
Certificates"; the Group 1 Class A Certificates and the Group 2 Class A
Certificates, together, the "Class A Certificates") and (iii) the Class R
Certificates (the "Residual Certificates"). Only the Class A Certificates are
offered hereby. The Residual Certificates, which are not being offered hereby,
may be sold at any time on or after the Closing Date in accordance with the
Agreement.
The Certificates represent in the aggregate the entire beneficial
ownership interest in a Trust Fund (the "Trust Fund") consisting primarily of a
pool (the "Mortgage Pool") of conventional, one- to four-family, first lien
mortgage loans having original terms to maturity ranging from 15 years to 30
years (the "Mortgage Loans"). The Mortgage Pool consists of two separate
sub-pools (each a "Sub-Pool"), designated as Sub-Pool 1, which will consist of
fixed-rate Mortgage Loans having an aggregate principal balance as of the
Cut-off Date of approximately $52,684,887, and Sub-Pool 2, which will consist of
adjustable-rate Mortgage Loans having an aggregate principal balance as of the
Cut-off Date of approximately $78,617,040, in each case subject to a permitted
variance as described under "The Mortgage Pool" herein.
WITH RESPECT TO THE GROUP 1 CLASS A CERTIFICATES, SUB-POOL 1 IS SOMETIMES
REFERRED TO HEREIN AS THE RELATED SUB-POOL AND THE MORTGAGE LOANS IN SUCH
SUB-POOL ARE SOMETIMES REFERRED TO AS THE RELATED MORTGAGE LOANS. WITH RESPECT
TO THE GROUP 2 CLASS A CERTIFICATES, SUB-POOL 2 IS SOMETIMES REFERRED TO HEREIN
AS THE RELATED SUB-POOL AND THE MORTGAGE LOANS IN SUCH SUB-POOL ARE SOMETIMES
REFERRED TO AS THE RELATED MORTGAGE LOANS.
The Class A Certificates in the aggregate will have an initial Certificate
Principal Balance of approximately $131,301,927. The Pass-Through Rate on each
class of Group 1 Class A Certificates is the fixed rate per annum set forth on
the cover hereof. The Pass-Through Rate on the Group 2 Class A Certificates is
adjustable and is calculated as described under "--Pass-Through Rate" herein.
The Class A Certificates in the aggregate initially evidence an interest of 100%
in the principal of the Trust Fund. The Group 1 Class A Certificates will
initially have an aggregate Certificate Principal Balance equal to the aggregate
principal balance as of the Cut-off Date of the Mortgage Loans in Sub-Pool 1,
and the primary source of funds for distribution to the holders of the Group 1
Class A Certificates will be the Mortgage Loans in Sub-Pool 1 as described under
"--Interest Distributions" and "--Principal Distributions on the Class A
Certificates" herein. The Group 2 Class A Certificates will initially have an
aggregate Certificate Principal Balance equal to the aggregate principal balance
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<PAGE>
as of the Cut-off Date of the Mortgage Loans in Sub-Pool 2, and the primary
source of funds for distribution to the holders of the Group 2 Class A
Certificateholders will be the Mortgage Loans in Sub-Pool 2 as described under
"--Interest Distributions" and "--Principal Distributions on the Class A
Certificates" herein.
The Class A Certificates will be issued, maintained and transferred on the
book-entry records of DTC and its Participants in minimum denominations of
$1,000 and integral multiples of $1.00 in excess thereof. The Class A
Certificates will initially be represented by one or more global certificates
registered in the name of the nominee of DTC (together with any successor
clearing agency selected by the Depositor, the "Clearing Agency"), except as
provided below. The Depositor has been informed by DTC that DTC's nominee will
be CEDE & Co. ("CEDE"). No Certificate Owner will be entitled to receive a
certificate representing such person's interest, except as set forth below under
"--Definitive Certificates". Unless and until Definitive Certificates are issued
under the limited circumstances described herein, all references to actions by
Certificateholders with respect to the Class A Certificates shall refer to
actions taken by DTC upon instructions from its Participants (as defined below),
and all references herein to distributions, notices, reports and statements to
Certificateholders with respect to the Class A Certificates shall refer to
distributions, notices, reports and statements to DTC or CEDE, as the registered
holder of the Class A Certificates, for distribution to Certificate Owners in
accordance with DTC procedures. See "--Registration of the Class A Certificates"
and "--Definitive Certificates" herein.
All distributions to holders of the Class A Certificates, other than the
final distribution on the Class A Certificates, will be made by or on behalf of
the Trustee to the persons in whose names such Class A Certificates are
registered at the close of business on each Record Date, which will be the last
business day of the month preceding the month in which the related Distribution
Date occurs. Such distributions will be made either (i) by check mailed to the
address of each such Certificateholder as it appears in the Certificate Register
or (ii) upon written request to the Trustee at least five business days prior to
the relevant Record Date by any holder of Class A Certificates having an
aggregate initial Certificate Principal Balance that is in excess of $5,000,000
by wire transfer in immediately available funds to the account of such
Certificateholder specified in the request. The final distribution on the Class
A Certificates will be made in like manner, but only upon presentment and
surrender of such Class A Certificates at the corporate trust office of the
Trustee or such other location specified in the notice to Certificateholders of
such final distribution.
REGISTRATION OF THE CLASS A CERTIFICATES
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and to facilitate the
clearance and settlement of securities transactions between Participants through
electronic book entries, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers (including
Salomon Brothers Inc), banks, trust companies and clearing corporations.
Indirect access to the DTC system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Certificate Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, the Class A Certificates may do so only through Participants and Indirect
Participants. In addition, Certificate Owners will receive all distributions of
principal of and interest on the Class A Certificates from the Trustee through
DTC and DTC Participants. The Trustee will forward payments to DTC in same day
funds and DTC will forward such payments to Participants in next day funds
settled through the New York Clearing House. Each Participant will be
responsible for disbursing such payments to Indirect Participants or to
Certificate
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<PAGE>
Owners. Unless and until Definitive Certificates are issued, it is anticipated
that the only Certificateholder of the Class A Certificates will be CEDE, as
nominee of DTC. Certificate Owners will not be recognized by the Trustee as
Certificateholders, as such term is used in the Agreement, and Certificate
Owners will be permitted to exercise the rights of Certificateholders only
indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Class A Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, the Class A Certificates.
Participants and Indirect Participants with which Certificate Owners have
accounts with respect to the Class A Certificates similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will not
possess Definitive Certificates, the Rules provide a mechanism by which
Certificate Owners through their Participants and Indirect Participants will
receive payments and will be able to transfer their interest.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and on behalf of certain banks, the ability of a
Certificate Owner to pledge Class A Certificates to persons or entities that do
not participate in the DTC system, or to otherwise act with respect to such
Certificates, may be limited due to the absence of physical certificates for the
Class A Certificates. In addition, under a book-entry format, Certificate Owners
may experience delays in their receipt of payments since distribution will be
made by the Trustee to CEDE, as nominee for DTC.
Under the Rules, DTC will take action permitted to be taken by a
Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC account the Class A Certificates are credited.
Additionally, under the Rules, DTC will take such actions with respect to
specified Voting Rights only at the direction of and on behalf of Participants
whose holdings of Class A Certificates evidence such specified Voting Rights.
DTC may take conflicting actions with respect to Voting Rights to the extent
that Participants whose holdings of Class A Certificates evidence such Voting
Rights, authorize divergent action.
The Depositor, the Master Servicer, the Insurer and the Trustee will have
no liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in the Class A Certificates held by
CEDE, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
DEFINITIVE CERTIFICATES
Definitive Certificates will be issued to Certificate Owners or their
nominees, respectively, rather than to DTC or its nominee, only if (i) the
Depositor advises the Trustee in writing that DTC is no longer willing or able
to discharge properly its responsibilities as Clearing Agency with respect to
the Class A Certificates and the Depositor is unable to locate a qualified
successor, (ii) the Depositor, at its option, elects to terminate the book-entry
system through DTC, or (iii) after the occurrence of an Event of Default,
Certificate Owners representing in the aggregate not less than 51% of the Voting
Rights of the Class A Certificates advise the Trustee and DTC through
Participants, in writing, that the continuation of a book-entry system through
DTC (or a successor thereto) is no longer in the Certificate Owners' best
interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee is required to notify all Certificate Owners through
Participants of the availability of Definitive Certificates. Upon surrender by
DTC of the definitive certificates representing the Class A Certificates and
receipt of instructions for re-registration, the Trustee will reissue the Class
A Certificates as Definitive Certificates issued in the respective principal
amounts owned by individual Certificate Owners, and thereafter the Trustee will
recognize the holders of such Definitive Certificates as Certificateholders
under the Agreement. Such Definitive Certificates will be issued in minimum
S-48
<PAGE>
denominations of $1,000, except that any beneficial ownership represented by a
Class A Certificate in an amount less than $1,000 immediately prior to the
issuance of a Definitive Certificate shall be issued in a minimum denomination
equal to the amount represented by such Class A Certificate.
PASS-THROUGH RATE
The Pass-Through Rate on each class of Group 1 Class A Certificates for
each Distribution Date is the fixed rate per annum set forth on the cover
hereof.
The Pass-Through Rate on the Group 2 Class A Certificates on each
Distribution Date after the first Distribution Date will be a rate per annum
equal to the lesser of (i) One-Month LIBOR plus 0.38%, in the case of each
Distribution Date through and including the Distribution Date on which the
aggregate principal balance of the Mortgage Loans is reduced to 10% or less of
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date, or
One-Month LIBOR plus 1.38% per annum, in the case of any Distribution Date
thereafter and (ii) the Sub-Pool 2 Available Funds Pass-Through Rate for such
Distribution Date. For the first Distribution Date, the Pass-Through Rate on the
Group 2 Class A Certificates will be approximately 5.86% per annum. See
"--Calculation of One-Month LIBOR" herein.
The "Sub-Pool 2 Available Funds Pass-Through Rate" for any Distribution
Date is a rate per annum equal to the lesser of (x) the fraction, expressed as a
percentage, the numerator of which is (i) an amount equal to (A) 1/12 of the
aggregate Scheduled Principal Balance of the then outstanding Mortgage Loans in
Sub-Pool 2 times the weighted average of the Expense Adjusted Mortgage Rates on
the then outstanding Mortgage Loans in Sub-Pool 2 minus (B) the amount of the
premium with respect to the Group 2 Class A Certificates payable to the Insurer
with respect to the Policy for such Distribution Date, and the denominator of
which is (ii) an amount equal to (A) the then outstanding aggregate Certificate
Principal Balance of the Group 2 Class A Certificates multiplied by (B) the
actual number of days elapsed in the related Interest Accrual Period divided by
360 and (y) the Maximum Group 2 Class A Pass-Through Rate.
The "Expense Adjusted Mortgage Rate" on any Mortgage Loan in Sub-Pool 2 is
equal to the then applicable Mortgage Rate thereon minus the sum of (i) the
Minimum Spread, (ii) the Trustee Fee Rate and (iii) the Servicing Fee Rate. For
any Distribution Date, the Minimum Spread is equal to 0.50% per annum, the
Trustee Fee Rate is equal to 0.00625% per annum and the Servicing Fee Rate is
equal to 0.50% per annum. See "Pooling and Servicing Agreement--The Trustee" and
"--Servicing and Other Compensation and Payment of Expenses" herein. The amount
of the premium payable to the Insurer with respect to the Policy for any
Distribution Date is described under "Pooling and Servicing Agreement--Certain
Matters Regarding the Insurer" herein.
The Pass-Through Rate on the Group 2 Class A Certificates for the current
related Interest Accrual Period, to the extent it has been determined, and for
the immediately preceding Interest Accrual Period may be obtained by telephoning
the Trustee at (212) 815-2297.
With respect to the Group 2 Class A Certificates and any Distribution
Date, to the extent that (a) the lesser of (x) the amount payable if clause (i)
of the related definition of Pass-Through Rate above is used to calculate
interest and (y) the amount payable if the Maximum Group 2 Class A PassThrough
Rate is used to calculate interest exceeds (b) the amount payable if clause (ii)
of the related definition of Pass-Through Rate above is used to calculate
interest (the "Basis Risk Shortfall"), the holders of the Group 2 Class A
Certificates will be entitled to the amount of such Basis Risk Shortfall with
interest thereon at the Pass-Through Rate for such Certificates applicable from
time to time after certain distributions to the holders of the Class A
Certificates and the Insurer but before the Residual Certificates are entitled
to any distributions. The "Unpaid Basis Risk Shortfall" for the Group 2 Class A
Certificates and any Distribution Date is equal to the aggregate of all Basis
Risk Shortfalls for any previous Distribution Dates less all payments made to
the holders of the Group 2 Class A Certificates in respect of such Basis Risk
Shortfalls on or prior to such Distribution Date. The Policy will not cover
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<PAGE>
Basis Risk Shortfalls or Unpaid Basis Risk Shortfalls. See
"--Overcollateralization Provisions" and "--Financial Guaranty Insurance Policy"
herein.
The "Maximum Group 2 Class A Pass-Through Rate" for any Distribution Date
is a per annum rate equal to the fraction, expressed as a percentage, the
numerator of which is (i) an amount equal to (A) 1/12 of the aggregate Scheduled
Principal Balance of the then outstanding Mortgage Loans in Sub-Pool 2 times the
weighted average of the Expense Adjusted Maximum Mortgage Rates on the then
outstanding Mortgage Loans in Sub-Pool 2 minus (B) the amount of the premium
with respect to the Group 2 Class A Certificates payable to the Insurer with
respect to the Policy for such Distribution Date, and the denominator of which
is (ii) an amount equal to (A) the aggregate Scheduled Principal Balance of the
then outstanding Mortgage Loans in Sub-Pool 2 multiplied by (B) the actual
number of days elapsed in the related Interest Accrual Period divided by 360.
The "Expense Adjusted Maximum Mortgage Rate" on any Mortgage Loan in
Sub-Pool 2 is equal to the Maximum Mortgage Rate thereon minus the sum of (i)
the Minimum Spread, (ii) the Trustee Fee Rate and (iii) the Servicing Fee Rate.
INTEREST DISTRIBUTIONS
Distributions in respect of interest on each Distribution Date will be
made to the holders of the Class A Certificates of each class in an amount equal
to the Interest Distribution Amount for such class.
The Interest Distribution Amount for any class of the Class A Certificates
on any Distribution Date is equal to interest accrued during the related
Interest Accrual Period on the Certificate Principal Balance thereof immediately
prior to such Distribution Date at the then applicable Pass-Through Rate,
reduced (to not less than zero), by Prepayment Interest Shortfalls to the extent
not covered by Compensating Interest paid by the Master Servicer and any
shortfalls resulting from the application of the Relief Act.
Distributions of the Interest Distribution Amount for each class of the
Class A Certificates will be made on each Distribution Date, commencing with the
first Distribution Date. The Interest Accrual Period for any Distribution Date
and the Group 1 Class A Certificates is the calendar month immediately preceding
the month in which such Distribution Date occurs, and all distributions of
interest on the Group 1 Class A Certificates will be based on a 360-day year
consisting of twelve 30- day months. The Interest Accrual Period for any
Distribution Date and the Group 2 Class A Certificates is the period commencing
on the 25th day of the month immediately preceding the month in which such
Distribution Date occurs (or, in the case of the first period, commencing on the
Closing Date) and ending on the 24th day of the month in which such Distribution
Date occurs, and all distributions of interest on the Group 2 Class A
Certificates will be based on a 360-day year and the actual number of days in
the applicable Interest Accrual Period.
Subject to the terms of the Policy, any interest losses allocable to the
Class A Certificates (other than Prepayment Interest Shortfalls, shortfalls
resulting from the application of the Relief Act, Basis Risk Shortfalls and
Unpaid Basis Risk Shortfalls) will be covered under the Policy. Notwithstanding
the foregoing, if payments are not made as required under the Policy, any such
interest losses may be allocated to the Class A Certificates.
The Certificate Principal Balance of a Class A Certificate outstanding at
any time represents the then maximum amount that the holder thereof is
thereafter entitled to receive as distributions allocable to principal from the
cash flow on the Mortgage Loans and the other assets in the Trust Fund. The
Certificate Principal Balance of a Class A Certificate as of any date of
determination is equal to the initial Certificate Principal Balance thereof
reduced by the aggregate of (a) all amounts allocable to principal previously
distributed with respect to such Certificate and (b) any reductions in the
Certificate Principal Balance thereof deemed to have occurred in connection with
allocations of Realized Losses in the manner described herein. The Certificate
Principal Balance of the Residual Certificates in the
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<PAGE>
aggregate as of any date of determination is equal to the excess, if any, of (a)
the then aggregate Stated Principal Balance of the Mortgage Loans over (b) the
then aggregate Certificate Principal Balance of the Class A Certificates.
CALCULATION OF ONE-MONTH LIBOR
The Pass-Through Rate on the Class Group 2 Class A Certificates on the
first Distribution Date will be approximately 5.86% per annum. Thereafter, on
the second business day preceding each Distribution Date (each such date, an
"Interest Determination Date"), the Trustee will determine the London interbank
offered rate for one-month U.S. dollar deposits ("One-Month LIBOR") for the next
Interest Accrual Period on the basis of the offered rates of the Reference Banks
for one-month U.S. dollar deposits, as such rates appear on the Reuter Screen
LIBO Page, as of 11:00 a.m. (London time) on such Interest Determination Date.
As used in this section, "business day" means a day on which banks are open for
dealing in foreign currency and exchange in London and New York City; "Reuter
Screen LIBO Page" means the display designated as page "LIBO" on the Reuter
Monitor Money Rates Service (or such other page as may replace the LIBO page on
that service for the purpose of displaying London interbank offered rates of
major banks); and "Reference Banks" means leading banks selected by the Trustee
and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (i) with an established place of business in London, (ii)
whose quotations appear on the Reuter Screen LIBO Page on the Interest
Determination Date in question, (iii) which have been designated as such by the
Trustee and (iv) not controlling, controlled by, or under common control with,
the Depositor or the Mortgage Loan Seller.
On each Interest Determination Date, One-Month LIBOR for the related Due
Period will be established by the Trustee as follows:
(a) If on such Interest Determination Date two or more Reference
Banks provide such offered quotations, One-Month LIBOR for the related
Interest Accrual Period shall be the arithmetic mean of such offered
quotations (rounded upwards if necessary to the nearest whole multiple of
0.0625%).
(b) If on such Interest Determination Date fewer than two Reference
Banks provide such offered quotations, One-Month LIBOR for the related
Interest Accrual Period shall be the higher of (x) One-Month LIBOR as
determined on the previous Interest Determination Date and (y) the Reserve
Interest Rate. The "Reserve Interest Rate" shall be the rate per annum
that the Trustee determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 0.0625%) of the
one-month U.S. dollar lending rates which New York City banks selected by
the Trustee are quoting on the relevant Interest Determination Date to the
principal London offices of leading banks in the London interbank market
or, in the event that the Trustee can determine no such arithmetic mean,
(ii) the lowest one-month U.S. dollar lending rate which New York City
banks selected by the Trustee are quoting on such Interest Determination
Date to leading European banks.
The establishment of One-Month LIBOR on each Interest Determination Date
by the Trustee and the Trustee's calculation of the rate of interest applicable
to the Group 2 Class A Certificates for the related Interest Accrual Period
shall (in the absence of manifest error) be final and binding.
PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES
Holders of the Group 1 Class A Certificates and Group 2 Class A
Certificates will be entitled to receive on each Distribution Date the Group 1
Class A Principal Distribution Amount and the Group 2 Class A Principal
Distribution Amount, respectively. The "Group 1 Class A Principal Distribution
Amount" and the "Group 2 Class A Principal Distribution Amount", respectively,
for any Distribution Date will be the lesser of:
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(a) the excess of (x) the sum of (A) the related Sub-Pool Available
Distribution Amount and (B) any nonrelated Sub-Pool Net Monthly Excess
Cashflow payable in respect of principal to the Group 1 Class A
Certificates or Group 2 Class A Certificates, as the case may be, as
described under "--Overcollateralization Provisions" below, over (y) the
aggregate of the Interest Distribution Amounts for the Group 1 Class A
Certificates or the Interest Distribution Amount for the Group 2 Class A
Certificates, as the case may be; and
(b) THE SUM OF:
(i) the principal portion of all scheduled monthly
payments on the related Mortgage Loans due during the related
Due Period, received by the Trustee or advanced to the Trustee
on or prior to the related Determination Date;
(ii) the principal portion of all proceeds of the
repurchase of a related Mortgage Loan (or, in the case of a
substitution, certain amounts representing a principal
adjustment) as required by the Agreement during the related
Prepayment Period;
(iii) the principal portion of all other unscheduled
collections, including insurance proceeds, liquidation
proceeds and all full and partial principal prepayments,
received during the related Prepayment Period, to the extent
applied as recoveries of principal on the related Mortgage
Loans;
(iv) the principal portion of any Realized Losses
incurred (or deemed to have been incurred) on any related
Mortgage Loans in the calendar month preceding such
Distribution Date to the extent covered by Net Monthly Excess
Cashflow (as defined herein) for such Distribution Date; and
(v) the amount of any Subordination Increase Amount (as
defined herein) for the Group 1 Class A Certificates or Group
2 Class A Certificates, as the case may be, for such
Distribution Date;
MINUS
(vi) the amount of any Subordination Reduction Amount
(as defined herein) for the Group 1 Class A Certificates or
the Group 2 Class A Certificates, as the case may be, for such
Distribution Date.
Notwithstanding the foregoing, as described under "--Overcollateralization
Provisions" herein, no amounts will be distributed to the holders of the Group 1
Class A Certificates or Group 2 Class A Certificates pursuant to clause (v)
above except to the extent of any Net Monthly Excess Cashflow remaining after
payment to the holders of the Class A Certificates relating to both Sub-Pools of
all amounts in respect of Realized Losses pursuant to clause (iii) above and
payment to the Insurer any Cumulative Insurance Payments. As of any Distribution
Date, "Cumulative Insurance Payments" refers to the aggregate of any payments
(other than those attributable to Excess Bankruptcy Losses, Excess Fraud Losses,
Excess Special Hazard Losses and Excess Extraordinary Losses) made by the
Insurer under the Policy to the extent not previously reimbursed, plus interest
thereon.
In no event will the Group 1 Class A Principal Distribution Amount or the
Group 2 Class A Principal Distribution Amount with respect to any Distribution
Date be (x) less than zero or (y) greater than the then outstanding aggregate
Certificate Principal Balance of the Group 1 Class A Certificates or Group 2
Class A Certificates, as the case may be.
The "Sub-Pool Available Distribution Amount" for the Group 1 Class A
Certificates or Group 2 Class A Certificates, as the case may be, for any
Distribution Date is equal to the sum, net of amounts reimbursable therefrom to
the Master Servicer, of (i) the aggregate amount of scheduled monthly payments
on the related Mortgage Loans due on the related Due Date and received by the
Trustee on or prior to the related Distribution Date, after deduction of the
Servicing Fee, the Trustee Fee and the premium payable with respect to the
Policy, (ii) certain unscheduled payments in respect of the related Mortgage
Loans, including prepayments, insurance proceeds, liquidation proceeds and
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proceeds from repurchases of and substitutions for such Mortgage Loans occurring
during the preceding calendar month and (iii) all P&I Advances with respect to
the related Mortgage Loans received by the Trustee for such Distribution Date.
In addition, on each Distribution Date, funds received as a result of a
claim under the Policy in respect of the principal portion of Realized Losses
allocated to the Group 1 Class A Certificates or Group 2 Class A Certificates,
as the case may be, will be distributed by or on behalf of the Trustee to the
holders of such Certificates. See "--Financial Guaranty Insurance Policy"
herein.
The Stated Principal Balance of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, received by the Trustee or advanced to the Trustee, reduced by all
other amounts allocable to principal that have been distributed to
Certificateholders with respect to such Mortgage Loan on or before such date,
and as further reduced to the extent that any Realized Loss thereon has been
allocated to one or more classes of Certificates on or before the date of
determination.
All amounts distributed in respect of principal on the Group 1 Class A
Certificates will be paid first to the holders of the Class A1-1 Certificates,
second to the holders of the Class A1-2 Certificates, third to the holders of
the Class A1-3 Certificates and fourth to the holders of the Class A1-4
Certificates, in each case in reduction of the Certificate Principal Balance of
such class and in each case until the Certificate Principal Balance of such
class has been reduced to zero. Notwithstanding the foregoing, if on any
Distribution Date an Insurer Default (as defined herein) exists and the
Subordinated Amount (as defined herein) has been reduced to zero, the sequential
priorities for principal distributions on the Group 1 Class A Certificates will
be disregarded and all amounts distributable in respect of principal on such
Distribution Date on the Group 1 Class A Certificates will be allocated among
the classes thereof on a PRO RATA basis.
OVERCOLLATERALIZATION PROVISIONS
The Agreement requires that, on each Distribution Date, the Net Monthly
Excess Cashflow, if any, be applied on such Distribution Date as an accelerated
payment of principal on the Class A Certificates, but only to the limited extent
hereafter described. The "Net Monthly Excess Cashflow" for any Distribution Date
is equal to the sum of the Sub-Pool Net Monthly Excess Cashflows for such
Distribution Date. The "Sub-Pool Net Monthly Excess Cashflow" for either
Sub-Pool and any Distribution Date is equal to the excess of the (x) the related
Sub-Pool Available Distribution Amount for such Distribution Date over (y) the
sum for such Distribution Date of (A) the sum of the Interest Distribution
Amounts payable to the holders of the related Class A Certificates and (B) the
amounts described in clauses (b)(i)-(iii) of the definition of Group 1 Class A
Principal Distribution Amount or Group 2 Class A Principal Distribution Amount,
as the case may be.
With respect to any Distribution Date, any Net Monthly Excess Cashflow
shall be paid as follows:
FIRST, concurrently, to the holders of the Group 1 Class A Certificates
and the holders of the Group 2 Class A Certificates, in each case from
related Sub-Pool Net Monthly Excess Cashflow and in each case in an amount
equal to any interest shortfalls (other than Prepayment Interest
Shortfalls to the extent not covered by Compensating Interest paid by the
Master Servicer, shortfalls resulting from the application of the Relief
Act, and in the case of the Group 2 Class A Certificates, Basis Risk
Shortfalls or Unpaid Basis Risk Shortfalls) and the principal portion of
any Realized Losses incurred or deemed to have been incurred on the
Mortgage Loans in the related Sub-Pool;
SECOND, to the holders of the Group 1 Class A Certificates or the holders
of the Group 2 Class A Certificates, as applicable, from nonrelated
Sub-Pool Net Monthly Excess Cashflow, in an amount equal to any amounts
described in clause FIRST above not paid pursuant to such clause FIRST
from the related Sub-Pool Net Monthly Excess Cashflow;
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THIRD, to the Insurer, in an amount equal to any Cumulative Insurance
Payments (any such Cumulative Insurance Payments with respect to any class
of Class A Certificates being deemed paid first from related Sub-Pool Net
Monthly Excess Cashflow, and then from any nonrelated Sub-Pool Net Monthly
Excess Cashflow remaining after any such payments from related Sub-Pool
Net Monthly Excess Cashflow);
FOURTH, concurrently, to the holders of the Group 1 Class A Certificates
and the holders of the Group 2 Class A Certificates, in each case from
related Sub-Pool Net Monthly Excess Cashflow and in each case in an amount
equal to the Subordination Increase Amount for such Certificates;
FIFTH, to the holders of the Group 1 Class A Certificates or the holders
of the Group 2 Class A Certificates, as applicable, from nonrelated
Sub-Pool Net Monthly Excess Cashflow, in an amount equal to any
Subordination Increase Amount not paid pursuant to clause FOURTH above
from the related Sub-Pool Net Monthly Cashflow;
SIXTH, concurrently, to the holders of the Group 1 Class A Certificates
and the holders of the Group 2 Class A Certificates, in each case from
related Sub-Pool Net Monthly Excess Cashflow and in each case in an amount
equal to any Prepayment Interest Shortfalls on the related Mortgage Loans
to the extent not covered by Compensating Interest paid by the Master
Servicer and any shortfalls resulting from the application of the Relief
Act with respect to the related Mortgage Loans;
SEVENTH, to the holders of the Group 1 Class A Certificates or the holders
of the Group 2 Class A Certificates, as applicable, from nonrelated
Sub-Pool Net Monthly Excess Cashflow, in an amount equal to any amounts
described in clause SIXTH above not paid pursuant to such clause SIXTH
from the related Sub-Pool Net Monthly Excess Cashflow;
EIGHTH, to the holders of the Group 2 Class A Certificates, in an amount
equal to any Basis Risk Shortfall;
NINTH, to the holders of the Group 2 Class A Certificates, in an amount
equal to any Unpaid Basis Risk Shortfall;
TENTH, to the Insurer, any amounts remaining due to the Insurer under the
terms of the Insurance Agreement (other than those attributable to Excess
Bankruptcy Losses, Excess Fraud Losses, Excess Special Hazard Losses and
Excess Extraordinary Losses); and
ELEVENTH, to the holders of the Residual Certificates.
With respect to any Distribution Date and the Group 1 Class A Certificates
and Group 2 Class A Certificates, respectively, the excess, if any, of (a) the
aggregate Stated Principal Balances of the related Mortgage Loans immediately
following such Distribution Date over (b) the Certificate Principal Balance of
the Group 1 Class A Certificates or Group 2 Class A Certificates, as applicable,
as of such date (after taking into account the payment of the amounts described
in clauses (b)(i)-(iv) of the definition of Group 1 Class A Principal
Distribution Amount or Group 2 Class A Principal Distribution Amount, as
applicable, on such Distribution Date) is the "Subordinated Amount" for such
Class A Certificates as of such Distribution Date. With respect to the Group 1
Class A Certificates and Group 2 Class A Certificates, any amount of Net Monthly
Excess Cashflow actually applied as an accelerated payment of principal to the
extent the related Required Subordinated Amount exceeds the related Subordinated
Amount as of such Distribution Date is a "Subordination Increase Amount" for
such Class A Certificates. The required level of the Subordinated Amount with
respect to a Distribution Date and the Group 1 Class A Certificates or Group 2
Class A Certificates is the related "Required Subordinated Amount" with respect
to such Distribution Date. With respect to any Distribution Date, the Required
Subordinated Amount for the Group 1 Class A Certificates will be an amount equal
2.00% of the aggregate Stated Principal Balance of the Mortgage Loans in
Sub-Pool 1 as of the Cut-off Date, and the Required Subordinated Amount for the
Group 2 Class A Certificates will be an amount equal 2.75% of the aggregate
Stated Principal Balance of the Mortgage Loans in
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Sub-Pool 2 as of the Cut-off Date, in each case subject to increase ("step up")
or, after three years, decrease ("step down"), upon the occurrence of certain
loss and delinquency triggers with respect to the Mortgage Pool set forth in the
Agreement.
In the event that the Required Subordinated Amounts are required to step
up on any Distribution Date, the Agreement provides that all Sub-Pool Net
Monthly Excess Cashflow for either Sub-Pool remaining after the distributions
described in clauses FIRST through THIRD above will be distributed in respect of
the Subordination Increase Amount for the related Class A Certificates until the
Certificate Principal Balances thereof have been reduced to zero, then in
respect of the Subordination Increase Amount for the nonrelated Class A
Certificates until the Certificate Principal Balances thereof have been reduced
to zero. This has the effect of accelerating the amortization of the Group 1
Class A Certificates or Group 2 Class A Certificates, as applicable, relative to
the amortization of the related Mortgage Loans, and of reducing the related
Subordinated Amount.
In the event that the either Required Subordinated Amount is permitted to
step down on any Distribution Date, the Agreement provides that a portion of the
principal which would otherwise be distributed to the holders of the related
Class A Certificates on such Distribution Date shall be distributed to the
holders of the Residual Certificates on such Distribution Date. This has the
effect of decelerating the amortization of the Group 1 Class A Certificates or
Group 2 Class A Certificates, as applicable, relative to the amortization of the
related Mortgage Loans, and of reducing the related Subordinated Amount. With
respect to any Distribution Date and the Group 1 Class A Certificates and Group
2 Class A Certificates, respectively, the excess, if any, of (a) the related
Subordinated Amount over (b) the related Required Subordinated Amount is the
related "Excess Subordinated Amount". If, on any Distribution Date, either
Excess Subordinated Amount is, or, after taking into account all other
distributions to be made on such Distribution Date would be, greater than zero
(I.E., the related Subordinated Amount is or would be greater than the related
Required Subordinated Amount), then any amounts relating to principal which
would otherwise be distributed to the holders of the related Class A
Certificates on such Distribution Date shall instead be distributed to the
holders of the Residual Certificates in an amount equal to the lesser of (x)
such Excess Subordinated Amount and (y) the amount available for distribution
specified in clauses (b)(i)-(iii) of the definition of Group 1 Class A Principal
Distribution Amount or Group 2 Class A Principal Distribution Amount, as
applicable, on such Distribution Date; such amount being the related
"Subordination Reduction Amount" for such Distribution Date.
FINANCIAL GUARANTY INSURANCE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy. A form of
the Policy may be obtained, upon request, from the Depositor.
Simultaneously with the issuance of the Class A Certificates, the Insurer
will deliver the Policy to the Trustee for the benefit of the holders of the
Class A Certificates. Under the Policy, the Insurer will irrevocably and
unconditionally guarantee payment on each Distribution Date to the Trustee for
the benefit of the holders of the Class A Certificates the full and complete
payment of Insured Payments with respect to the Class A Certificates, calculated
in accordance with the original terms of the Class A Certificates when issued
and without regard to any amendment or modification of the Class A Certificates
or the Agreement except amendments or modifications to which the Insurer has
given its prior written consent. "Insured Payments" shall mean with respect to
the Class A Certificates as of any Distribution Date (i) any shortfall in
amounts available in the Distribution Account (as defined in the Agreement) to
pay the Interest Distribution Amounts for the related Interest Accrual Period,
(ii) the principal portion of any Realized Losses allocated to any of the Class
A Certificates and, without duplication, the excess, if any, of (a) the
aggregate Certificate Principal Balance of all of the Class A Certificates then
outstanding over (b) the aggregate principal balances of the Mortgage Loans then
outstanding and (iii) without duplication of the amount specified in clause
(ii), the aggregate Certificate Principal Balance of all of the Class A
Certificates to the extent unpaid on the final Distribution Date
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or earlier termination of the Trust Fund pursuant to the terms of the Agreement.
The Policy does not cover Prepayment Interest Shortfalls, Relief Act Shortfalls,
Basis Risk Shortfalls or Unpaid Basis Risk Shortfalls.
If any Insured Payment is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law, the Insurer will pay such
amount out of funds of the Insurer on the later of (a) the date when due to be
paid pursuant to the Order referred to below or (b) the first to occur of (i)
the fourth Business Day following Receipt by the Insurer from the Trustee of (A)
a certified copy of the order of the court or other governmental body which
exercised jurisdiction to the effect that a holder of Class A Certificates is
required to return principal or interest distributed with respect to a Class A
Certificate during the Term of the Policy because such distributions were
avoidable preferences under applicable bankruptcy law (the "Order"), (B) a
certificate of such holder of Class A Certificates that the Order has been
entered and is not subject to any stay, and (C) an assignment duly executed and
delivered by such holder of Class A Certificates, in such form as is reasonably
required by the Insurer and provided to such holder of Class A Certificates by
the Insurer, irrevocably assigning to the Insurer all rights and claims of such
holder of Class A Certificates against the debtor which made such preference
payment or otherwise with respect to such preference payment, or (ii) the date
of Receipt by the Insurer from the Trustee of the items referred to in clauses
(A), (B) and (C) above if, at least four Business Days prior to such date of
Receipt, the Insurer shall have Received written notice from the Trustee that
such items were to be delivered on such date and such date was specified in such
notice. Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order and not to the
Trustee or holder of Class A Certificates directly (unless a holder of Class A
Certificates has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which case
such payment shall be disbursed to the Trustee for distribution to such
Certificateholder upon proof of such payment reasonably satisfactory to the
Insurer). In connection with the foregoing, the Insurer shall have the rights
provided pursuant to the Agreement.
Payment of claims under the Policy will be made by the Insurer following
Receipt by the Insurer of the appropriate notice for payment on the later to
occur of (a) 12:00 noon, New York City time, on the second Business Day
following Receipt of such notice for payment, and (b) 12:00 noon, New York City
time, on the relevant Distribution Date.
The terms "Receipt" and "Received," with respect to the Policy, means
actual delivery to the Insurer and to its fiscal agent appointed by the Insurer
at its option, if any, prior to 12:00 p.m., New York City time, on a Business
Day; delivery either on a day that is not a Business Day or after 12:00 p.m.,
New York City time, shall be deemed to be Receipt on the next succeeding
Business Day. If any notice or certificate given under the Policy by the Trustee
is not in proper form or is not properly completed, executed or delivered, it
shall be deemed not to have been Received, and the Insurer or the fiscal agent
shall promptly so advise the Trustee and the Trustee may submit an amended
notice.
Under the Policy, "Business Day" means any day other than (i) a Saturday
or Sunday or (ii) a day on which banking institutions in the City of New York,
New York, the State of New York or in the city in which the corporate trust
office of the Trustee is located, are authorized or obligated by law or
executive order to be closed. The Insurer's obligations under the Policy to make
Insured Payments shall be discharged to the extent funds are transferred to the
Trustee as provided in the Policy, whether or not such funds are properly
applied by the Trustee.
"Term of the Policy" means the period from and including the date of
issuance of the Policy to and including the date on which the Certificate
Principal Balances of the Class A Certificates are zero, plus such additional
period, to the extent specified in the Policy, during which any payment on the
Class A Certificates could be avoided in whole or in part as a preference
payment.
The Insurer shall be subrogated to the rights of the holders of the Class
A Certificates to receive payments of principal and interest, as applicable,
with respect to distributions on the Class A Certificates to the extent of any
payment by the Insurer under the Policy. To the extent the Insurer
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makes Insured Payments, either directly or indirectly (as by paying through the
Trustee), to the holders of the Class A Certificates, the Insurer will be
subrogated to the rights of the holders of the Class A Certificates, as
applicable, with respect to such Insured Payment and shall be deemed to the
extent of the payments so made to be a registered holder of Class A Certificates
for purposes of payment.
Claims under the Policy constitute direct unsecured and unsubordinated
obligations of the Insurer, and will rank equally with any other unsecured and
unsubordinated obligations of the Insurer except for certain obligations in
respect to tax and other payments to which preference is or may become afforded
by statute. The terms of the Policy cannot be modified, altered or affected by
any other agreement or instrument, or by the merger, consolidation or
dissolution of the Depositor. The Policy by its terms may not be cancelled or
revoked prior to distribution in full of all Guaranteed Distributions (as
defined therein). The Policy is governed by the laws of the State of New York.
The Policy is not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law.
To the fullest extent permitted by applicable law, the Insurer agrees
under the Policy not to assert, and waives, for the benefit of each holder of
Class A Certificates, all its rights (whether by counterclaim, setoff or
otherwise) and defenses (including, without limitation, the defense of fraud),
whether acquired by subrogation, assignment or otherwise, to the extent that
such rights and defenses may be available to the Insurer to avoid payment of its
obligations under the Policy in accordance with the express provisions of the
Policy.
Pursuant to the terms of the Agreement, unless an Insurer Default exists,
the Insurer will be entitled to exercise certain rights of the holders of the
Class A Certificates, without the consent of such Certificateholders, and the
holders of the Class A Certificates may exercise such rights only with the prior
written consent of the Insurer. See "Pooling and Servicing Agreement--Voting
Rights" and "--Certain Matters Regarding the Insurer" herein.
The Depositor, the Mortgage Loan Seller and the Insurer will enter into an
Insurance and Indemnity Agreement (the "Insurance Agreement") pursuant to which
the Depositor and the Mortgage Loan Seller will agree to reimburse, with
interest, the Insurer for amounts paid pursuant to claims under the Policy. The
Depositor and the Mortgage Loan Seller will further agree to pay the Insurer all
reasonable charges and expenses which the Insurer may pay or incur relative to
any amounts paid under the Policy or otherwise in connection with the
transaction and to indemnify the Insurer against certain liabilities. Except to
the extent provided therein, amounts owing under the Insurance Agreement will be
payable solely from the Trust Fund. An event of default by the Mortgage Loan
Seller under the Insurance Agreement will constitute an Event of Default by the
Mortgage Loan Seller (in its capacity as Master Servicer) under the Agreement
and allow the Insurer, among other things, to direct the Trustee to terminate
the Master Servicer. An "event of default" by the Mortgage Loan Seller under the
Insurance Agreement includes (i) the Mortgage Loan Seller's failure to pay when
due any amount owed under the Insurance Agreement or certain other documents,
(ii) the Mortgage Loan Seller's untruth or incorrectness in any material respect
of any representation or warranty of the Mortgage Loan Seller in the Insurance
Agreement, the Agreement (in its capacity as Master Servicer) or certain other
documents, (iii) the Mortgage Loan Seller's failure to perform or to observe any
covenant or agreement in the Insurance Agreement, the Agreement (in its capacity
as Master Servicer) and certain other documents, (iv) the Mortgage Loan Seller's
failure to pay its debts in general or the occurrence of certain events of
insolvency or bankruptcy with respect to the Mortgage Loan Seller, and (v) the
occurrence of an Event of Default under the Agreement (in its capacity as Master
Servicer) or certain other documents.
P&I ADVANCES
Subject to the following limitations, the Master Servicer will be
obligated to advance or cause to be advanced on or before each Distribution Date
its own funds, or funds in the Certificate Account
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that are not included in the related Sub-Pool Available Distribution Amount for
such Distribution Date, in an amount equal to the aggregate of all payments of
principal and interest, net of the Servicing Fee Rate, that were due during the
related Due Period on the Mortgage Loans and that were delinquent on the related
Determination Date, plus certain amounts representing assumed payments not
covered by any current net income on the Mortgaged Properties acquired by
foreclosure or deed in lieu of foreclosure (any such advance, a "P&I Advance").
Notwithstanding the foregoing, with respect to a delinquent Balloon Payment, the
Master Servicer is not required to make an advance of such delinquent Balloon
Payment. The Master Servicer will, however, make monthly P&I Advances with
respect to Balloon Mortgage Loans with delinquent Balloon Payments, in each case
in an amount equal to the assumed monthly principal and interest payment that
would have been due on the related Due Date based on the original assumed
hypothetical principal amortization schedule for the applicable Balloon Mortgage
Loan.
P&I Advances are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making such P&I Advances is to
maintain a regular cash flow to the Certificateholders, rather than to guarantee
or insure against losses. The Master Servicer will not be required to make any
P&I Advances with respect to reductions in the amount of the monthly payments on
the Mortgage Loans due to bankruptcy proceedings or the application of the
Relief Act.
All P&I Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which such unreimbursed P&I Advance was made. In addition, any P&I
Advances previously made in respect of any Mortgage Loan that are deemed by the
Master Servicer to be nonrecoverable from related late collections, insurance
proceeds or liquidation proceeds may be reimbursed to the Master Servicer out of
any funds in the Certificate Account prior to the distributions on the
Certificates. In the event the Master Servicer fails in its obligation to make
any such advance, the Trustee will be obligated to make any such advance, to the
extent required in the Agreement.
ALLOCATION OF LOSSES; SUBORDINATION
The Policy will cover all Realized Losses allocated to the Class A
Certificates. Notwithstanding the foregoing, if payments are not made as
required under the Policy, Realized Losses will be allocable to the Class A
Certificates based on the following priorities.
With respect to any defaulted Mortgage Loan that is finally liquidated
through foreclosure sale, disposition of the related Mortgaged Property (if
acquired on behalf of the Certificateholders by deedin-lieu of foreclosure) or
otherwise, the amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the Master
Servicer for P&I Advances and expenses, including attorneys' fees) towards
interest and principal owing on the Mortgage Loan. Such amount of loss realized
and any Special Hazard Losses, Fraud Losses, Bankruptcy Losses and Extraordinary
Losses are referred to herein as "Realized Losses".
Any Realized Losses on the Mortgage Loans other than Excess Special Hazard
Losses, Excess Bankruptcy Losses, Excess Fraud Losses and Excess Extraordinary
Losses on the Mortgage Loans in either Sub-Pool will be allocated on any
Distribution Date, (i) first to the related Sub-Pool Net Monthly Excess
Cashflow, (ii) second, after the allocation to the nonrelated Sub-Pool Net
Monthly Excess Cashflow for such Distribution Date pursuant to the preceding
clause (i), to any remaining nonrelated Sub-Pool Net Monthly Excess Cashflow,
(iii) third to the Residual Certificates until the Certificate Principal Balance
thereof has been reduced to zero and (iv) fourth, to the related Class A
Certificates.
Excess Special Hazard Losses, Excess Bankruptcy Losses, Excess Fraud
Losses and Excess Extraordinary Losses with respect to the Mortgage Loans in
either Sub-Pool will be allocated on any
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Distribution Date among the related Class A Certificates and the Residual
Certificates on a PRO RATA basis.
Unless an Insurer Default exists and the Subordinated Amount has been
reduced to zero, any Realized Losses allocated on any Distribution Date to the
Group 1 Class A Certificates shall be allocated to the class or classes of Group
1 Class A Certificates then entitled to distributions in respect of principal.
However, on any Distribution Date on which an Insurer Default exists and the
Subordinated Amount has been reduced to zero, any Realized Losses allocated to
the Group 1 Class A Certificates shall be allocated among the classes of Group 1
Class A Certificates on a PRO RATA basis.
Any allocation of a Realized Loss to a Certificate will be made by
reducing the Certificate Principal Balance thereof by the amount so allocated as
of the Distribution Date in the month following the calendar month in which such
Realized Loss was incurred. An allocation of a Realized Loss on a PRO RATA basis
between two or more classes of Certificates means an allocation to each such
class of Certificates on the basis of its then outstanding Certificate Principal
Balance prior to giving effect to distributions to be made on such Distribution
Date.
The aggregate amount of Realized Losses which may be allocated to the
Residual Certificates in connection with Special Hazard Losses on the Mortgage
Loans in each Sub-Pool (the related "Special Hazard Amount") shall initially be
equal to approximately $1,790,845 and $1,957,960, respectively. As of any date
of determination following the Cut-off Date, the Special Hazard Amount for each
Sub-Pool shall equal the amount set forth in the preceding sentence less the sum
of (A) any amounts allocated solely to the Residual Certificates in respect of
related Special Hazard Losses and (B) the related Adjustment Amount. The
Adjustment Amounts will be as calculated pursuant to the terms of the Agreement.
The aggregate amount of Realized Losses which may be allocated to the
Residual Certificates in connection with Fraud Losses on the Mortgage Loans in
each Sub-Pool (the "Fraud Loss Amount") shall initially be equal to
approximately $1,580,547 and $2,358,512, respectively. As of any date of
determination after the Cut-off Date, the Fraud Loss Amount for each Sub-Pool
shall equal (X) prior to the first anniversary of the Cut-off Date an amount
equal to 3.00% of the aggregate principal balance of all of the related Mortgage
Loans as of the Cut-off Date minus the aggregate amounts allocated to the
Residual Certificates in respect of related Fraud Losses on such Mortgage Loans
up to such date of determination, (Y) from the first to the second anniversary
of the Cut-off Date, an amount equal to (1) the lesser of (a) the related Fraud
Loss Amount as of the most recent anniversary of the Cut-off Date and (b) 2.00%
of the aggregate principal balance of all of the related Mortgage Loans as of
the most recent anniversary of the Cut-off Date minus (2) the aggregate amounts
allocated to the Residual Certificates in respect of Fraud Losses on such
Mortgage Loans since the most recent anniversary of the Cut-off Date up to such
date of determination and (Z) from the second to the fifth anniversary of the
Cut-off Date, an amount equal to (1) the lesser of (a) the related Fraud Loss
Amount as of the most recent anniversary of the Cut-off Date, and (b) 1.00% of
the aggregate principal balance of all of the related Mortgage Loans as of the
most recent anniversary of the Cut-off Date minus (2) the aggregate amounts
allocated to the Residual Certificates in respect of Fraud Losses on such
Mortgage Loans since the most recent anniversary of the Cut-off Date up to such
date of determination. On and after the fifth anniversary of the Cut-off Date,
the each Fraud Loss Amount shall be zero.
The aggregate amount of Realized Losses which may be allocated to the
Residual Certificates in connection with Bankruptcy Losses on the Mortgage Loans
in either Sub-Pool (the "Bankruptcy Amount") will initially be equal to
approximately $100,000. As of any date of determination, the Bankruptcy Amount
shall equal the approximate amount set forth in the preceding sentence less the
sum of any amounts allocated to the Residual Certificates in respect of
Bankruptcy Losses on the Mortgage Loans in either Sub-Pool up to such date of
determination.
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The aggregate amount of Realized Losses which may be allocated to the
Residual Certificates in connection with Extraordinary Losses on the Mortgage
Loans in each Sub-Pool (the "Extraordinary Loss Amount") will initially be equal
to approximately $52,685 and $78,617, respectively. As of any date of
determination, the Extraordinary Loss Amount for each Sub-Pool shall equal the
approximate amount set forth in the preceding sentence less the sum of any
amounts allocated to the Residual Certificates in respect of Extraordinary
Losses on the related Mortgage Loans up to such date of determination.
A "Special Hazard Loss" is a loss incurred in respect of any defaulted
Mortgage Loan as a result of direct physical loss or damage to the Mortgaged
Property (except as a result of the exclusions described below), which is not
insured against under the standard hazard insurance policy or blanket policy
insuring against hazard losses which the Master Servicer is required to cause to
be maintained on each Mortgage Loan. See "Description of Primary Insurance
Policies--Primary Hazard Insurance Policies" in the Prospectus.
Special Hazard Losses will not include any loss (an "Extraordinary Loss")
resulting from:
(i) wear and tear, deterioration, rust or corrosion, mold,
wet or dry rot; inherent vice or latent defect; animals, birds, vermin,
insects;
(ii) smog, smoke, vapor, liquid or dust discharge from
agricultural or industrial operations; pollution; contamination;
(iii) settling, subsidence, cracking, shrinkage, bulging or
expansion of pavements, foundations, walls, floors, roofs or ceilings;
(iv) errors in design, faulty workmanship or faulty
materials, unless the collapse of the property or a part thereof ensues
and then only for the ensuing loss;
(v) nuclear or chemical reaction or nuclear radiation or
radioactive or chemical contamination, all whether controlled or
uncontrolled and whether such loss be direct or indirect, proximate or
remote or be in whole or in part caused by, contributed to or aggravated
by a peril insured against;
(vi) hostile or warlike action in time of peace or war,
including action in hindering, combating or defending against an actual,
impending or expected attack by any government or sovereign power, de jure
or de facto, or by any authority maintaining or using military, naval or
air forces, or by military, naval or air forces, or by an agent of any
such government, power, authority or forces;
(vii) any weapon of war employing atomic fission or
radioactive forces whether in time of peace or war; and
(viii) insurrection, rebellion, revolution, civil war, usurped
power or action taken by governmental authority in hindering, combating or
defending against such an occurrence, seizure or destruction under
quarantine or customs regulations, confiscation by order of any government
or public authority, or risks of contraband or illegal transactions or
trade.
"Excess Special Hazard Losses" with respect to either Sub-Pool are related
Special Hazard Losses in excess of the related Special Hazard Amount.
"Excess Extraordinary Losses" with respect to either Sub-Pool are related
Extraordinary Losses in excess of the related Extraordinary Loss Amount.
A "Fraud Loss" is a loss incurred on a defaulted Mortgage Loan as to which
there was intentional fraud, dishonesty or misrepresentation in the origination
of such Mortgage Loan.
"Excess Fraud Losses" with respect to either Sub-Pool are related Fraud
Losses in excess of the related Fraud Loss Amount.
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<PAGE>
A "Bankruptcy Loss" is a Deficient Valuation or a Debt Service Reduction.
With respect to any Mortgage Loan, a "Deficient Valuation" is a valuation by a
court of competent jurisdiction of the Mortgaged Property in an amount less than
the then outstanding indebtedness under the Mortgage Loan, which valuation
results from a proceeding initiated under the United States Bankruptcy Code. A
"Debt Service Reduction" is any reduction in the amount which a mortgagor is
obligated to pay on a monthly basis with respect to a Mortgage Loan as a result
of any proceeding initiated under the United States Bankruptcy Code, other than
a reduction attributable to a Deficient Valuation.
"Excess Bankruptcy Losses" are Bankruptcy Losses in excess of the
Bankruptcy Amount.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Agreement, a form of which
is filed as an exhibit to the Registration Statement. A Current Report on Form
8-K relating to the Certificates containing a copy of the Agreement as executed
will be filed by the Depositor with the Securities and Exchange Commission
within fifteen days of initial issuance of the Certificates. The Trust Fund
created under the Agreement will consist of (i) all of the Depositor's right,
title and interest in the Mortgage Loans, the related Mortgage Notes, Mortgages
and other related documents, (ii) all payments on or collections in respect of
the Mortgage Loans due after the Cut-off Date, together with any proceeds
thereof, (iii) any Mortgaged Properties acquired on behalf of Certificateholders
by foreclosure or by deed in lieu of foreclosure, and any revenues received
thereon, (iv) the rights of the Trustee under all insurance policies required to
be maintained pursuant to the Agreement and (v) the rights of the Depositor
under the Mortgage Loan Purchase Agreement between the Depositor and the
Mortgage Loan Seller. Reference is made to the Prospectus for important
information in addition to that set forth herein regarding the Trust Fund, the
terms and conditions of the Agreement and the Class A Certificates. The Class A
Certificates will be transferable and exchangeable at the corporate trust
offices of the Trustee, located in New York, New York. The Depositor will
provide to a prospective or actual Certificateholder without charge, on written
request, a copy (without exhibits) of the Agreement. Requests should be
addressed to the Secretary, Salomon Brothers Mortgage Securities VII, Inc.,
Seven World Trade Center, New York, New York 10048.
ASSIGNMENT OF THE MORTGAGE LOANS
The Depositor will deliver to the Trustee with respect to each Mortgage
Loan (i) the mortgage note endorsed without recourse to the Trustee to reflect
the transfer of the Mortgage Loan, (ii) the original mortgage with evidence of
recording indicated thereon and (iii) an assignment of the mortgage in
recordable form to the Trustee, reflecting the transfer of the Mortgage Loan.
Such assignments of Mortgage Loans are required to be recorded by or on behalf
of the Depositor in the appropriate offices for real property records.
THE MORTGAGE LOAN SELLER AND MASTER SERVICER
The information set forth in the following paragraphs has been provided by
the Mortgage Loan Seller. None of the Depositor, the Trustee or any of their
affiliates have made or will make any representation as to the accuracy or
completeness of such information.
Berkeley Federal Bank and Trust FSB, a federally-chartered savings bank,
headquartered in West Palm Beach, Florida (the "Mortgage Loan Seller"), will
serve as the Master Servicer for the Mortgage Loans pursuant to the Agreement
(in such capacity, the "Master Servicer"). The Mortgage Loan Seller is a
wholly-owned subsidiary of Ocwen Financial Corporation, a privately-owned
financial services holding company. At March 31, 1996, the Mortgage Loan Seller
had approximately $1.849 billion in assets, approximately $1.721 billion in
liabilities and approximately $128 million in equity. At March 31, 1996, the
Mortgage Loan Seller's tangible and leveraged capital ratio was approximately
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6.99% and its risk-based capital ratio was approximately 11.41%. For the year
ended December 31, 1995, the Mortgage Loan Seller's income from continuing
operations was approximately $31 million.
The major business of the Mortgage Loan Seller has been the resolution of
nonperforming single-family mortgage loan portfolios acquired from the
Resolution Trust Corporation, from private investors, and most recently, from
HUD through HUD's auction of defaulted FHA Loans. The Mortgage Loan Seller is a
market leader in the nonperforming mortgage loan acquisition business, having
acquired in excess of $2.8 billion of such mortgage loans over the past three
years. The Mortgage Loan Seller is using its expertise in the resolution of
nonperforming portfolios as the foundation for entering into the acquisition and
servicing of non-conforming credit mortgage loans ("BCD Mortgage Loans").
The following table sets forth, for the BCD Mortgage Loan servicing
portfolio derived from the Mortgage Loan Seller as of December 31, 1995, and as
of March 31, 1996, certain information relating to the delinquency experience
(including loans in foreclosure of BCD Mortgage Loans included in the Mortgage
Loan Seller's servicing portfolio (which portfolio does not include mortgage
loans that are subserviced by others) at the end of the indicated periods. The
indicated periods of delinquency are based on the number of days past due on a
contractual basis. No mortgage loan is considered delinquent for these purposes
until it is one month past due on a contractual basis.
<TABLE>
<CAPTION>
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
As of As of
DECEMBER 31, 1995 MARCH 31, 1996
------------------------------------------- -----------------------------------------
Percent Percent Percent Percent
By No. By By No. By By No. By By No. By
of Dollar of Dollar of Dollar of Dollar
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
------ ------ ----- ------ ------- --------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio ................ 1,694 $194,717 N/A N/A 1,788 $200,424 N/A N/A
Period of Delinquency:
30-59 Days .................. 35 $3,201 2.07% 1.64% 49 $5,940 2.74% 2.96%
60-89 Days .................. 18 $2,157 1.06% 1.11% 27 $2,699 1.51% 1.35%
90 days or more ............. 37 $5,676 2.18% 2.91% 64 $7,554 3.58% 3.77%
-- ------ ---- ---- -- ------ ---- ----
Total Delinquent Loans ......... 90 $11,034 5.31% 5.67% 140 $16,193 7.83% 8.08%
== ======= ==== ==== === ======= ==== ====
Loans in Foreclosure(1) ........ 29 $4,292 1.71% 2.20% 72 $8,463 4.14% 4.22%
</TABLE>
- -------------------------
(1) Loans in foreclosure are also included under the heading "Total Delinquent
Loans"
------------------------------------
The following tables set forth, for the BCD Mortgage Loan servicing
portfolio derived from the Mortgage Loan Seller as of December 31, 1995, and as
of March 31, 1996, certain information relating to the foreclosure experience of
BCD Mortgage Loans included in the Mortgage Loan Seller's servicing portfolio
(which portfolio does not include mortgage loans that are subserviced by others)
at the end of the indicated periods.
<TABLE>
<CAPTION>
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
As of As of
DECEMBER 31, 1995 MARCH 31, 1996
-------------------- -----------------------
By No. By By No. By
of Dollar of Dollar
LOANS AMOUNT LOANS AMOUNT
----- ------ ----- ------
<S> <C> <C> <C> <C>
Total Portfolio ........... 1,694 $194,717 1,788 $200,424
Foreclosed Loans(1) ....... 0 $ 0 5 $ 497
Foreclosed Ratio(2) ....... 0.00% 0.00% 0.28% 0.25%
</TABLE>
- ------------------------
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by the Mortgage Loan Seller.
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<PAGE>
(2) The Foreclosure Ratio is equal to the aggregate principle balance or
number of Foreclosed Loans divided by the aggregate principal balance, or
number, as applicable, of mortgage loans in the Total Portfolio at the end
of the indicated period.
-----------------------------------
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the Mortgage Loan Seller's mortgage portfolio set forth in the foregoing tables.
The statistics shown above represent the delinquency experience for the Mortgage
Loan Seller's mortgage servicing portfolio only for the periods presented,
whereas the aggregate delinquency experience on the Mortgage Loans comprising
the Mortgage Pool will depend on the results obtained over the life of the
Mortgage Pool. The Mortgage Loan Seller commenced receiving applications for
mortgage loans under its BCD Mortgage Loan program in December 1994.
Accordingly, the Mortgage Loan Seller (whether as an originator or acquirer of
mortgage loans or as a servicer of such mortgage loans) does not have
significant historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of Mortgage Loans. There can be no assurance
that the Mortgage Loans comprising the Mortgage Pool will perform consistent
with the delinquency or foreclosure experience described herein. It should be
noted that if the residential real estate market should experience an overall
decline in property values, the actual rates of delinquencies and foreclosures
could be higher than those previously experienced by the Mortgage Loan Seller.
In addition, adverse economic conditions may affect the timely payment by
Mortgagors of scheduled payments of principal and interest on the Mortgage Loans
and, accordingly, the actual rates of delinquencies and foreclosures with
respect to the Mortgage Pool.
THE TRUSTEE
The Bank of New York, a New York banking corporation, will act as Trustee
for the Certificates pursuant to the Agreement. The Trustee's offices for
notices under the Agreement are located at 101 Barclay Street, 12 East, New
York, New York and its telephone number is (212) 815-2297.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Agreement will be equal to accrued interest at the Trustee
Fee Rate of 0.00625% per annum on the Stated Principal Balance of each Mortgage
Loan. The Agreement will provide that the Trustee and any director, officer,
employee or agent of the Trustee will be indemnified by the Trust Fund and will
be held harmless against any loss, liability or expense (not including expenses,
disbursements and advances incurred or made by the Trustee, including the
compensation and the expenses and disbursements of its agents and counsel, in
the ordinary course of the Trustee's performance in accordance with the
provisions of the Agreement) incurred by the Trustee arising out of or in
connection with the acceptance or administration of its obligations and duties
under the Agreement, other than any loss, liability or expense (i) resulting
from the Master Servicer's actions or omissions in connection with the Agreement
and the Mortgage Loans, (ii) that constitutes a specific liability of Trustee
under the Agreement or (iii) incurred by reason of willful misfeasance, bad
faith or negligence in the performance of the Trustee's duties under the
Agreement or as a result of a breach, or by reason of reckless disregard, of the
Trustee's obligations and duties under the Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect of
its servicing activities for the Certificates will be equal to accrued interest
at the Servicing Fee Rate of 0.50% per annum with respect to each Mortgage Loan
on the Scheduled Principal Balance of each Mortgage Loan. As additional
servicing compensation, the Master Servicer is entitled to retain all assumption
fees, prepayment penalties and late payment charges, to the extent collected
from mortgagors, together with any interest or other income earned on funds held
in the Certificate Account and any escrow accounts. The Master Servicer is
obligated to offset any Prepayment Interest Shortfall on any Distribution Date
(payments made by the Master Servicer in satisfaction of such obligation,
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<PAGE>
"Compensating Interest") to the extent of its aggregate servicing compensation
for such Distribution Date described in the preceding two sentences. The Master
Servicer is obligated to pay certain insurance premiums and certain ongoing
expenses associated with the Mortgage Pool and incurred by the Master Servicer
in connection with its responsibilities under the Agreement and is entitled to
reimbursement therefor as provided in the Agreement. See "Description of the
Certificates-Retained Interest; Servicing Compensation and Payment of Expenses"
in the Prospectus for information regarding expenses payable by the Master
Servicer and "Certain Federal Income Tax Consequences" herein regarding certain
taxes payable by the Master Servicer.
VOTING RIGHTS
With respect to any date of determination, the percentage of all the
Voting Rights allocated among holders of the any class of the Class A
Certificates and of the Residual Certificates shall be the fraction, expressed
as a percentage, the numerator of which is the aggregate Certificate Principal
Balance of all the Certificates of such class then outstanding and the
denominator of which is the aggregate Stated Principal Balance of the Mortgage
Loans then outstanding. The Voting Rights allocated to each class of Certificate
shall be allocated among all holders of each such class in proportion to the
outstanding Certificate Principal Balance of such Certificates. Unless an
Insurer Default exists, the Insurer will be entitled to exercise certain voting
and other rights of the holders of the Class A Certificates. See "--Certain
Matters Regarding the Insurer" herein.
CERTAIN MATTERS REGARDING THE INSURER
Under the Agreement, on each Distribution Date, the Trustee is required to
pay to the Insurer a premium with respect to the Policy equal to 1/12 times
0.18% per annum times the Certificate Principal Balance of the Class A
Certificates of each class.
Pursuant to the terms of the Agreement, unless there exists a continuance
of any failure by the Insurer to make a required payment under the Policy or
there exists a proceeding in bankruptcy by or against the Insurer (either such
condition, an "Insurer Default"), the Insurer will be entitled to exercise,
among others, the following rights of the holders of the Class A Certificates,
without the consent of such holders, and the holders of the Class A Certificates
may exercise such rights only with the prior written consent of the Insurer: (i)
the right to direct the Trustee to terminate the rights and obligations of the
Master Servicer under the Agreement in the event of a default by the Master
Servicer; (ii) the right to consent to or direct any waivers of defaults by the
Master Servicer; (iii) the right to remove the Trustee pursuant to the
Agreement; and (iv) the right to institute proceedings against the Master
Servicer in the event of default by the Master Servicer and refusal of the
Trustee to institute such proceedings. In addition, unless an Insurer Default
exists, the Insurer will have the right to direct all matters relating to any
proceeding seeking the avoidance as a preferential transfer under applicable
bankruptcy, insolvency, receivership or similar law of any distribution made
with respect to the Class A Certificates, and, unless an Insurer Default exists,
the Insurer's consent will be required prior to, among other things, (i) the
removal of the Trustee, (ii) the appointment of any successor Trustee or Master
Servicer or (iii) any amendment to the Agreement.
TERMINATION
The circumstances under which the obligations created by the Agreement
will terminate in respect of the Certificates are described in "Description of
the Certificates--Termination" in the Prospectus. The majority holder of the
Residual Certificates (or if such holders does not exercise such option, the
Master Servicer or the Insurer) will have the right to purchase all remaining
Mortgage Loans and any properties acquired in respect thereof and thereby effect
early retirement of the Certificates on any Distribution Date following the Due
Period during which the aggregate principal balance of the Mortgage Loans and
such properties at the time of purchase is 10% or less of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date. In the event the
majority holder of the Residual
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Certificates or the Master Servicer or the Insurer exercises such option, the
purchase price payable in connection therewith generally will be equal to par
plus accrued interest for each Mortgage Loan at the related Mortgage Rate to but
not including the first day of the month in which such repurchase price is
distributed, together with any amounts due to the Master Servicer for servicing
compensation at the related Servicing Fee Rate. In the event the holder of the
Residual Certificates or the Master Servicer or the Insurer exercises such
option, the portion of the purchase price allocable to the Class A Certificates
will be, to the extent of available funds (including funds paid under the
Policy) with respect to the Class A Certificates of any class, (i) 100% of the
then outstanding Certificate Principal Balance thereof, plus (ii) one month's
interest on the then outstanding Certificate Principal Balance thereof at the
then applicable Pass-Through Rate for such class, plus (iii) any previously
accrued but unpaid interest thereon. No such termination shall be permitted
without the prior written consent of the Insurer if it would result in a draw
under the Policy. In no event will the trust created by the Agreement continue
beyond the expiration of 21 years from the death of the survivor of the persons
named in the Agreement. See "Description of the Certificates--Termination" in
the Prospectus.
THE INSURER
The following information has been supplied by Financial Security
Assurance Inc. (the "Insurer") for inclusion in this Prospectus Supplement. No
representation is made by the Depositor or the Underwriter as to the accuracy
and completeness of such information.
GENERAL
The Insurer is a monoline insurance company incorporated in 1984 under the
laws of the State of New York. The Insurer is licensed to engage in financial
guaranty insurance business in all 50 states, the District of Columbia and
Puerto Rico.
The Insurer and its subsidiaries are engaged in the business of writing
financial guaranty insurance, principally in respect of securities offered in
domestic and foreign markets. In general, financial guaranty insurance consists
of the issuance of a guaranty of scheduled payments of an issuer's
securities--thereby enhancing the credit rating of those securities--in
consideration for the payment of a premium to the insurer. The Insurer and its
subsidiaries principally insure asset-backed, collateralized and municipal
securities. Asset-backed securities are generally supported by residential
mortgage loans, consumer or trade receivables, securities or other assets having
an ascertainable cash flow or market value. Collateralized securities include
public utility first mortgage bonds and sale/leaseback obligation bonds.
Municipal securities consist largely of general obligation bonds, special
revenue bonds and other special obligations of state and local governments. The
Insurer insures both newly-issued securities sold in the primary market and
outstanding securities sold in the secondary market that satisfy the Insurer's
underwriting criteria.
The Insurer is a wholly-owned subsidiary of Financial Security Assurance
Holdings Ltd. ("Holdings"), a New York Stock Exchange Listed company. Major
shareholders of Holdings include Fund American Enterprises Holdings, Inc., U S
West Capital Corporation and The Tokio Marine and Fire Insurance Co., Ltd. No
shareholder of Holdings is obligated to pay any debt of the Insurer or any claim
under any insurance policy issued by the Insurer or to make any additional
contribution to the capital of the Insurer.
The principal executive offices of the Insurer are located at 350 Park
Avenue, New York, New York 10022, and its telephone number at that location is
(212) 826-0100.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the Insurer or any of its
domestic operating insurance company subsidiaries are reinsured among such
companies on an agreed-upon percentage substantially
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<PAGE>
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, the Insurer reinsures a
portion of its liabilities under certain of its financial guaranty insurance
policies with other reinsurers under various quota share treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by the Insurer as
a risk management device and to comply with certain statutory and rating agency
requirements; it does not alter or limit the Insurer's obligations under any
financial guaranty insurance policy.
RATINGS OF CLAIMS-PAYING ABILITY
The Insurer's claims-paying ability is rated "Aaa" by Moody's and "AAA" by
each of Standard & Poor's, Nippon Investors Service, Inc. and Standard & Poor's
(Australia) Pty. Ltd. Such ratings reflect only the views of the respective
rating agencies, are not recommendations to buy, sell or hold securities and are
subject to revision or withdrawal at any time by such rating agencies. See
"Ratings".
CAPITALIZATION
The following table sets forth the capitalization of the Insurer and its
wholly owned subsidiaries on the basis of generally accepted accounting
principles as of March 31, 1996 (in thousands):
MARCH 31,
1996
(UNAUDITED)
-----------
Unearned Premium Reserve (net of prepaid
reinsurance premiums)........................................ $340,226
--------
Stockholder's Equity:
Common Stock................................................. 15,000
Additional Paid-In Capital................................... 681,470
Unrealized Loss on Investments (net of deferred
income taxes).......................................... (737)
Accumulated Earnings......................................... 83,444
------
Total Shareholder's Equity......................................... 779,177
--------
Total Unearned Premium Reserve and Shareholder's Equity............ $1,119,403
==========
For further information concerning the Insurer, see the Consolidated
Financial Statements of the Insurer and its subsidiaries, and the notes thereto,
incorporated by reference herein. Copies of the statutory quarterly and annual
financial statements filed with the State of New York Insurance Department by
the Insurer are available upon request to the State of New York Insurance
Department.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described under "Incorporation of Certain
Information by Reference" in the Prospectus, the consolidated financial
statements of the Insurer and subsidiaries included in or as exhibits to the
following documents which have been filed with the Securities and Exchange
Commission by Holdings, are hereby incorporated by reference in this Prospectus
Supplement, which together with the Prospectus, forms a part of the Depositor's
Registration Statement: (a) the Annual Report on Form 10-K for the year ended
December 31, 1995 and (b) the Quarterly Report on Form 10-Q for the three month
period ended March 31, 1996.
All financial statements of the Insurer and subsidiaries included in
documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the Class
A Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
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<PAGE>
The Depositor will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon oral or written request of such person,
a copy of any or all of the foregoing financial statements incorporated by
reference. Requests for such copies should be directed to the Secretary, Salomon
Brothers Mortgage Securities VII, Inc., Seven World Trade Center, New York, New
York 10048.
INSURANCE REGULATION
The Insurer is licensed and subject to regulation as a financial guaranty
insurance corporation under the laws of the State of New York, its state of
domicile. In addition, the Insurer and its insurance subsidiaries are subject to
regulation by insurance laws of the various other jurisdictions in which they
are licensed to do business. As a financial guaranty insurance corporation
licensed to do business in the State of New York, the Insurer is subject to
Article 69 of the New York Insurance Law which, among other things, limits the
business of each such insurer to financial guaranty insurance and related lines,
requires that each such insurer maintain a minimum surplus to policyholders,
establishes contingency, loss and unearned premium reserve requirements for each
such insurer, and limits the size of individual transactions ("single risks")
and the volume of transactions ("aggregate risks") that may be underwritten by
each such insurer. Other provisions of the New York Insurance Law, applicable to
non-life insurance companies such as the Insurer, regulate, among other things,
permitted investments, payment of dividends, transactions with affiliates,
mergers, consolidations, acquisitions or sales of assets and incurrence of
liability for borrowings.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class A Certificates, Thacher Proffitt & Wood,
counsel to the Depositor, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Agreement, for federal income tax
purposes, the Trust Fund will qualify as a REMIC under the Code.
For federal income tax purposes, (i) the Residual Certificates will be the
sole class of "residual interests" in the REMIC and (ii) the Class A
Certificates will be the "regular interests" in the REMIC and will be treated as
debt instruments of the REMIC. See "Certain Federal Income Tax
Consequences--REMIC--Classification of REMICs" in the Prospectus.
For federal income tax reporting purposes, the Class A Certificates will
not be treated as having been issued with original issue discount. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, premium and market discount, if any, for federal income
tax purposes will be based on the assumption that subsequent to the date of any
determination the Mortgage Loans will prepay at a rate equal to 100% of the
Prepayment Vector, in the case of the Mortgage Loans in Sub-Pool 1, or at a
constant rate of 20% CPR, in the case of the Mortgage Loans in Sub-Pool 2. No
representation is made that the Mortgage Loans will prepay at either such rate
or at any other rate. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers of
the Class A Certificates should be aware that the OID Regulations do not
adequately address certain issues relevant to, or are not applicable to,
securities such as the Class A Certificates. In addition, with respect to the
Group 2 Class A Certificates, there is considerable uncertainty concerning the
application of the OID Regulations to REMIC Regular Certificates that provide
for payments based on an adjustable rate. Because of the uncertainty concerning
the application of Section 1272(a)(6) of the Code to such Certificates and
because the rules of the OID Regulations relating to debt instruments having an
adjustable rate of interest are limited in their application in ways that could
preclude their application to such Certificates even in
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the absence of Section 1272(a)(6) of the Code, the IRS could assert that the
Group 2 A Certificates should be treated as issued with original issue discount
or should be governed by the rules applicable to debt instruments having
contingent payments or by some other method not yet set forth in regulations.
Prospective purchasers of the Class A Certificates are advised to consult their
tax advisors concerning the tax treatment of such Certificates.
It appears that a reasonable method of reporting original issue discount
with respect to the Group 2 Class A Certificates if such Certificates are
required to be treated as issued with original issue discount generally would be
to report all income with respect to such Certificates as original issue
discount for each period, computing such original issue discount (i) by assuming
that the value of the applicable Index will remain constant for purposes of
determining the original yield to maturity of, and projecting future
distributions on such Certificates, thereby treating such Certificates as fixed
rate instruments to which the original issue discount computation rules
described in the Prospectus can be applied, and (ii) by accounting for any
positive or negative variation in the actual value of the applicable Index in
any period from its assumed value as a current adjustment to original issue
discount with respect to such period. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus.
The Class A Certificates may be treated for federal income tax purposes as
having been issued at a premium. Whether any holder of a Class A Certificate
will be treated as holding a Certificate with amortizable bond premium will
depend on such Certificateholder's purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
Certificateholder. Holders of the Class A Certificates should consult their own
tax advisors regarding the possibility of making an election to amortize such
premium. See "Certain Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Regular Certificates--Premium" in the Prospectus.
The Class A Certificates will be treated as "qualifying real property
loans" under Section 593(d) of the Code, assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(5)(A)
of the Code, generally in the same proportion that the assets in the Trust Fund
would be so treated. In addition, interest on the Class A Certificates will be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code, generally to the extent that the Class A
Certificates are treated as "real estate assets" under Section 856(c)(5)(A) of
the Code. The Class A Certificates (other than the Residual Certificates) also
will be treated as "qualified mortgages" under Section 860G(a)(3) of the Code.
See "Certain Federal Income Tax Consequences--REMICs--Characterization of
Investments in REMIC Certificates" in the Prospectus.
It is not anticipated that the Trust Fund will engage in any transactions
that would subject it to the prohibited transactions tax as defined in Section
860F(a)(2) of the Code, the contributions tax as defined in Section 860G(d) of
the Code or the tax on net income from foreclosure property as defined in
Section 860G(c) of the Code. However, in the event that any such tax is imposed
on the Trust Fund, such tax will be borne (i) by the Trustee, if the Trustee has
breached its obligations with respect to REMIC compliance under the Agreement,
(ii) the Master Servicer, if the Master Servicer has breached its obligations
with respect to REMIC compliance under the Agreement, and (iii) otherwise by the
Trust Fund, with a resulting reduction in amounts otherwise distributable to
holders of the Class A Certificates. See "Description of the
Certificates--General" and "Certain Federal Income Tax
Consequences--REMICs--Prohibited Transactions Tax and Other Taxes" in the
Prospectus.
The responsibility for filing annual federal information returns and other
reports will be borne by the Trustee or the Master Servicer. See "Certain
Federal Income Tax Consequences--REMICs--Reporting and Other Administrative
Matters" in the Prospectus.
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For further information regarding the federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated June 25, 1996 (the "Underwriting Agreement"), the Depositor has
agreed to sell, and the Underwriter, an affiliate of the Depositor, has agreed
to purchase, the Class A Certificates.
Distribution of the Class A Certificates will be made from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Class A
Certificates, before deducting expenses payable by the Depositor, will be 99.95%
of the initial Certificate Principal Balance of the Class A Certificates, plus,
in the case of the Group 1 Class A Certificates, accrued interest thereon from
the Cut-off Date. In connection with the purchase and sale of the Class A
Certificates, the Underwriter may be deemed to have received compensation from
the Depositor in the form of underwriting discounts.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended, or will contribute to payments the
Underwriter may be required to make in respect thereof.
SECONDARY MARKET
There can be no assurance that a secondary market for the Class A
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Class A
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates--Reports to Certificateholders", which will
include information as to the outstanding principal balance of the Class A
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Class A
Certificates will be available through any other source. In addition, the
Depositor is not aware of any source through which price information about the
Class A Certificates will be generally available on an ongoing basis. The
limited nature of such information regarding the Class A Certificates may
adversely affect the liquidity of the Class A Certificates, even if a secondary
market for the Class A Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Class A Certificates will be passed
upon for the Depositor and the Underwriter by Thacher Proffitt & Wood, New York,
New York.
EXPERTS
The consolidated balance sheets of the Insurer and subsidiaries as of
December 31, 1995 and 1994 and the related consolidated statements of income,
changes in shareholder's equity, and cash flows for each of the three years in
the period ended December 31, 1995 incorporated by reference in this Prospectus
Supplement, have been incorporated herein in reliance on the report of Coopers &
Lybrand L.L.P., independent certified public accountants, given on the authority
of that firm as experts in accounting and auditing.
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RATINGS
It is a condition to the issuance of the Certificates that the Class A
Certificates be rated "AAA" by Standard & Poor's Ratings Services ("Standard &
Poor's") and "Aaa" by Moody's Investors Service, Inc. ("Moody's").
The ratings of Moody's and Standard & Poor's assigned to mortgage
pass-through certificates address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled. The rating process addresses structural and legal aspects associated
with the Certificates, including the nature of the underlying mortgage loans.
The ratings assigned to mortgage pass-through certificates do not represent any
assessment of the likelihood that principal prepayments will be made by the
mortgagors or the degree to which such prepayments will differ from that
originally anticipated. The ratings assigned by Moody's and Standard & Poor's on
the Class A Certificates are based in part upon the Insurer's claims paying
ability. Any change in the ratings of the Insurer by Standard & Poor's and
Moody's may result in a change in the ratings on the Class A Certificates. The
ratings do not address the possibility that Certificateholders might suffer a
lower than anticipated yield. In addition, such ratings do not address the
likelihood of the receipt of any amounts in respect of Basis Risk Shortfalls or
Unpaid Basis Risk Shortfalls.
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 assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Class A Certificates are subsequently lowered for any reason, no person or
entity is obligated to provide any additional credit support or credit
enhancement with respect to the Class A Certificates.
The Depositor has not requested that any rating agency rate the Class A
Certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the Class A Certificates, or, if it
does, what rating would be assigned by any such other rating agency. A rating on
the Class A Certificates by another rating agency, if assigned at all, may be
lower than the ratings assigned to the Class A Certificates as stated above.
LEGAL INVESTMENT
The Class A 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 not lower than the second highest rating category by a
Rating Agency (as defined in the Prospectus), and, as such, will be legal
investments for certain entities to the extent provided in SMMEA. SMMEA,
however, provides for state limitation on the authority of such entities to
invest in "mortgage related securities" provided that such restrictive
legislation was enacted prior to October 3, 1991. Certain states have enacted
legislation which overrides the preemption provisions of SMMEA. Institutions
whose investment activities are subject to legal investment laws and regulations
or to review by certain regulatory authorities may be subject to restrictions on
investment in the Class A Certificates. The Federal Financial Institutions
Examination Council, which includes the Board of Governors of the Federal
Reserve System (the "FRB"), the Federal Deposit Insurance Corporation (the
"FDIC"), the National Credit Union Administration (the "NCUA"), the Comptroller
of the Currency (the "OCC") and the Office of Thrift Supervision (the "OTS"),
has issued a supervisory policy statement (the "Policy Statement") that is
applicable to all depository institutions (to the extent adopted by their
respective federal regulators), setting forth guidelines for and imposing
significant restrictions on investments in "high-risk mortgage securities". The
Policy Statement generally indicates that a mortgage derivative product will be
deemed to be high-risk if (i) it has a weighted average life greater than 10
years given a reasonable prepayment assumption or (ii) it exhibits greater
average life volatility or greater price volatility than a benchmark fixed-rate
thirty-year mortgage backed pass-through security. According to the Policy
Statement, prior to purchase, a depository institution would be required to
determine
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whether a mortgage derivative product that it is considering acquiring is
high-risk, and if so that the proposed acquisition would reduce the
institution's overall interest rate risk. Reliance on analysis and documentation
obtained from a securities dealer or other outside party without internal
analysis by the institution would be unacceptable, and a failure to adhere to
the monitoring, reporting and diligence requirements would be considered an
unsafe and unsound practice. There can be no assurance as to whether the Class A
Certificates would be treated as high-risk under the Policy Statement. The
Policy Statement has been adopted by the FRB, the FDIC, the OCC, the OTS and the
NCUA. In addition, the NCUA has issued regulations governing federal credit
union investments which prohibit investment in certain specified types of
securities, which may include the Class A Certificates. The NCUA has indicated
that its regulations will take precedence over the Policy Statement. Similar
policy statements and regulations have been issued by other regulators having
jurisdiction over other types of depository institutions. Any such institution
should consult its own legal advisors in determining whether and to what extent
there may be restrictions on its ability to invest in the Class A Certificates.
See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
The U.S. Department of Labor issued an individual exemption, Prohibited
Transaction Exemption 89-89 (the "Exemption"), on October 17, 1989 to Salomon
Brothers Inc, which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Section 4975(a) and (b) of the Code and
Section 502(i) of ERISA, certain transactions, among others, relating to the
servicing and operation of mortgage pools and the purchase, sale and holding of
mortgage pass-through certificates underwritten by the Underwriter (as
hereinafter defined), provided that certain conditions set forth in the
Exemption are satisfied. For purposes of this Section "ERISA Considerations",
the term "Underwriter" shall include (a) Salomon Brothers Inc, (b) any person
directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with Salomon Brothers Inc and (c) any
member of the underwriting syndicate or selling group of which a person
described in (a) or (b) is a manager or co-manager with respect to the Class A
Certificates.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Class A
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of Class A Certificates by certain employee benefit plans subject to
Section 406 of ERISA, or by individual retirement accounts or other plans
subject to Section 4975 of the Code (each, a "Plan"), must be on terms that are
at least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party. Second, the rights and interests evidenced
by the Class A Certificates must not be subordinated to the rights and interests
evidenced by the other certificates of the same trust. Third, the Class A
Certificates at the time of acquisition by the Plan must be rated in one of the
three highest generic rating categories by Standard & Poor's, Moody's, Duff &
Phelps Credit Rating Co. or Fitch Investors Service, Inc. Fourth, the Trustee
cannot be an affiliate of any member of the "Restricted Group", which consists
of any Underwriter, the Depositor, the Master Servicer, each sub-servicer and
any mortgagor with respect to Mortgage Loans constituting more than 5% of the
aggregate unamortized principal balance of the Mortgage Loans as of the date of
initial issuance of the Class A Certificates. Fifth, the sum of all payments
made to and retained by the Underwriter must represent not more than reasonable
compensation for underwriting the Class A Certificates; the sum of all payments
made to and retained by the Depositor pursuant to the assignment of the Mortgage
Loans to the Trust Fund must represent not more than the fair market value of
such obligations; and the sum of all payments made to and retained by the Master
Servicers and any sub-servicer must represent not more than reasonable
compensation for such person's services under the Agreement and reimbursement of
such person's reasonable expenses in connection therewith. Sixth, the investing
Plan must be 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, as
amended.
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Because the Class A Certificates are not subordinated to any other class
of Certificates, the second general condition set forth above is satisfied with
respect to the Class A Certificates. It is a condition of the issuance of the
Class A Certificates that they be rated in the highest rating categories by
Standard & Poor's and Moody's. A fiduciary of a Plan contemplating purchasing a
Class A Certificate in the secondary market must make its own determination that
at the time of such acquisition, the Class A Certificates continue to satisfy
the third general condition set forth above. The Depositor expects that the
fourth general condition set forth above will be satisfied with respect to the
Class A Certificates. A fiduciary of a Plan contemplating purchasing a Class A
Certificate must make its own determination that the first, third, fifth and
sixth general conditions set forth above will be satisfied with respect to the
Class A Certificates.
Before purchasing Class A Certificates, a fiduciary of a Plan should
itself confirm (a) that such Class A Certificates constitute "certificates" for
purposes of the Exemption and (b) that the specific and general conditions of
the Exemption and the other requirements set forth in the Exemption would be
satisfied. In addition to making its own determination as to the availability of
the exemptive relief provided in the Exemption, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions, in
particular, Prohibited Transaction Class Exemption 83-1. See "ERISA
Considerations" in the Prospectus.
Any Plan fiduciary considering whether to purchase a Class A Certificate
on behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to such investment.
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MORTGAGE PASS-THROUGH CERTIFICATES (ISSUABLE IN SERIES)
Principal and interest with respect to Certificates will be payable each month
on the date specified in the related Prospectus Supplement, commencing with the
month following the month in which the applicable Cut-off Date (as defined
herein) occurs.
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
The Certificates offered hereby and by Supplements to this Prospectus will be
offered from time to time in series.
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a segregated pool of (a) various types of one-
to four-family residential first and junior lien mortgage loans, multifamily
residential mortgage loans, cooperative apartment loans or manufactured housing
conditional sales contracts and installment loan agreements (collectively, the
"Mortgage Loans"), or beneficial interests therein, (b) pass-through or
participation certificates issued or guaranteed by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") (any such
certificates, "Agency Securities") or (c) pass-through or participation
certificates or other mortgage-backed securities issued or guaranteed by private
entities ("Private Mortgage-Backed Securities"), or any combination thereof,
together with other assets described herein (collectively, a "Trust Fund" or the
"Trust Fund Assets").
Each series of Certificates will include one or more classes. Each class of
Certificates of any series will represent the right, which right may be senior
to the rights of one or more of the other classes of the Certificates, to
receive a specified portion of payments of principal and interest on the
Mortgage Loans, Agency Securities or Private Mortgage-Backed Securities in the
related Trust Fund in the manner described herein and in the related Prospectus
Supplement. A series may include one or more classes of Certificates entitled to
principal distributions, with disproportionate, nominal or no interest
distributions, or to interest distributions, with disproportionate, nominal or
no principal distributions. A series may include two or more classes of
Certificates that differ as to the timing, sequential order or amount of
distributions of principal or interest or both. If so specified in the related
Prospectus Supplement, the Trust Fund for a series of Certificates may include
pool insurance policies, letters of credit, reserve funds or other types of
credit support, or any combination thereof. See "Description of the
Certificates" and "Description of Credit Support".
The only obligations of the Depositor with respect to a series of Certificates
will be pursuant to its representations and warranties. The Master Servicer with
respect to a series of Certificates evidencing interests in a Trust Fund
including Mortgage Loans will be named in the related Prospectus Supplement. The
principal obligations of a Master Servicer will be limited to its contractual
servicing obligations, and, to the extent provided in the related Prospectus
Supplement, its obligation to make certain cash advances in the event of payment
delinquencies on the Mortgage Loans. The Certificates of each series will not
represent an obligation of or interest in the Depositor, the Master Servicer or
any of their respective affiliates, except to the limited extent described
herein and in the related Prospectus Supplement. The Certificates will not be
guaranteed or insured by any governmental agency or instrumentality. Although
payment of principal and interest on Agency Securities will be guaranteed as
described herein and in the related prospectus supplement by GNMA, FNMA or
FHLMC, the Certificates of any series evidencing interests in a Trust Fund
including Agency Securities will not be so guaranteed. Each Trust Fund will be
held in trust for the benefit of the holders of the related series of
Certificates pursuant to a Pooling and Servicing Agreement or a Trust Agreement
as more fully described herein. If so provided in the related Prospectus
Supplement, one or more elections may be made to treat the related Trust Fund or
a designated portion thereof as a "real estate mortgage investment conduit" for
federal income tax purposes.
See "Certain Federal Income Tax Consequences".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Offers of the Certificates may be made through one or more different methods,
including offerings through underwriters, as more fully described under "Methods
of Distribution" and in the related Prospectus Supplement.
With respect to each series, all of the Certificates of each class offered
hereby will be rated in one of the four highest rating categories by one or more
nationally recognized statistical rating organizations. There will have been no
public market for any series of Certificates prior to the offering thereof. No
assurance can be given that such a market will develop as a result of such an
offering. All securities will be distributed by, or sold by underwriters managed
by:
SALOMON BROTHERS INC
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS MAY NOT BE USED TO
CONSUMMATE SALES OF SECURITIES OFFERED HEREBY UNLESS ACCOMPANIED BY A PROSPECTUS
SUPPLEMENT.
The date of this Prospectus is June 17, 1996.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE CERTIFICATES
OFFERED HEREBY AND THEREBY OR AN OFFER OF THE CERTIFICATES TO ANY PERSON IN ANY
STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY
OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS
WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL
BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
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TABLE OF CONTENTS
CAPTION PAGE
Available Information..................................................... 4
Reports to Certificateholders............................................. 4
Incorporation of Certain Information by Reference......................... 4
Summary of Prospectus..................................................... 5
The Trust Funds........................................................... 15
The Mortgage Loans..................................................... 15
Agency Securities...................................................... 20
Private Mortgage-Backed Securities..................................... 25
Use of Proceeds........................................................... 27
Yield Considerations...................................................... 27
Maturity and Prepayment Considerations.................................... 28
The Depositor............................................................. 30
Mortgage Loan Program..................................................... 30
Underwriting Standards................................................. 30
Qualifications of Originators and Mortgage Loan Sellers................ 32
Representations by or on behalf of Mortgage Loan Sellers; Repurchases.. 32
Description of the Certificates........................................... 34
General................................................................ 34
Assignment of Trust Fund Assets........................................ 36
Deposits to Certificate Account........................................ 39
Payments Mortgage Loans................................................ 40
Payments on Agency Securities and Private Mortgage-Backed Securities.....42
Distributions.......................................................... 42
Available Distribution Amount.......................................... 42
Interest on the Certificates........................................... 43
Principal of the Certificates.......................................... 43
Allocation of Losses................................................... 44
Advances in Respect of Delinquencies................................... 44
Reports to Certificateholders.......................................... 45
Collection and Other Servicing Procedures.............................. 46
Sub-Servicing.......................................................... 47
Realization Upon Defaulted Mortgage Loans.............................. 48
Retained Interest; Servicing or Administration Compensation and Payment
of Expenses.......................................................... 50
Evidence as to Compliance.............................................. 50
Certain Matters Regarding the Master Servicer and the Depositor........ 51
Events of Default...................................................... 52
Rights Upon Event of Default........................................... 52
Amendment.............................................................. 53
Termination............................................................ 53
Duties of the Trustee.................................................. 54
The Trustee............................................................ 54
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CAPTION PAGE
Description of Credit Support............................................. 54
Subordination.......................................................... 55
Letter of Credit....................................................... 56
Mortgage Pool Insurance Policy......................................... 58
Special Hazard Insurance Policy........................................ 59
Bankruptcy Bond........................................................ 61
Certificate Guarantee Insurance........................................ 61
Reserve Fund........................................................... 61
Description of Primary Insurance Policies................................. 62
Primary Mortgage Insurance Policies.................................... 62
Primary Hazard Insurance Policies...................................... 62
FHA Insurance.......................................................... 64
VA Guarantees............................................................64
Certain Legal Aspects of Mortgage Loans................................... 65
General................................................................ 65
Single-Family Loans and Multifamily Loans.............................. 65
Leases and Rents....................................................... 66
Cooperative Loans...................................................... 66
Contracts.............................................................. 67
Foreclosure on Mortgages............................................... 69
Foreclosure on Cooperative Shares...................................... 71
Repossession with respect to Contracts................................. 72
Louisiana Law.......................................................... 73
Rights of Redemption with respect to Single-Family Properties and
Multifamily Properties.............................................. 73
Notice of Sale; Redemption Rights with respect to Manufactured Homes... 73
Anti-Deficiency Legislation and Other Limitations on Lenders........... 74
Junior Mortgages....................................................... 75
Consumer Protection Laws with respect to Contracts..................... 75
Other Limitations...................................................... 76
Enforceability of Certain Provisions................................... 76
Subordinate Financing.................................................. 78
Applicability of Usury Laws............................................ 78
Alternative Mortgage Instruments....................................... 79
Formaldehyde Litigation with respect to Contracts...................... 79
Soldiers' and Sailors' Civil Relief Act of 1940........................ 80
Certain Federal Income Tax Consequences................................... 80
General................................................................ 80
REMICs................................................................. 81
Grantor Trust Funds.................................................... 99
Partnership Trust Funds.................................................109
State and Other Tax Consequences.......................................... 116
ERISA Considerations...................................................... 116
Legal Investment.......................................................... 119
Methods of Distribution................................................... 119
Legal Matters............................................................. 120
Financial Information..................................................... 120
Index of Principal Definitions............................................ 121
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CERTIFICATES COVERED BY SUCH SUPPLEMENT, WHETHER
OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER
SUCH SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS
UNDERWRITERS OF THE CERTIFICATES COVERED BY SUCH SUPPLEMENT AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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<PAGE>
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports and other information filed by the Depositor can be inspected and copied
at the public reference facilities maintained by the Commission at its Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and its
Regional Offices located as follows: Chicago Regional Office, 500 West Madison,
14th Floor, Chicago, Illinois 60661; New York Regional Office, 75 Park Place,
New York, New York 10007. 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 Depositor does not intend to send any
financial reports to Certificateholders.
This Prospectus does not contain all of the information set forth in the
Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Depositor has filed with the Commission under the Securities
Act of 1933 and to which reference is hereby made.
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMC's most recent Information Statement and any subsequent information
statement, any supplement to any information statement relating to FHLMC and any
quarterly report made available by FHLMC after December 31, 1983 can be obtained
by writing or calling the FHLMC Investor Inquiry Department at 1759 Business
Center Drive, P.O. Box 4112, Reston, Virginia 22090 (800-336-3672). The
Depositor did not participate in the preparation of FHLMC's Offering Circular,
Information Statement or any supplement and, accordingly, makes no
representation as to the accuracy or completeness of the information set forth
therein.
Copies of FNMA's most recent Prospectus for FNMA Certificates are available
from FNMA's Mortgage Backed Securities Office, 3900 Wisconsin Avenue, N.W.,
Washington, D.C. 20016 (202-752-6547). FNMA's annual report and quarterly
financial statements, as well as other financial information, are available from
FNMA's Office of the Treasurer, 3900 Wisconsin Avenue, N.W., Washington, D.C.
20016 (202-752-7000) or the Office of the Vice President of Investor Relations,
3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7000). The
Depositor did not participate in the preparation of FNMA's Prospectus and,
accordingly, makes no representations as to the accuracy or completeness of the
information set forth therein.
REPORTS TO CERTIFICATEHOLDERS
The Trustee will mail monthly reports concerning each Trust Fund to all
registered holders of Certificates of the related series. See "Description of
the Certificates-Reports to Certificateholders".
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed or
caused to be filed by the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of the offering of Offered Certificates evidencing interest therein. The
Depositor will provide or cause to be provided without charge to each person to
whom this Prospectus is delivered in connection with the offering of one or more
classes of Offered Certificates, a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to one or more of such classes of such Offered Certificates,
other than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to its principal executive office at Seven World Trade
Center, New York, New York 10048, Attention: Secretary, or by telephone at (212)
783-5635. The Depositor has determined that its financial statements are not
material to the offering of any Offered Certificates.
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SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Certificates contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. An Index of Principal
Definitions is included at the end of this Prospectus.
Title of Certificates.........Mortgage Pass-Through Certificates, issuable
in series (the "Certificates").
Depositor.....................Salomon Brothers Mortgage Securities VII, Inc., an
indirect wholly-owned subsidiary of Salomon Inc
and an affiliate of Salomon Brothers Inc. See "The
Depositor".
Master Servicer...............The Master Servicer (the "Master Servicer") for
each series of Certificates evidencing interests
in a Trust Fund including Mortgage Loans will be
named in the related Prospectus Supplement, which
may be the Depositor or an affiliate of the
Depositor. See "Description of the
Certificates-Certain Matters Regarding the Master
Servicer and the Depositor".
Trustee.......................The Trustee (the "Trustee") for each series of
Certificates will be named in the related
Prospectus Supplement.
Description of Certificates...Each series of Certificates will
include one or more classes. Each series of
Certificates (including any class or classes of
Certificates of such series not offered hereby)
will represent in the aggregate the entire
beneficial ownership interest in a segregated pool
of Mortgage Loans, or beneficial interests
therein, Agency Securities or Private
Mortgage-Backed Securities, or any combination
thereof (each, a "Trust Fund Asset"), and certain
other assets as described below (a "Trust Fund").
Unless otherwise provided in the related
Prospectus Supplement, each class of Certificates
(other than certain Strip Certificates as defined
below) will have a stated principal amount (a
"Certificate Principal Balance") and will be
entitled to payments of interest thereon based on
a fixed, variable or adjustable interest rate (a
"Pass-Through Rate"). The related Prospectus
Supplement will specify the Pass-Through Rate for
each class or, in the case of a variable or
adjustable PassThrough Rate, the method for
determining the PassThrough Rate.
A series of Certificates may include one or more
classes of Certificates (collectively, the "Senior
Certificates") that are senior to one or more
classes of Certificates (collectively, the
"Subordinate Certificates") in respect of certain
distributions of principal and interest and
allocation of losses on the Mortgage Loans. Credit
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enhancement also may be provided with respect to
any series by means of various pool insurance
policies, letters of credit, reserve funds or
other types of credit support, or any combination
of the foregoing, as described herein and in the
related Prospectus Supplement. See "Description of
Credit Support".
A series may include one or more classes of
Certificates entitled (i) to principal
distributions, with disproportionate, nominal or
no interest distributions, or (ii) to interest
distributions, with disproportionate, nominal or
no principal distributions ("Strip Certificates").
In addition, a series may include two or more
classes of Certificates which differ as to timing,
sequential order, priority of payment,
pass-through rate or amount of distributions of
principal or interest or both, or as to which
distributions of principal or interest or both on
any class may be made upon the occurrence of
specified events, in accordance with a schedule or
formula, or on the basis of collections from
designated portions of the Mortgage Pool, which
series may include one or more classes of
Certificates ("Accrual Certificates"), as to which
certain accrued interest will not be distributed
but rather will be added to the principal balance
thereof on each Distribution Date, as hereinafter
defined, in the manner described in the related
Prospectus Supplement.
If so provided in the related Prospectus
Supplement, a series of Certificates may include
one or more classes of Certificates (collectively,
the "Senior Certificates") which are senior to one
or more classes of Certificates (collectively, the
"Subordinate Certificates") in respect of certain
distributions of principal and interest
allocations of losses on Mortgage Loans. In
addition, certain classes of Senior (or
Subordinate) Certificates may be senior to other
classes of Senior (or Subordinate) Certificates in
respect of such distribution or losses.
With respect to each series, one or more elections
may be made to treat the related Trust Fund or a
designated portion thereof as a "real estate
mortgage investment conduit" or "REMIC" as defined
in the Internal Revenue Code of 1986 (the "Code").
If any such election is made with respect to a
series, one of the classes of Certificates
comprising such series will be designated as
evidencing all "residual interests" in the related
REMIC as defined in the Code.
The Certificates will not represent an interest in
or obligation of the Depositor or any affiliate
thereof except as set forth herein, nor will the
Certificates or any
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Mortgage Loans be insured or guaranteed by any
governmental agency or instrumentality. Although
payment of principal and interest on Agency
Securities will be guaranteed as described herein
and in the related Prospectus Supplement by GNMA,
FNMA or FHLMC, the Certificates of any series
including Agency Securities will not be so
guaranteed.
The Trust Funds...............Each Trust Fund will consist primarily of (a) a
pool (a "Mortgage Pool") of one- to four-family
residential mortgage loans, multifamily
residential mortgage loans, cooperative apartment
loans or manufactured housing conditional sales
contracts and installment loan agreements
(collectively, the "Mortgage Loans"), or
beneficial interests therein, or real property
acquired upon foreclosure or comparable conversion
of such Mortgage Loans, (b) Agency Securities or
(c) Private Mortgage-Backed Securities, or any
combination thereof.
A. The Mortgage Loans.......As more specifically described herein, the
Mortgage Loans will be secured by first or junior
liens on, or security interests in, (i) one- to
four-family residential properties, (ii) rental
apartment buildings or projects containing five or
more residential units (including apartment
buildings owned by cooperative housing
corporations), (iii) cooperative loans (the
"Cooperative Loans") secured primarily by shares
in a private cooperative housing corporation (a
"Cooperative") that give the owner thereof the
right to occupy a particular dwelling unit in the
Cooperative or (iv) new or used manufactured homes
(collectively, the "Mortgaged Properties"). The
Mortgaged Properties may be located in any one of
the fifty states or the District of Columbia.
Unless otherwise provided in the related
Prospectus Supplement, all Mortgage Loans will
have individual principal balances at origination
of not less than $25,000 or more than $5,000,000
and original terms to maturity of not more than 40
years. All Mortgage Loans will have been
originated by persons unaffiliated with the
Depositor and will have been purchased, either
directly or indirectly, by the Depositor on or
before the date of initial issuance of the related
series of Certificates. Unless otherwise provided
in the related Prospectus Supplement, each Trust
Fund will contain one of the following types of
Mortgage Loans:
(1) Fully amortizing Mortgage Loans with a fixed
rate of interest (an "Interest Rate") and level
monthly payments to maturity;
(2) Fully amortizing Mortgage Loans with an
Interest Rate adjusted periodically (with
corresponding
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<PAGE>
adjustments in the amount of monthly payments) to
equal the sum (which may be rounded) of a fixed
percentage amount and an index ("ARM Loans"), as
described in the related Prospectus Supplement;
(3) ARM Loans that provide for an election, at the
borrower's option, to convert the adjustable
Interest Rate to a fixed interest rate, as
described in the related Prospectus Supplement;
(4) ARM Loans that provide for negative
amortization or accelerated amortization resulting
from delays in or limitations on the payment
adjustments necessary to amortize fully the
outstanding principal balance of the loan at its
then applicable Interest Rate over its remaining
term;
(5) Fully amortizing Mortgage Loans with a fixed
Interest Rate and level monthly payments, or
payments of interest only, during the early years
of the term, followed by periodically increasing
monthly payments of principal and interest for the
duration of the term or for a specified number of
years, as described in the related Prospectus
Supplement;
(6) Fixed Interest Rate Mortgage Loans providing
for level payments of principal and interest on
the basis of an assumed amortization schedule and
a balloon payment at the end of a specified term;
and
(7) Another type of Mortgage Loan described in the
related Prospectus Supplement.
All of the Mortgage Loans will be covered by
standard hazard insurance policies insuring
against losses due to fire and various other
causes. Certain of the Mortgage Loans will be
covered by primary mortgage insurance policies to
the extent provided herein and in the related
Prospectus Supplement and if so provided in the
related Prospectus Supplement, certain of the
Mortgage Loans will be insured or guaranteed by
the Federal Housing Administration (the "FHA") or
the United States Department of Veterans Affairs
(the "VA"). See "Description of Primary Insurance
Policies".
B. Agency Securities........The Agency Securities evidenced by a series of
Certificates will consist of (i) Mortgage
Participation Certificates issued and guaranteed
as to timely payment of interest and, unless
otherwise specified in the related Prospectus
Supplement, ultimate payment of principal by the
Federal Home Loan Mortgage Corporation ("FHLMC
Certificates"), (ii) Guaranteed Mortgage
PassThrough Certificates issued and guaranteed as
to timely payment of principal and interest by the
Federal National
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Mortgage Association ("FNMA Certificates"), (iii)
fully modified pass-through mortgage-backed
certificates guaranteed as to timely payment of
principal and interest by the Government National
Mortgage Association ("GNMA Certificates"), (iv)
stripped mortgage-backed securities representing
an undivided interest in all or a part of either
the principal distributions (but not the interest
distributions) or the interest distributions (but
not the principal distributions) or in some
specified portion of the principal and interest
distributions (but not all of such distributions)
on certain FHLMC, FNMA or GNMA Certificates and,
unless otherwise specified in the Prospectus
Supplement, guaranteed to the same extent as the
underlying securities, (v) another type of
guaranteed pass-through certificate issued or
guaranteed by GNMA, FNMA or FHLMC and described in
the related Prospectus Supplement or (vi) a
combination of such Agency Securities. All GNMA
Certificates will be backed by the full faith and
credit of the United States. No FHLMC or FNMA
Certificates will be backed, directly or
indirectly, by the full faith and credit of the
United States.
The Agency Securities may consist of pass-through
securities issued under FHLMC's Cash or Guarantor
Program, the GNMA I Program, the GNMA II Program
or another program specified in the Prospectus
Supplement. The payment characteristics of the
Mortgage Loans underlying the Agency Securities
will be described in the related Prospectus
Supplement.
C. Private Mortgage-Backed
Securities............Private Mortgage-Backed Securities may include (a)
mortgage participations or pass-through
certificates representing beneficial interests in
certain mortgage loans or (b) collateralized
mortgage obligations secured by such mortgage
loans. Although individual mortgage loans
underlying a Private Mortgage-Backed Security may
be insured or guaranteed by the United States or
an agency or instrumentality thereof, they need
not be, and the Private Mortgage-Backed Securities
themselves will not be so insured or guaranteed.
See "The Trust Funds-Private Mortgage-Backed
Securities" herein.
Certificate Account...........Each Trust Fund will include one or more accounts
(collectively, the "Certificate Account")
established and maintained on behalf of the
Certificateholders into which the Master Servicer
will, to the extent described herein and in the
related Prospectus Supplement, deposit all
payments and collections received or advanced with
respect to the related Trust Fund Assets. A
Certificate Account may be maintained as an
interest bearing or a
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<PAGE>
non-interest bearing account, or funds held
therein may be invested in certain short-term
high-quality obligations. See "Description of the
Certificates-Deposits to Certificate Account".
Credit Support................If so specified in the related Prospectus
Supplement, one or more classes of Certificates of
a series evidencing interests in a Trust Fund that
includes Mortgage Loans or Private Mortgage-Backed
Securities may be provided partial or full
protection against certain defaults and losses on
such assets in the form of subordination of one or
more other classes of Certificates in such series
or by one or more other types of credit support,
such as a letter of credit, reserve fund,
insurance policy or a combination thereof (any
such coverage, "Credit Support"). The amount and
types of coverage, the identification of the
entity providing the coverage (if applicable) and
related information with respect to each type of
Credit Support, if any, will be described in the
Prospectus Supplement for a series of
Certificates. See "Description of Credit Support".
Interest on Certificates......Interest on each class of Certificates (other than
certain classes of Strip Certificates) of each
series will accrue at the applicable Pass-Through
Rate on the outstanding Certificate Principal
Balance thereof and will be distributed to
Certificateholders as provided in the related
Prospectus Supplement (each of the specified dates
on which distributions are to be made, a
"Distribution Date"). Distributions with respect
to interest on Strip Certificates with no or, in
certain cases, a nominal Certificate Principal
Balance will be made on each Distribution Date on
the basis of a notional amount as described herein
and in the related Prospectus Supplement.
Distributions of interest with respect to one or
more classes of Certificates may be reduced to the
extent of certain delinquencies and other
contingencies described herein and in the related
Prospectus Supplement. See "Yield Considerations"
and "Description of the Certificates-Interest on
the Certificates".
Principal of Certificates.....The Certificates of each series (other than
certain Strip Certificates) initially will have an
aggregate Certificate Principal Balance equal to
the outstanding principal balance of the Trust
Fund Assets as of, unless the related Prospectus
Supplement provides otherwise, the close of
business on the first day of the month of
formation of the related Trust Fund (the "Cut-off
Date"), after application of scheduled payments
due on or before such date, whether or not
received. The
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<PAGE>
Certificate Principal Balance of a Certificate
represents the maximum amount that the holder
thereof is entitled to receive in respect of
principal from future cash flow on the assets in
the related Trust Fund. The Prospectus Supplement
will include the initial Certificate Principal
Balance of each class of Certificates offered
thereby. Unless otherwise provided in the related
Prospectus Supplement, distributions of principal
will be made on each Distribution Date to the
class or classes of Certificates entitled thereto
until the Certificate Principal Balance of such
class has been reduced to zero. Distributions of
principal of any class of Certificates will be
made on a pro rata basis among all of the
Certificates of such class. Strip Certificates
with no Certificate Principal Balance will not
receive distributions in respect of principal. See
"Description of the Certificates-Principal of the
Certificates".
Advances......................The Master Servicer, directly or through
sub-servicers, will service and administer the
Mortgage Loans included in a Trust Fund and,
unless the related Prospectus Supplement provides
otherwise, in connection therewith will be
obligated to make certain advances with respect to
delinquent scheduled payments on the Mortgage
Loans. Advances made by the Master Servicer are
reimbursable to the extent described herein and in
the related Prospectus Supplement. The Prospectus
Supplement with respect to any series may provide
that the Master Servicer will obtain a cash
advance surety bond, or maintain a cash advance
reserve fund, to cover any obligation of the
Master Servicer to make advances. The obligor on
any such surety bond will be named, and the terms
applicable to any such cash advance reserve fund
will be described in the related Prospectus
Supplement. See "Description of the
Certificates-Advances in respect of
Delinquencies".
Optional Termination..........If so specified in the related Prospectus
Supplement, a series of Certificates may be
subject to optional early termination through the
repurchase of the assets in the related Trust Fund
by the party specified therein, under the
circumstances and in the manner set forth herein
under "Description of the
Certificates-Termination".
Tax Status of
the Certificates..............The Certificates of each series offered hereby
will constitute either (i) "regular interests"
("REMIC Regular Certificates") and "residual
interests" ("REMIC Residual Certificates") in a
Trust Fund treated as a REMIC under Sections 860A
through 860G of the Code, (ii) interests ("Grantor
Trust Certificates") in a Trust Fund treated as a
grantor trust under applicable provisions of the
Code, (iii) interests ("Partnership Certificates")
in a Trust Fund
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treated as a partnership under applicable
provisions of the Code or (iv) evidences of
indebtedness ("Debt Certificates") of a Trust Fund
treated as debt instruments for federal income tax
purposes.
In general, to the extent the assets and income of
the Trust Fund are treated as qualifying assets
and income under the following sections of the
Code, REMIC Regular Certificates and REMIC
Residual Certificates (i) owned by a "domestic
building and loan association" will be treated as
"loans secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C),
(ii) owned by a thrift institution will be treated
as "qualifying real property loans" within the
meaning of Section 593(d) of the Code, and (iii)
owned by a real estate investment trust will be
treated as "real estate assets" for purposes of
Section 856(c)(5)(A) of the Code and interest
income therefrom will be treated as "interest on
obligations secured by mortgages on real property"
for purposes of Section 856(c)(3)(B) of the Code.
In addition, REMIC Regular Certificates will be
"obligation[s]. . .which. . .[are] principally
secured by an interest in real property" within
the meaning of Section 860G(a)(3)(C) of the Code.
Moreover, if 95% or more of the assets and the
income of the Trust Fund qualify for any of the
foregoing treatments, the REMIC Regular
Certificates and (with the exception of Section
860G(a)(3)(C) of the Code) REMIC Residual
Certificates will qualify for the foregoing
treatments in their entirety.
REMIC Residual Certificates generally will be
treated as representing an interest in qualifying
assets and income to the same extent described
above for institutions subject to Sections 593(d),
7701(a)(19)(C), 856(c)(5)(A) and 856(c)(3)(B) of
the Code. A portion (or, in certain cases, all) of
the income from REMIC Residual Certificates (i)
may not be offset by any losses from other
activities of the holder of such REMIC Residual
Certificates (except generally with respect to
thrift institutions described in Section 593 of
the Code, if such REMIC Residual Certificate has
"significant value"), (ii) may be treated as
unrelated business taxable income, for holders of
REMIC Residual Certificates that are subject to
tax on unrelated business taxable income (as
defined in Section 511 of the Code), and (iii) may
be subject to foreign withholding rules. In
addition, transfers of certain REMIC Residual
Certificates may be disregarded under some
circumstances for all federal income tax purposes.
See "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC
Residual Certificates-Excess Inclusions," and
"-Noneconomic REMIC Residual Certificates" herein.
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Unless otherwise provided in the related
Prospectus Supplement, Grantor Trust Certificates
may be either Certificates having a Certificate
Principal Balance and a Pass-Through Rate
("Grantor Trust Fractional Interest Certificates")
or Strip Certificates ("Grantor Trust Strip
Certificates"). Holders of Grantor Trust
Fractional Interest Certificates generally will be
treated as owning an interest in qualifying assets
and income under Sections 593(d), 7701(a)(19)(C),
856(c)(5)(A), 856(c)(3)(B) and 860G(a)(3)(A) of
the Code. It is unclear whether Grantor Trust
Strip Certificates will be treated as representing
an ownership interest in qualifying assets and
income under Sections 593(d), 7701(a)(19)(C),
856(c)(5)(A) and 856(c)(3)(B) of the Code,
although the policy considerations underlying
those Sections suggest that such treatment should
be available. Partnership Certificates will be
treated as partnership interests for purposes of
federal income taxation, and accordingly, will not
represent an interest in qualifying assets for
purposes of Sections 593(d) and 7701(a)(19)(C) of
the Code, but will represent qualifying assets and
income under Sections 856(c)(5)(A) and
856(c)(3)(B) of the Code to the extent their
proportionate share of the assets of the related
Trust Fund so qualify. Debt Certificates will not
represent qualifying assets or income for purposes
of any of the preceding Sections.
Investors are advised to consult their tax
advisors and to review "Certain Federal Income Tax
Consequences" herein and in the related Prospectus
Supplement.
Rating........................At the date of issuance, as to each series, each
class of Certificates offered hereby will be rated
in one of the four highest rating categories by
one or more nationally recognized statistical
rating agencies. See "Rating" in the related
Prospectus Supplement.
Legal Investment..............The Prospectus Supplement for each series of
Certificates will specify which classes of
Certificates of such series, if any, will
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Any class of
Certificates that is not rated in one of the two
highest rating categories by one or more
nationally recognized statistical rating agencies
or that represents an interest in a Trust Fund
that includes junior mortgage loans will not
constitute "mortgage related securities" for
purposes of SMMEA. See "Legal Investment".
ERISA Considerations..........A fiduciary of an employee benefit plan and
certain other retirement plans and arrangements,
including individual retirement accounts,
annuities, Keogh plans,
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and collective investment funds and separate
accounts in which such plans, accounts, annuities
or arrangements are invested, that is subject to
the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of the
Code should carefully review with its legal
advisors whether the purchase or holding of
Certificates could give rise to a transaction that
is prohibited or is not otherwise permissible
either under ERISA or Section 4975 of the Code.
The U.S. Department of Labor has issued an
individual exemption, Prohibited Transaction
Exemption 89-89, to Salomon Brothers Inc
("Salomon") that generally exempts from the
application of certain of the prohibited
transaction provisions of Section 406 of ERISA and
the excise taxes imposed on such prohibited
transactions by Section 4975(a) and (b) of the
Code and Section 502(i) of ERISA, transactions
relating to the purchase, sale and holding of
pass-through certificates underwritten by Salomon
and the servicing and operation of asset pools
such as certain of the Mortgage Pools, provided
that certain conditions are satisfied. See "ERISA
Considerations" herein.
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THE TRUST FUNDS
THE MORTGAGE LOANS
GENERAL
The Mortgage Loans may consist of mortgage loans secured by first or junior
liens on by one- to four-family residential properties ("Single Family
Properties" and the related loans, "Single Family Loans"), mortgage loans
secured by rental apartments or projects (including apartment buildings owned by
cooperative housing corporations) containing five or more dwelling units
("Multifamily Properties" and the related loans, "Multifamily Loans"), mortgage
loans secured by shares in a private cooperative housing corporation (a
"Cooperative" and the related loans, "Cooperative Loans") that give the owner
thereof the right to occupy a particular dwelling unit (each, a "Cooperative
Unit") in the Cooperative or conditional sales contracts and installment loan
agreements with respect to new or used Manufactured Homes (as defined herein,
and the related contracts or agreements, the "Contracts"), or beneficial
interests therein, or real property acquired upon foreclosure or comparable
conversion of such Mortgage Loans. The Single-Family Properties, Cooperative
shares (together with the right to occupy a particular Cooperative Unit
evidenced thereby) and Manufactured Homes (collectively, the "Mortgaged
Properties") may be located in any one of the fifty states or the District of
Columbia. The Mortgaged Properties may include leasehold interests in
residential properties, the title to which is held by third party lessors. The
term of any such leasehold will exceed the term of the Mortgage Note by at least
five years. Each Mortgage Loan will have been originated by a person (the
"Originator") not affiliated with Salomon Brothers Mortgage Securities VII, Inc.
(the "Depositor"). Each Mortgage Loan will be selected by the Depositor for
inclusion in a Mortgage Pool from among those purchased, either directly or
indirectly, from a prior holder thereof (a "Mortgage Loan Seller"), which prior
holder may not be the Originator thereof and may be an affiliate of the
Depositor. See "Mortgage Loan Program-Underwriting Standards".
Unless otherwise specified below or in the related Prospectus Supplement, all
of the Mortgage Loans in a Mortgage Pool will (i) have individual principal
balances at origination of not less than $25,000 or more than $5,000,000, (ii)
have monthly payments due on the first day of each month, (iii) have original
terms to maturity of not more than 40 years and (iv) be one of the following
types of mortgage loans:
(1) Fully amortizing Mortgage Loans with a fixed rate of interest (an
"Interest Rate") and level monthly payments to maturity;
(2) Fully amortizing Mortgage Loans with an Interest Rate adjusted
periodically (with corresponding adjustments in the amount of monthly
payments) to equal the sum (which may be rounded) of a fixed percentage
amount and an index ("ARM Loans"), as described in the related Prospectus
Supplement;
(3) ARM Loans that provide for an election, at the borrower's option, to
convert the adjustable Interest Rate to a fixed interest rate, as described
in the related Prospectus Supplement;
(4) ARM Loans that provide for negative amortization or accelerated
amortization resulting from delays in or limitations on the payment
adjustments necessary to amortize fully the outstanding principal balance of
the loan at its then applicable Interest Rate over its remaining term;
(5) Fully amortizing Mortgage Loans with a fixed Interest Rate and level
monthly payments, or payments of interest only, during the early years of the
term, followed by periodically increasing monthly payments of principal and
interest for the duration of the
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term or for a specified number of years, as described in the related
Prospectus Supplement;
(6) Fixed Interest Rate Mortgage Loans providing for level payment of
principal and interest on the basis of an assumed amortization schedule and a
balloon payment at the end of a specified term; and
(7) Another type of Mortgage Loan described in the related Prospectus
Supplement.
If provided in the related Prospectus Supplement, certain of the Mortgage
Pools may contain Mortgage Loans secured by junior liens, and the related senior
liens ("Senior Liens") may not be included in the Mortgage Pool. The primary
risk to holders of Mortgage Loans secured by junior liens is the possibility
that adequate funds will not be received in connection with a foreclosure of the
related Senior Liens to satisfy fully both the Senior Liens and the Mortgage
Loan. In the event that a holder of a Senior Lien forecloses on a Mortgaged
Property, the proceeds of the foreclosure or similar sale will be applied first
to the payment of court costs and fees in connection with the foreclosure,
second to real estate taxes, third in satisfaction of all principal, interest,
prepayment or acceleration penalties, if any, and any other sums due and owing
to the holder of the Senior Liens. The claims of the holders of the Senior Liens
will be satisfied in full out of proceeds of the liquidation of the Mortgage
Loan, if such proceeds are sufficient, before the Trust Fund as holder of the
junior lien receives any payments in respect of the Mortgage Loan. If the Master
Servicer were to foreclose on any Mortgage Loan, it would do so subject to any
related Senior Liens. In order for the debt related to the Mortgage Loan to be
paid in full at such sale, a bidder at the foreclosure sale of such Mortgage
Loan would have to bid an amount sufficient to pay off all sums due under the
Mortgage Loan and the Senior Liens or purchase the Mortgaged Property subject to
the Senior Liens. In the event that such proceeds from a foreclosure or similar
sale of the related Mortgaged Property are insufficient to satisfy all Senior
Liens and the Mortgage Loan in the aggregate, the Trust Fund, as the holder of
the junior lien, and, accordingly, holders of one or more classes of the
Certificates bear (i) the risk of delay in distributions while a deficiency
judgment against the borrower is obtained and (ii) the risk of loss if the
deficiency judgment is not realized upon. Moreover, deficiency judgments may not
be available in certain jurisdictions. In addition, a junior mortgagee may not
foreclose on the property securing a junior mortgage unless it forecloses
subject to the senior mortgages.
Liquidation expenses with respect to defaulted junior mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that the Master Servicer took the same steps in
realizing upon a defaulted junior mortgage loan having a small remaining
principal balance as it would in the case of a defaulted junior mortgage loan
having a large remaining principal balance, the amount realized after expenses
of liquidation would be smaller as a percentage of the outstanding principal
balance of the small junior mortgage loan than would be the case with the
defaulted junior mortgage loan having a large remaining principal balance.
Because the average outstanding principal balance of the Mortgage Loans is
smaller relative to the size of the average outstanding principal balance of the
loans in a typical pool of first priority mortgage loans, liquidation proceeds
may also be smaller as a percentage of the principal balance of a Mortgage Loan
than would be the case in a typical pool of first priority mortgage loans.
Unless otherwise specified in the related Prospectus Supplement, the
following requirements as to the Loan-to-Value Ratio of each Mortgage Loan of
the type described above shall apply. The "Loan-to-Value Ratio" of a Mortgage
Loan at any given time is the ratio (expressed as a percentage) of the then
outstanding principal balance of the Mortgage Loan, plus, in the case of a
Mortgage Loan secured by a junior lien, the outstanding principal balance of the
related Senior Liens, to the Value of the related Mortgaged Property. The Value
of a Single-Family Property, Multifamily Property or Cooperative Unit, other
than with respect to
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Refinance Loans, is the lesser of (a) the appraised value determined in an
appraisal obtained by the originator at origination of such loan and (b) the
sales price for such property. Refinance Loans are loans made to refinance
existing loans. The Value of the Mortgaged Property securing a Refinance Loan is
the appraised value thereof determined in an appraisal obtained at the time of
origination of the Refinance Loan. Unless otherwise specified in the related
Prospectus Supplement, for purposes of calculating the Loan-to-Value Ratio of a
Contract relating to a new Manufactured Home, the Value is no greater than the
sum of a fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site) including
"accessories" identified in the invoice (the "Manufacturer's Invoice Price"),
plus the actual cost of any accessories purchased from the dealer, a delivery
and set-up allowance, depending on the size of the unit, and the cost of state
and local taxes, filing fees and up to three years prepaid hazard insurance
premiums. Unless otherwise specified in the related Prospectus Supplement, with
respect to a used Manufactured Home, the Value is the least of the sale price,
the appraised value, and the National Automobile Dealer's Association book value
plus prepaid taxes and hazard insurance premiums. The appraised value of a
Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable.
A Mortgaged Property may have been subject to secondary financing at
origination of the Mortgage Loan, but, unless otherwise specified in the related
Prospectus Supplement, the total amount of primary and secondary financing at
the time of origination of the Mortgage Loan did not produce a combined
Loan-to-Value Ratio in excess of (i) 90% in the case of a Mortgage Loan secured
by an owner-occupied primary residence or (ii) 80% in the case of a Mortgage
Loan secured by a vacation or second home.
With respect to each Mortgaged Property, unless otherwise provided in the
related Prospectus Supplement, the borrower will have represented that the
dwelling is either (a) an owner-occupied primary residence or (b) a vacation or
second home that (i) is not part of a mandatory rental pool and (ii) is suitable
for year-round occupancy. With respect to a vacation or second home, no income
derived from the property will be considered for underwriting purposes.
Unless otherwise specified in the related Prospectus Supplement, the
aggregate principal balance on the Cut-off Date of Mortgage Loans secured by
condominium units will not exceed 30% of the aggregate principal balance of the
Mortgage Loans in the related Mortgage Pool. A Mortgage Loan secured by a
condominium unit will not be included in a Mortgage Pool unless, at the time of
sale of such Mortgage Loan by the Mortgage Loan Seller, certain representations
and warranties as to the condominium project are made by the Mortgage Loan
Seller or an affiliate thereof or by such other person acceptable to the
Depositor having knowledge regarding the subject matter of such representations
and warranties. Unless otherwise specified in the related Prospectus Supplement,
such Mortgage Loan Seller, or another party on its behalf, will have made the
following representations and warranties. If a condominium project is subject to
developer control or to incomplete phasing or add-ons, at least 70% of the units
have been sold to bona fide purchasers and are occupied as primary residences or
vacation or second homes. If a condominium project has been controlled by the
unit owners (other than the developer) for less than two years and is not
subject to incomplete phasing or add-ons, at least 70% of the units have been
sold to bona fide purchasers and at least 60% of the units are occupied as
primary residences or vacation or second homes. The foregoing percentages may be
modified in the case of a particular project upon proof of demonstrated market
acceptance but in no event will any such percentage be reduced below 51%. If a
condominium project has been controlled by the unit owners (other than the
developer) for at least two years, has all common elements completed and is not
subject to phasing or add-ons, the Mortgage Loan Seller, or another party on its
behalf, must represent
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and warrant, unless otherwise specified in the related Prospectus Supplement,
that the marketability of the project has been proven and that at least 90% of
the units have been sold to bona fide purchasers. See "Mortgage Loan
Program-Representations by or on behalf of Mortgage Loan Sellers; Repurchases"
herein for a description of certain other representations made by or on behalf
of Mortgage Loan Sellers at the time Mortgage Loans are sold.
If provided in the related Prospectus Supplement, certain of the Mortgage
Pools may contain Mortgage Loans subject to temporary buydown plans ("Buydown
Mortgage Loans"), pursuant to which the monthly payments made by the borrower in
the early years of the Mortgage Loan (the "Buydown Period") will be less than
the scheduled monthly payments on the Mortgage Loan, the resulting difference to
be made up from (i) an amount contributed by the borrower, the seller of the
Mortgaged Property, or another source (such amount, exclusive of investment
earnings thereon, being hereinafter referred to as "Buydown Funds") and placed
in a custodial account and (ii) unless otherwise specified in the Prospectus
Supplement, investment earnings on the Buydown Funds. See "Description of the
Certificates-Payments on Mortgage Loans. Generally, the borrower under each
Buydown Mortgage Loan will be qualified at the applicable Buydown Mortgage Rate.
Accordingly, the repayment of a Buydown Mortgage Loan is dependent on the
ability of the borrower to make larger level monthly payments after the Buydown
Funds have been depleted and, for certain Buydown Mortgage Loans, during the
Buydown Period. See "Mortgage Loan Program-Underwriting Standards" for a
discussion of loss and delinquency considerations relating to Buydown Mortgage
Loans.
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan having a Loan-to-Value Ratio at origination in excess of 80%, is
required to be covered by a primary mortgage guaranty insurance policy insuring
against default on such Mortgage Loan as to at least the principal amount
thereof exceeding 75% of the Value of the Mortgaged Property at origination of
the Mortgage Loan. Such insurance must remain in force at least until the
Mortgage Loan amortizes to a level that would produce a Loan-to-Value Ratio
lower than 80%. See "Description of Primary Insurance Policies-Primary Mortgage
Insurance Policies".
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then specifically known to the
Depositor, with respect to the Mortgage Loans, Agency Securities or Private
Mortgage-Backed Securities contained in the related Trust Fund, including (i)
the aggregate outstanding principal balance, the largest, smallest and average
outstanding principal balance of the Trust Fund Assets as of the applicable
Cut-off Date, and, with respect to Mortgage Loans secured by a junior lien, the
amount of the related Senior Liens, (ii) the type of property securing the
Mortgage Loans (e.g., one- to four-family houses, multifamily residential
dwellings, shares in Cooperatives and the related proprietary leases or
occupancy agreements, condominium units and other attached units, new or used
Manufactured Homes and vacation and second homes), (iii) the original terms to
maturity of the Mortgage Loans, (iv) the earliest origination date and latest
maturity date, (v) the aggregate principal balance of Mortgage Loans having
Loan-to-Value Ratios at origination exceeding 80%, or, with respect to Mortgage
Loans secured by a junior lien, the aggregate principal balance of Mortgage
Loans having combined Loan-to-Value Ratios exceeding 80%, (vi) the Interest
Rates or range of Interest Rates borne by the Mortgage Loans or mortgage loans
underlying the Agency Securities or Private Mortgage-Backed Securities, (vii)
the geographical distribution of the Mortgage Loans on a state-by-state basis,
(viii) the number and aggregate principal balance of Buydown Mortgage Loans, if
any, (ix) the weighted average Retained Interest, if any, (x) with respect to
ARM Loans, the adjustment dates, the highest, lowest and weighted average
margin, and the maximum Interest Rate variation at the time of any adjustment
and over the life of the ARM Loan, and (xi) with respect to Mortgage Loans of
the type described in (5) above, whether such loans provide for payments of
interest only for any period and the frequency and amount by which, and the term
during which,
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monthly payments adjust. If specific information respecting the Trust Fund
Assets is not known to the Depositor at the time Certificates are initially
offered, more general information of the nature described above will be provided
in the Prospectus Supplement, and specific information will be set forth in a
report which will be available to purchasers of the related Certificates at or
before the initial issuance thereof and will be filed as part of a report on
Form 8-K with the Securities and Exchange Commission within fifteen days after
such initial issuance.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the respective dates of origination
of the related Mortgage Loans. If the residential real estate market should
experience an overall decline in property values such that the outstanding
principal balances of the Mortgage Loans, and any secondary financing on the
Mortgaged Properties, in a particular Mortgage Pool become equal to or greater
than the value of the Mortgaged Properties, the rates of delinquencies,
foreclosures or repossessions and losses could be higher than those now
generally experienced by institutional lenders. Manufactured Homes are less
likely to experience appreciation in value and more likely to experience
depreciation in value over time than other types of housing properties. In
addition, adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by borrowers of scheduled payments of
principal and interest on the Mortgage Loans and, accordingly, the rates of
delinquencies, foreclosures or repossessions and losses with respect to any
Mortgage Pool. To the extent that such losses are not covered by Credit Support,
such losses will be borne, at least in part, by the holders of one or more
classes of the Certificates of the related series offered hereby.
The Depositor will cause the Mortgage Loans comprising each Trust Fund to be
assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Certificates of the related series. The Master
Servicer named in the related Prospectus Supplement will service the Mortgage
Loans, either directly or through other loan servicing institutions pursuant to
a Pooling and Servicing Agreement among the Depositor, itself and the Trustee,
and will receive a fee for such services. See "Mortgage Loan Program" and
"Description of the Certificates". With respect to Mortgage Loans serviced by
the Master Servicer through a Sub-Servicer, the Master Servicer will remain
liable for its servicing obligations under the related Pooling and Servicing
Agreement as if the Master Servicer alone were servicing such Mortgage Loans.
The Depositor will make certain representations and warranties regarding the
Mortgage Loans, but its assignment of the Mortgage Loans to the Trustee will be
without recourse. See "Description of the Certificates-Assignment of Trust Fund
Assets". The obligations of the Master Servicer with respect to the Mortgage
Loans will consist principally of its contractual servicing obligations under
the related Pooling and Servicing Agreement (including its obligation to enforce
certain purchase and other obligations of Sub-Servicers or Mortgage Loan
Sellers, or both, as more fully described herein under "Mortgage Loan
Program-Representations by or on behalf of Mortgage Loan Sellers; Repurchases"
and "Description of the Certificates-Sub-Servicing" and "-Assignment of Trust
Fund Assets") and, unless otherwise provided in the related Prospectus
Supplement, its obligation to make certain cash advances in the event of
delinquencies in payments on or with respect to the Mortgage Loans in amounts
described herein under "Description of the Certificates-Advances in respect of
Delinquencies". Any obligation of the Master Servicer to make advances may be
subject to limitations, to the extent provided herein and in the related
Prospectus Supplement.
SINGLE-FAMILY LOANS
The Single-Family Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by first mortgages or first deeds of trust (the "Mortgages")
creating a first lien on the Single-Family Properties. The Single-Family
Properties will consist of one- to four-family
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residences, including detached and attached dwellings, townhouses, rowhouses,
individual condominium units, individual units in planned-unit developments and
individual units in de minimis planned-unit developments. Single-Family loans
may be conventional loans, FHAinsured loans or VA-guaranteed loans as specified
in the related Prospectus Supplement.
MULTIFAMILY LOANS
The Multifamily Loans will be evidenced by Mortgage Notes secured by
Mortgages creating a first lien on the Multifamily Properties. The Multifamily
Properties will consist of rental apartments or projects (including apartment
buildings owned by cooperative housing cooperatives) containing five or more
dwelling units. Multifamily Properties may include high-rise, mid-rise and
garden apartments. Multifamily Loans may be conventional loans or FHA insured
loans as specified in the related Prospectus Supplement.
COOPERATIVE LOANS
The Cooperative Loans will be evidenced by promissory notes (the "Cooperative
Notes") secured by security interests in shares issued by Cooperatives and in
the related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific Cooperative Units in the related buildings.
CONTRACTS
The Contracts will consist of manufactured housing conditional sales
contracts and installment loan agreements each secured by a Manufactured Home.
The Manufactured Homes securing the Contracts will 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."
AGENCY SECURITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
GNMA is a wholly-owned corporate instrumentality of the United States with
the United States Department of Housing and Urban Development. Section 306(g) of
Title II of the National Housing Act of 1934, as amended (the "Housing Act"),
authorizes GNMA to guarantee the timely payment of the principal of and interest
on certificates which represent an interest in a pool of mortgage loans insured
by FHA under the Housing Act, or Title V of the Housing Act of 1949 ("FHA
Loans"), 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 ("VA
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 guarantee under this subsection." In order to meet its
obligations under any such guarantee, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States
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Treasury in an amount which is at anytime sufficient to enable GNMA, with no
limitations as to amount, to perform its obligations under its guarantee.
GNMA CERTIFICATES
Each GNMA Certificate held in a Trust Fund (which may be issued under either
the GNMA I program or the GNMA II program) will be a "fully modified
pass-through" mortgaged-backed certificate issued and serviced by a mortgage
banking company or other financial concern ("GNMA Issuer") approved by GNMA or
approved by FNMA as a seller-servicer of FHA Loans and/or VA Loans. The mortgage
loans underlying the GNMA Certificates will consist of FHA Loans and/or VA
Loans. Each such mortgage loan is secured by a one- to four-family residential
property. GNMA will approve the issuance of each such GNMA Certificate in
accordance with a guaranty agreement (a "Guaranty Agreement") between GNMA and
the GNMA Issuer. Pursuant to its Guaranty Agreement, a GNMA Issuer will be
required to advance its own funds in order to make timely payments of all
amounts due on each such GNMA Certificate, even if the payments received by the
GNMA Issuer on the FHA Loans or VA Loans underlying each such GNMA Certificate
are less than the amounts due on each such GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by oneto four-family
residential properties and will provide for the payment by or on behalf of the
GNMA Issuer to the registered holder of such GNMA Certificate of scheduled
monthly payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly principal and
interest payment on each FHA Loan or VA Loan underlying such GNMA Certificate,
less the applicable servicing and guarantee fee which together equal the
difference between the interest on the FHA Loan or VA Loan and the pass-through
rate on the GNMA Certificate. In addition, each payment will include
proportionate pass-through payments of any prepayments of principal on the FHA
Loans or VA Loans underlying such GNMA Certificate and liquidation proceeds in
the event of a foreclosure or other disposition of any such FHA Loans or VA
Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such GNMA Certificate. In the event no payment is made by a
GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered holder of
the GNMA Certificates held in a Trust Fund, will have the right to proceed
directly against GNMA under the terms of the Guaranty Agreements relating to
such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per annum
interest rates that vary from each other by up to one percentage point. The
interest rate on each GNMA II Certificate will be between one-half percentage
point and one and one-half
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percentage points lower than the highest interest rate on the mortgage loans
included in the pool of mortgage loans underlying such GNMA II Certificate
(except for pools of mortgage loans secured by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a Trust
Fund will be comprised of interest due as specified on such GNMA Certificate
plus the scheduled principal payments on the FHA Loans or VA Loans underlying
such GNMA Certificate due on the first day of the month in which the scheduled
monthly installments on such GNMA Certificate is due. Such regular monthly
installments on each such GNMA Certificate are required to be paid to the
Trustee as registered holder by the 15th day of each month in the case of a GNMA
I Certificate and are required to be mailed to the Trustee by the 20th day of
each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or "buydown" mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non"buydown"
mortgage loans are available in respect of graduated payment or "buydown"
mortgages. GNMA Certificates related to a series of Certificates may be held in
book-entry form.
If specified in a Prospectus Supplement, GNMA Certificates may be backed by
multifamily mortgage loans having the characteristics specified in such
Prospectus Supplement.
FEDERAL HOME LOAN MORTGAGE CORPORATION
FHLMC is a corporate instrumentality of the United States created pursuant to
Title III of the Emergency Home Finance Act of 1970, as amended (the "FHLMC
Act"). The common stock of FHLMC is owned by the Federal Home Loan Banks. FHLMC
was established primarily for the purpose of increasing the availability of
mortgage credit for the financing of urgently needed housing. It seeks to
provide 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 currently consists of the purchase of
first lien conventional mortgage loans or participation interests in such
mortgage loans and the sale of the mortgage loans or participations so purchased
in the form of mortgage securities, primarily FHLMC Certificates. FHLMC is
confined to purchasing, so far as practicable, mortgage loans that it deems to
be of such quality, type and class as to meet generally the purchase standards
imposed by private institutional mortgage investors.
FHLMC CERTIFICATES
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Each FHLMC Certificate represents an undivided interest in a pool of mortgage
loans that may consist of first lien conventional loans, FHA Loans or VA Loans
(a "FHLMC Certificate group"). FHLMC Certificates are sold under the terms of a
Mortgage Participation Certificate Agreement. A FHLMC Certificate may be issued
under either FHLMC's Cash Program or Guarantor Program.
Mortgage loans underlying the FHLMC Certificates held in a Trust Fund will
consist of mortgage loans with original terms to maturity of between 10 and 30
years. Each such mortgage loan must meet the applicable standards set forth in
the FHLMC Act. A FHLMC Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another FHLMC Certificate group. Under the Guarantor
Program, any such FHLMC Certificate group may include only whole loans or
participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the timely
payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
collection by such holder of all principal on the underlying mortgage loans,
without any offset or deduction, to the extent of such holder's pro rata share
thereof, but does not, except if and to the extent specified in the Prospectus
Supplement for a series of Certificates, 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 guarantees, 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 mortgage loans which it
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 standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any Federal
Home Loan Bank and do not constitute debts or obligations of the United States
or any Federal Home Loan Bank. The obligations of FHLMC under its guarantee are
obligations solely of FHLMC and are not backed by, nor entitled to, the full
faith and credit of the United States. If FHLMC were unable to satisfy such
obligations, distributions to holders of FHLMC Certificates would consist solely
of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial repayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit
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each registered FHLMC Certificateholder's pro rata share of principal payments
on the underlying mortgage loans, interest at the FHLMC pass-through rate and
any other sums such as prepayment fees, within 60 days of the date on which such
payments are deemed to have been received by FHLMC.
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
guaranty income as agreed upon between the seller and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or before
the last business day of a month are registered effective as of the first day of
the month. The first remittance to a registered holder of a FHLMC Certificate
will be distributed so as to be received normally by the 15th day of the second
month following the month in which the purchaser became a registered holder of
the FHLMC Certificates. Thereafter, such remittance will be distributed monthly
to the registered holder so as to be received normally by the 15th day of each
month. The Federal Reserve Bank of New York maintains book-entry accounts with
respect to FHLMC Certificates sold by FHLMC on or after January 2, 1985, and
makes payments of principal and interest each month to the registered holders
thereof in accordance with such holders' instructions.
FEDERAL NATIONAL MORTGAGE ASSOCIATION
FNMA is a federally chartered and privately owned corporation organized and
existing under the Federal National Mortgage Association Charter Act (the
"Charter Act"). 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 privatelymanaged corporation by
legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, 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.
FNMA CERTIFICATES
FNMA Certificates are Guaranteed Mortgage Pass-Through Certificates
representing fractional undivided interests in a pool of mortgage loans formed
by FNMA. Each mortgage loan must meet the applicable standards of the FNMA
purchase program. Mortgage loans comprising a pool are either provided by FNMA
from its own portfolio or purchased pursuant to the criteria of the FNMA
purchase program.
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Mortgage loans underlying FNMA Certificates held in a Trust Fund will consist
of conventional mortgage loans, FHA Loans or VA Loans. Original maturities of
substantially all of the conventional, level payment mortgage loans underlying a
FNMA Certificate are expected to be between either 8 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.
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 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 guaranty fee. Under a
regular servicing option (pursuant to which the mortgagee or other servicers
assumes the entire risk of foreclosure losses), the annual interest rates on the
mortgage loans underlying a FNMA Certificate will be between 50 basis points and
250 basis points greater than in its annual pass-through rate and under a
special servicing option (pursuant to which FNMA assumes the entire risk for
foreclosure losses), the annual interest rates on the mortgage loans underlying
a FNMA Certificate will generally be between 55 basis points and 255 basis
points greater than the annual FNMA Certificate pass-through rate. If specified
in the Prospectus Supplement, FNMA Certificates may be backed by adjustable rate
mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it will
distribute amounts representing such holder's proportionate share of scheduled
principal and interest payments at the applicable pass-through rate provided for
by such FNMA Certificate on the underlying mortgage loans, whether or not
received, and such 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 not backed by, nor entitled
to, the full faith and credit of the United States. Although the Secretary of
the Treasury of the United States has discretionary authority to lend FNMA up to
$2.25 billion outstanding at any time, neither the United States nor any agency
thereof is obligated to finance FNMA's operations or to assist FNMA in any other
manner. If FNMA were unable to satisfy its obligations, distributions to holders
of FNMA Certificates would consist solely of payments and other recoveries on
the underlying mortgage loans and, accordingly, monthly distributions to holders
of FNMA Certificates would be affected by delinquent payments and defaults on
such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans formed on
or after May 1, 1985 (other than FNMA Certificates backed by pools containing
graduated payment mortgage loans or mortgage loans secured by multifamily
projects) are available in book-entry form only. Distributions of principal and
interest on each FNMA Certificate will be made by FNMA on the 25th day of each
month to the persons in whose name the FNMA Certificate is entered in the books
of the Federal Reserve Banks (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 thereon will be made by wire, and with respect to
fully registered FNMA Certificates, distributions thereon will be made by check.
STRIPPED MORTGAGE-BACKED SECURITIES
Agency Securities may consist of one or more stripped mortgage-backed
securities, each as described herein and in the related Prospectus Supplement.
Each such Agency Security will represent an undivided interest in all or part of
either the principal distributions (but not the interest distributions) or the
interest distributions (but not the principal distributions), or in some
specified portion of the principal and interest distributions (but not all of
such distributions) on certain FHLMC, FNMA or GNMA Certificates. The underlying
securities will be held under a trust agreement by FHLMC, FNMA or GNMA, each as
trustee, or by another
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trustee named in the related Prospectus Supplement. FHLMC, FNMA or GNMA will
guarantee each stripped Agency Security to the same extent as such entity
guarantees the underlying securities backing such stripped Agency Security,
unless otherwise specified in the related Prospectus Supplement.
OTHER AGENCY SECURITIES
If specified in the related Prospectus Supplement, a Trust Fund may include
other mortgage pass-through certificates issued or guaranteed by GNMA, FNMA or
FHLMC. The characteristics of any such mortgage pass-through certificates will
be described in such Prospectus Supplement. If so specified, a combination of
different types of Agency Securities may be held in a Trust Fund.
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 mortgage loans or (b)
collateralized mortgage obligations secured by mortgage loans. Private
Mortgage-Backed Securities will have been issued pursuant to a pooling and
servicing agreement, an indenture or similar agreement (a "PMBS Agreement"). The
seller/servicer of the underlying mortgage loans 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 mortgage loans
underlying such Private Mortgage-Backed Security. Mortgage loans underlying a
Private Mortgage-Backed Security will be serviced by a servicer (the "PMBS
Servicer") directly or by one or more subservicers who may be subject to the
supervision of the PMBS Servicer. The PMBS Servicer will be a 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. 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 mortgage 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 MortgageBacked 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
MortgageBacked Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
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UNDERLYING LOANS
The mortgage loans underlying the Private Mortgage-Backed Securities may
consist of fixed rate, level payment, fully amortizing loans or graduated
payment mortgage loans, buydown loans, adjustable rate mortgage loans, or loans
having balloon or other special payment features. Such Mortgage Loans may be
secured by single family property, multifamily property, manufactured homes or
by an assignment of the proprietary lease or occupancy agreement relating to a
specific dwelling within a Cooperative and the related shares issued by such
Cooperative. Except as otherwise specified in the related Prospectus Supplement,
(i) no mortgage loan will have had a Loan-to-Value Ratio at origination in
excess of 95%, (ii) each single family loan secured by a mortgaged property
having a loan-to-value ratio in excess of 80% at origination will be covered by
a primary mortgage insurance policy, (iii) each mortgage loan will have had an
original term to stated maturity of not less than 5 years and not more than 40
years, (iv) no mortgage 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 mortgage 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 mortgage loan (other than a
cooperative loan or a Contract 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-backed securities issued under the PMBS Agreement, letters of credit,
insurance policies or other types of credit support may be provided with respect
to the mortgage loans underlying the Private Mortgage-Backed Securities or with
respect to the Private Mortgage-Backed Securities themselves.
ADDITIONAL INFORMATION
The Prospectus Supplement for a series for which the Trust Fund includes
Private Mortgage-Backed Securities will specify (i) the aggregate approximate
principal amount and type of the Private Mortgage-Backed Securities to be
included in the Trust Fund, (ii) certain characteristics of the mortgage loans
which comprise the underlying assets for the Private Mortgage-Backed Securities
including (A) the payment features of such mortgage loans, (B) the approximate
aggregate principal balance, if known, of underlying mortgage loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range of servicing
fees with respect to the mortgage loans and (D) the minimum and maximum stated
maturities of the underlying mortgage loans at origination, (iii) the maximum
original term-to-stated maturity of the Private Mortgage-Backed Securities, (iv)
the weighted average term-to-stated maturity of the Private Mortgage-Backed
Securities, (v) the pass-through or certificate rate of the Private
Mortgage-Backed Securities, (vi) the weighted average pass-through or
certificate rate of the Private Mortgage-Backed Securities, (vii) the PMBS
Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS Trustee
for such Private Mortgage-Backed Securities, (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies, letters of
credit or guarantees relating to the mortgage loans underlying the Private
MortgageBacked Securities or to such Private Mortgage-Backed Securities
themselves, (ix) the term on which the underlying mortgage 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 (x) the terms on which mortgage loans may be substituted for
those originally underlying the Private Mortgage-Backed Securities.
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USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor to the purchase of Trust Fund Assets or will be used by
the Depositor for general corporate purposes. The Depositor expects that it will
make additional sales of securities similar to the Certificates from time to
time, but the timing and amount of offerings of Certificates will depend on a
number of factors, including the volume of Trust Fund Assets acquired by the
Depositor, prevailing interest rates, availability of funds and general market
conditions.
YIELD CONSIDERATIONS
Unless otherwise provided in the related Prospectus Supplement, each monthly
interest payment on a Trust Fund Asset is calculated as one-twelfth of the
applicable Interest Rate multiplied by the unpaid principal balance thereof.
Interest to be distributed on each Distribution Date to the holders of the
various classes of Certificates (other than certain classes of Strip
Certificates) of each series will be similarly calculated for the applicable
period, as one-twelfth of the applicable Pass-Through Rate multiplied by the
outstanding Certificate Principal Balance thereof, except as provided below with
respect to prepayments. In the case of Strip Certificates with no or, in certain
cases, a nominal Certificate Principal Balance, such distributions of interest
will be in an amount (as to any Distribution Date, "Stripped Interest")
described in the related Prospectus Supplement.
The effective yield to Certificateholders will be lower than the yield
otherwise produced by the applicable Pass-Through Rate (or, as to a Strip
Certificate, the distributions of Stripped Interest thereon) and purchase price,
because although interest accrued on each Trust Fund Asset during each month is
due and payable on the first day of the following month (unless otherwise
provided in the related Prospectus Supplement), the distribution of interest on
the Certificates will not be made until the Distribution Date occurring in the
month following the month of accrual of interest in the case of Mortgage Loans,
and in later months in the case of Agency Securities or Private Mortgage-Backed
Securities and in the case of a series of Certificates having Distribution Dates
occurring at intervals less frequently than monthly.
Unless otherwise specified in the related Prospectus Supplement, when a
principal prepayment in full is made on a Mortgage Loan or a mortgage loan
underlying a Private Mortgage-Backed Security, the borrower is charged interest
only for the period from the due date of the preceding monthly payment up to the
date of such prepayment, instead of for a full month. Accordingly, the effect of
principal prepayments in full during any month will be to reduce the aggregate
amount of interest collected that is available for distribution to
Certificateholders. If so provided in the related Prospectus Supplement, certain
of the Mortgage Loans or the mortgage loans underlying a Private Mortgage-Backed
Security may contain provisions limiting prepayments hereof or requiring the
payment of a prepayment penalty upon prepayment in full or in part. Unless
otherwise provided in the related Prospectus Supplement, any such penalty will
be applied to offset the above-described shortfalls in interest collections on
the related Distribution Date. Unless otherwise specified in the related
Prospectus Supplement, partial principal prepayments are applied on the first
day of the month following receipt, with no resulting reduction in interest
payable for the period in which the partial principal prepayment is made. Unless
specified otherwise in the related Prospectus Supplement, neither the Trustee,
the Master Servicer nor the Depositor will be obligated to fund shortfalls in
interest collections resulting from prepayments. Holders of Agency Securities
are entitled to a full month's interest in connection with prepayments in full
of the underlying mortgage loans. Full and partial principal prepayments
collected during the applicable Prepayment Period will be available for
distribution to Certificateholders on the related
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Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, a "Prepayment Period" in respect of any Distribution Date will
commence on the first day of the month in which the preceding Distribution Date
occurs (or, as to the first Prepayment Period, the day after the Cut-off Date)
and will end on the last day of the month prior to the month in which the
related Distribution Date occurs. See "Maturity and Prepayment Considerations"
and "Description of the Certificates-General".
The Prospectus Supplement for each series of Certificates may set forth
additional information regarding yield considerations.
MATURITY AND PREPAYMENT CONSIDERATIONS
The original terms to maturity of the Trust Fund Assets in a particular Trust
Fund will vary depending upon the type of mortgage loans underlying or
comprising the Trust Fund Assets in such Trust Fund. Each Prospectus Supplement
will contain information with respect to the type and maturities of the Trust
Fund Assets in the related Trust Fund. Unless otherwise specified in the related
Prospectus Supplement, all of the Single-Family Loans, Cooperative Loans and
Contracts and all of the mortgage loans underlying the Agency Securities and
Private Mortgage-Backed Securities may be prepaid without penalty in full or in
part at any time. If so provided in the related Prospectus Supplement, certain
of the Mortgage Loans may contain provisions prohibiting prepayment for a
specified period after the origination date (a "Lockout Period"), prohibiting
partial prepayments entirely or prohibiting prepayment in full or in part
without a prepayment penalty.
The prepayment experience on the mortgage loans underlying or comprising the
Trust Fund Assets in a Trust Fund will affect the weighted average life of the
related series of Certificates. Weighted average life refers to the average
amount of time that will elapse from the date of issuance of a security until
each dollar of 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 mortgage loans underlying or comprising the Trust
Fund Assets included in the related Trust Fund is paid, which payments 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 and hazard or condemnation losses). The rate of prepayment with respect
to fixed rate mortgage loans has fluctuated significantly in recent years. In
general, if interest rates fall below the Interest Rates on the mortgage loans
underlying or comprising the Trust Fund Assets, the rate of prepayment would be
expected to increase. There can be no assurance as to the rate of prepayment of
the mortgage loans underlying or comprising the Trust Fund Assets in any Trust
Fund. The Depositor is not aware of any publicly available statistics relating
to the principal prepayment experience of diverse portfolios of mortgage loans
over an extended period of time. All statistics known to the Depositor that have
been compiled with respect to prepayment experience on mortgage loans indicates
that while some mortgage loans may remain outstanding until their stated
maturities, a substantial number will be paid prior to their respective stated
maturities.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates, the terms
of the mortgage loans (as affected by the existence of lockout provisions,
due-on-sale and due-on-encumbrance clauses and prepayment fees), the quality of
management of the mortgaged properties, possible changes in tax laws and the
availability of mortgage funds, may affect prepayment experience. Unless
otherwise provided in the related Prospectus Supplement, all Mortgage Loans or
mortgage loans underlying Private Mortgage-Backed Securities will contain
due-on-sale provisions permitting the lender to accelerate the maturity of such
mortgage loan upon sale
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or certain transfers by the borrower of the underlying Mortgaged Property. The
Multifamily Loans may contain due-on-encumbrance provisions (permitting the
lender to accelerate the maturity of the Multifamily Loan upon further
encumbrance by the borrower of the underlying Multifamily Property).
Conventional mortgage loans that underlie FHLMC Certificates and FNMA
Certificates may contain, and in certain instances must contain, such
due-on-sale provisions. FHA Loans, VA Loans and other mortgage loans underlying
GNMA Certificates contain no such clause and may be assumed by the purchaser of
the mortgaged property. Thus, the rate of prepayments on FHA Loans, VA Loans and
other mortgage loans underlying GNMA Certificates may be lower than that of
conventional Mortgage Loans bearing comparable interest rates.
With respect to a series of Certificates evidencing interests in the Trust
Fund including Mortgage Loans, unless otherwise provided in the related
Prospectus Supplement, the Master Servicer generally will enforce any
due-on-sale clause or due-on-encumbrance clause, to the extent it has knowledge
of the conveyance or encumbrance or the proposed conveyance or encumbrance of
the underlying Mortgaged Property and reasonably believes that it is entitled to
do so under applicable law; provided, however, that the Master Servicer will not
take any enforcement action that would impair or threaten to impair any recovery
under any related insurance policy. See "Description of the
Certificates-Collection and Other Servicing Procedures" and "Certain Legal
Aspects of Mortgage Loans-Enforceability of Certain Provisions" and "-Prepayment
Charges and Prepayments" for a description of certain provisions of each
Agreement and certain legal developments that may affect the prepayment
experience on the Mortgage Loans. See "Description of the
Certificates-Termination" for a description of the possible early termination of
any series of Certificates. See also "Mortgage Loan Program-Representations by
or on behalf of Mortgage Loan Sellers; Repurchases" and "Description of the
Certificates-Assignment of Trust Fund Assets" for a description of the
obligation of the Mortgage Loan Sellers, the Master Servicer and the Depositor
to repurchase Mortgage Loans under certain circumstances.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on January 27, 1987
as an indirect wholly-owned subsidiary of Salomon Inc. The Depositor was
organized for the purpose of serving as a private secondary mortgage market
conduit. The Depositor maintains its principal office at Seven World Trade
Center, New York, New York 10048. Its telephone number is (212) 783-7228.
The Depositor does not have, nor is it expected in the future to have, any
significant assets.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will be purchased by the Depositor, either directly or
indirectly, from the Mortgage Loan Sellers. The Mortgage Loans so acquired by
the Depositor will have been originated by the Originators in accordance with
the underwriting criteria specified below under "Underwriting Standards".
UNDERWRITING STANDARDS
All Mortgage Loans will have been subject to underwriting standards
acceptable to the Depositor and applied as described below. Each Mortgage Loan
Seller, or another party on its behalf, will represent and warrant that Mortgage
Loans purchased by or on behalf of the
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Depositor from it have been originated by the related Originators in accordance
with such underwriting standards.
Unless otherwise specified in the related Prospectus Supplement, the
underwriting standards are applied by the Originators to evaluate the borrower's
credit standing and repayment ability, and the value and adequacy of the
Mortgaged Property as collateral. Initially, a prospective borrower is required
to fill out a detailed application regarding pertinent credit information. As
part of the description of the borrower's financial condition, the borrower is
required to provide a current balance sheet describing assets and liabilities
and a statement of income and expenses, as well as an authorization to apply for
a credit report that summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In addition, an employment
verification is obtained that reports the borrower's current salary and may
contain information regarding length of employment and whether it is expected
that the borrower will continue such employment in the future. If a prospective
borrower is self-employed, the borrower is required to submit copies of signed
tax returns. The borrower may also be required to authorize verification of
deposits at financial institutions where the borrower has demand or savings
accounts. In the case of a Multifamily Loan, the borrower is also required to
provide certain information regarding the related Multifamily Property,
including a current rent schedule, the type and length of leases and pro forma
operating income statements. In addition, the Depositor will consider the
location of the Multifamily Property, the availability of competitive lease
space and rental income of comparable properties in the relevant market area,
the overall economy and demographic features of the geographic area and the
mortgagor's prior experience in owning and operating properties similar to the
Multifamily Properties.
In determining the adequacy of the property as collateral, an appraisal is
made of each property considered for financing, except in the case of new
Manufactured Homes, as described under "The Trust Funds". Each appraiser is
selected in accordance with predetermined guidelines established for appraisers.
The appraiser is required to inspect the property and verify that it is in good
condition and that construction, if new, has been completed. With respect to
properties other than Multifamily Properties, the appraisal is based on the
market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the home. With respect to
Multifamily Properties, the appraisal must specify whether an income analysis, a
market analysis or a cost analysis was used. An appraisal employing the income
approach to value analyzes a property's cash flow, expenses, capitalization and
other operational information in determining the property's value. The market
approach to value analyzes the prices paid for the purchase of similar
properties in the property's area, with adjustments made for variations between
these other properties and the property being appraised. The cost approach
requires the appraiser to make an estimate of land value and then determine the
current cost of reproducing the building less any accrued depreciation. In any
case, the value of the property being financed, as indicated by the appraisal,
must be such that it currently supports, and is anticipated to support in the
future, the outstanding loan balance.
In the case of Single Family Loans and Contracts, once all applicable
employment, credit and property information is received, a determination is made
as to whether the prospective borrower has sufficient monthly income available
(i) to meet the borrower's monthly obligations on the proposed mortgage loan
(determined on the basis of the monthly payments due in the year of origination)
and other expenses related to the home (such as property taxes and hazard
insurance) and (ii) to meet monthly housing expenses and other financial
obligations and monthly living expenses. Unless otherwise provided in the
related Prospectus Supplement, the underwriting standards to be applied to the
Single Family Loans will be generally similar to the traditional underwriting
guidelines used by FNMA and FHLMC which are in effect at the time of origination
of each Single Family Loan, except that the ratios at
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origination of the amounts described in (i) and (ii) above to the applicant's
stable monthly gross income may exceed in certain cases the then applicable FNMA
and FHLMC guidelines, but such ratios in general may not exceed 33% and 38%,
respectively, of the applicant's stable monthly gross income. Such underwriting
standards may be varied in appropriate cases.
In the case of a Single Family Loan or Multifamily Loan secured by a
leasehold interest in a residential property, the title to which is held by a
third party lessor, the Mortgage Loan Seller, or another party on its behalf, is
required to warrant, among other things, that the remaining term of the lease
and any sublease be at least five years longer than the remaining term of the
Mortgage Loan.
The Mortgaged Properties may be located in states where, in general, a lender
providing credit on a residential property may not seek a deficiency judgment
against the mortgagor but rather must look solely to the property for repayment
in the event of foreclosure. The underwriting standards to be applied to the
Mortgage Loans in all states (including anti-deficiency states) require that the
value of the property being financed, as indicated by the appraisal, currently
supports and is anticipated to support in the future the outstanding principal
balance of the Mortgage Loan.
With respect to any FHA Loan the Mortgage Loan Seller is required to
represent that the FHA Loan complies with the applicable underwriting policies
of the FHA. See "Description of Primary Insurance Policies-FHA Insurance". With
respect to any VA Loan, the Mortgage Loan Seller is required to represent that
the VA Loan complies with the applicable underwriting policies of the VA. See
"Description of Primary Insurance Policies-VA Guarantee".
The recent foreclosure or repossession and delinquency experience with
respect to loans serviced by the Master Servicer or, if applicable, a
significant Sub-Servicer will be provided in the related Prospectus Supplement.
Certain of the types of loans that may be included in the Mortgage Pools are
recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such Mortgage Loans may
provide for escalating or variable payments by the borrower. These types of
Mortgage Loans are underwritten on the basis of a judgment that borrowers will
have the ability to make larger monthly payments in subsequent years. In some
instances, however, a borrower's income may not be sufficient to make loan
payments as such payments increase. Unless otherwise specified in the related
Prospectus Supplement, the Multifamily Loans will be nonrecourse loans, as to
which, in the event of mortgagor default, recourse may only be had against the
specific Multifamily Property pledged to secure that Multifamily Loan, and not
against the mortgagor's assets.
QUALIFICATIONS OF ORIGINATORS AND MORTGAGE LOAN SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Originator and Mortgage Loan Seller will be required to satisfy the
qualifications set forth herein. Each Originator must be an institution
experienced in originating and servicing conventional mortgage loans in
accordance with accepted practices and prudent guidelines, and must maintain
satisfactory facilities to originate and service those loans. Each Originator
and Mortgage Loan Seller must be a seller/servicer approved by either FNMA or
FHLMC. Each Originator and Mortgage Loan Seller must be a HUD-approved mortgagee
or an institution the deposit accounts in which are insured by the Bank
Insurance Fund ("BIF") or Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation (the "FDIC"). In addition, with respect to
FHA Loans or VA Loans, each Originator must be approved to originate such
Mortgage Loans by the FHA or VA, as applicable. In addition, each Originator and
Mortgage Loan Seller must satisfy certain criteria as to financial stability
evaluated on a case by case basis by the Depositor.
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REPRESENTATIONS BY OR ON BEHALF OF MORTGAGE LOAN SELLERS; REPURCHASES
Each Mortgage Loan Seller, or a party on its behalf, will have made
representations and warranties in respect of the Mortgage Loans sold by such
Mortgage Loan Seller. Such representations and warranties include, among other
things: (i) that any required hazard insurance was effective at the origination
of each Mortgage Loan, and that each such policy remained in effect on the date
of purchase of the Mortgage Loan from the Mortgage Loan Seller by or on behalf
of the Depositor; (ii) that, in the case of Single-Family Loans and Multifamily
Loans, either (A) title insurance insuring (subject only to permissible title
insurance exceptions) the lien status of the Mortgage was effective at the
origination of each Mortgage Loan and such policy remained in effect on the date
of purchase of the Mortgage Loan from the Mortgage Loan Seller by or on behalf
of the Depositor or (B) if the Mortgaged Property securing any Mortgage Loan is
located in an area where such policies are generally not available, there is in
the related mortgage file an attorney's certificate of title indicating (subject
to such permissible exceptions set forth therein) the first lien status of the
mortgage; (iii) that the Mortgage Loan Seller had good title to each Mortgage
Loan and each Mortgage Loan was subject to no offsets, defenses, counterclaims
or rights of rescission except to the extent that any buydown agreement
described herein may forgive certain indebtedness of a borrower; (iv) that each
Mortgage constituted a valid first lien on, or security interest in, the
Mortgaged Property (subject only to permissible title insurance exceptions and
Senior Liens, if any) and that the Mortgaged Property was free from damage and
was in good repair; (v) that there were no delinquent tax or assessment liens
against the Mortgaged Property; (vi) that each Mortgage Loan was current as to
all required payments; and (vii) that each Mortgage Loan was made in compliance
with, and is enforceable under, all applicable local, state and federal laws and
regulations in all material respects. If a person other than a Mortgage Loan
Seller makes any of the foregoing representations and warranties on behalf of
such Mortgage Loan Seller, the identity of such person will be specified in the
related Prospectus Supplement. Any person making representations and warranties
on behalf of a Mortgage Loan Seller shall be an affiliate thereof or such other
person acceptable to the Depositor having knowledge regarding the subject matter
of such representations and warranties.
All of the representations and warranties made by or on behalf of a Mortgage
Loan Seller in respect of a Mortgage Loan will have been made as of the date on
which such Mortgage Loan Seller sold the Mortgage Loan to or on behalf of the
Depositor. A substantial period of time may have elapsed between such date and
the date of initial issuance of the series of Certificates evidencing an
interest in such Mortgage Loan. Unless otherwise specified in the related
Prospectus Supplement, in the event of a breach of any such representation or
warranty, the Mortgage Loan Seller will be obligated to cure such breach or
repurchase or replace the affected Mortgage Loan as described below. Since the
representations and warranties made by or on behalf of such Mortgage Loan Seller
do not address events that may occur following the sale of a Mortgage Loan by
such Mortgage Loan Seller, it will have a cure, repurchase or substitution
obligation in connection with a breach of such a representation and warranty
only if the relevant event that causes such breach occurs prior to the date of
such sale. A Mortgage Loan Seller would have no such obligations if the relevant
event that causes such breach occurs after the date of such sale. However, the
Depositor will not include any Mortgage Loan in the Trust Fund for any series of
Certificates if anything has come to the Depositor's attention that would cause
it to believe that the representations and warranties made in respect of such
Mortgage Loan will not be accurate and complete in all material respects as of
the date of initial issuance of the related series of Certificates.
The only representations and warranties to be made for the benefit of holders
of Certificates in respect of any Mortgage Loan relating to the period
commencing on the date of sale of such Mortgage Loan by the Mortgage Loan Seller
to or on behalf of the Depositor will be certain limited representations of the
Depositor and of the Master Servicer described
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below under "Description of the Certificates-Assignment of Trust Fund Assets".
If the Master Servicer is also a Mortgage Loan Seller with respect to a
particular series, such representations will be in addition to the
representations and warranties made by the Master Servicer in its capacity as a
Mortgage Loan Seller.
The Master Servicer and/or Trustee will promptly notify the relevant Mortgage
Loan Seller of any breach of any representation or warranty made by or on behalf
of it in respect of a Mortgage Loan that materially and adversely affects the
value of such Mortgage Loan or the interests therein of the Certificateholders.
If such Mortgage Loan Seller cannot cure such breach within 60 days from the
date on which the Mortgage Loan Seller was notified of such breach, then such
Mortgage Loan Seller will be obligated to repurchase such Mortgage Loan from the
Trustee within 90 days from the date on which the Mortgage Loan Seller was
notified of such breach, at the Purchase Price therefor. As to any Mortgage
Loan, unless otherwise specified in the related Prospectus Supplement, the
"Purchase Price" is equal to the sum of (i) the unpaid principal balance
thereof, (ii) unpaid accrued interest on the Stated Principal Balance (as
defined below) at the Net Interest Rate from the date as to which interest was
last paid to the end of the calendar month in which the relevant purchase is to
occur, (iii) any unpaid servicing fees and certain unreimbursed servicing
expenses payable or reimbursable to the Master Servicer with respect to such
Mortgage Loan, (iv) any unpaid Retained Interest with respect to such Mortgage
Loan, (v) any Realized Losses, as described below under "Description of the
Certificates-Allocation of Losses", incurred with respect to such Mortgage Loan,
and (vi) if applicable, any expenses reasonably incurred or to be incurred by
the Master Servicer or the Trustee in respect of the breach or defect giving
rise to a purchase obligation. Unless otherwise provided in the related
Prospectus Supplement, a Mortgage Loan Seller, rather than repurchase a Mortgage
Loan as to which a breach has occurred, will have the option, within a specified
period after initial issuance of the related series of Certificates, to cause
the removal of such Mortgage Loan from the Trust Fund and substitute in its
place one or more other Mortgage Loans, in accordance with the standards
described below under "Description of the Certificates-Assignment of the
Mortgage Loans". The Master Servicer will be required under the applicable
Pooling and Servicing Agreement to use its best efforts to enforce such
obligations of the Mortgage Loan Seller for the benefit of the Trustee and the
holders of the Certificates, following the practices it would employ in its good
faith business judgment were it the owner of such Mortgage Loan. This repurchase
or substitution obligation will constitute the sole remedy available to holders
of Certificates or the Trustee for a breach of representation by a Mortgage Loan
Seller. See "Description of the Certificates-General".
The "Stated Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts, including
advances by the Master Servicer, allocable to principal that are distributed to
Certificateholders on or before the date of determination, and as further
reduced to the extent that any Realized Loss (as defined below) thereon has been
(or, if it had not been covered by any form of Credit Support, would have been)
allocated to one or more classes of Certificates on or before the date of
determination.
Neither the Depositor nor the Master Servicer will be obligated to purchase
or substitute for a Mortgage Loan if a Mortgage Loan Seller defaults on its
obligation to do so, and no assurance can be given that Mortgage Loan Sellers
will carry out such obligations with respect to Mortgage Loans. To the extent
that a breach of the representations and warranties of a Mortgage Loan Seller
may also constitute a breach of a representation made by the Depositor, the
Depositor may have a repurchase or substitution obligation as described below
under "Description of the Certificates-Assignment of Trust Fund Assets".
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DESCRIPTION OF THE CERTIFICATES
The Certificates of each series evidencing interests in a Trust Fund
consisting of Mortgage Loans will be issued pursuant to a Pooling and Servicing
Agreement among the Depositor, the Master Servicer (if the Depositor is not
acting as Master Servicer) and the Trustee named in the Prospectus Supplement.
The Certificates of each series evidencing interests in a Trust Fund consisting
exclusively of Agency Securities or Private Mortgage-Backed Securities will be
issued pursuant to a Trust Agreement between the Depositor and the Trustee (each
Trust Agreement or Pooling and Servicing Agreement, an "Agreement"). The
provisions of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust Fund.
Various forms of Pooling and Servicing Agreement have been filed as exhibits to
the Registration Statement of which this Prospectus is a part. The following
summaries describe certain provisions which may appear in each Agreement. The
Prospectus Supplement for a series of Certificates will describe any provision
of the Agreement relating to such series that materially differs from the
description thereof contained in this Prospectus. The summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all of the provisions of the Agreement for each Trust Fund and the
related Prospectus Supplement. Whenever particular sections or defined terms of
the Agreement are referred to, such sections or defined terms are incorporated
herein by reference. Article and section numbers cited herein refer to articles
and sections common to each Pooling and Servicing Agreement. As used herein with
respect to any series, the term "Certificate" refers to all of the Certificates
of that series, whether or not offered hereby and by the related Prospectus
Supplement, unless the context otherwise requires.
GENERAL
The Certificates of each series (including any class of Certificates not
offered hereby) will be issued in fully registered form only and will represent
the entire beneficial ownership interest in the Trust Fund created pursuant to
the related Agreement. (Section 5.01) If so provided in the Prospectus
Supplement, any class of Certificates of any series may be represented by a
certificate registered in the name of a nominee of The Depository Trust Company
("DTC"). The interests of beneficial owners of such Certificates will be
represented by such entries on the records of participating members of DTC.
Definitive certificates will be available for such Certificates only under
limited circumstances as provided in the related Prospectus Supplement. Unless
otherwise provided in the related Prospectus Supplement, each Trust Fund will
consist of (i) such Trust Fund Assets, or interests therein, exclusive of any
portion of interest payments (the "Retained Interest") on a Trust Fund Asset
retained by the Depositor or any previous owner thereof, as from time to time
are subject to the Agreement; (ii) such assets as from time to time are
identified as deposited in the Certificate Account or any other account
maintained for the benefit of the Certificateholders; (iii) with respect to
Trust Funds that include Mortgage Loans, (a) property acquired on behalf of
Certificateholders by foreclosure, deed in lieu of foreclosure or repossession
and any revenues received thereon; (b) the rights of the Depositor under any
hazard insurance policies, FHA insurance policies, VA guarantees and primary
mortgage insurance policies, as described under "Description of Primary
Insurance Policies"; (c) the rights of the Depositor under the agreement or
agreements pursuant to which it acquired the Mortgage Loans in such Trust Fund;
and (d) the rights of the Trustee in any cash advance reserve fund or surety
bond as described under "Advances in respect of Delinquencies" and (iv) any
letter of credit, mortgage pool insurance policy, special hazard insurance
policy, bankruptcy bond, reserve fund or other type of credit support provided
with respect to the related series, as described under "Description of Credit
Support". Subject to any limitations described in the related Prospectus
Supplement, the Certificates will be transferable and exchangeable for like
Certificates of the same class and series in authorized denominations at the
corporate trust office of the Trustee
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specified in the related Prospectus Supplement. No service charge will be made
for any registration of exchange or transfer of Certificates, but the Depositor
or the Trustee or any agent thereof may require payment of a sum sufficient to
cover any tax or other governmental charge. (Section 5.02)
Each series of Certificates may consist of either (i) a single class of
Certificates evidencing the entire beneficial ownership of the related Trust
Fund; (ii) two or more classes of Certificates evidencing the entire beneficial
ownership of the related Trust Fund, one or more classes of which ("Senior
Certificates") will be senior in right of payment to one or more of the other
classes ("Subordinate Certificates") to the extent described in the related
Prospectus Supplement (any such series, a "Senior/Subordinate Series"); or (iii)
other types of classes of Certificates, as described in the related Prospectus
Supplement. A series may include one or more classes of Certificates entitled to
(i) principal distributions, with disproportionate, nominal or no interest
distributions or (ii) interest distributions, with disproportionate, nominal or
no principal distributions ("Strip Certificates"). If so specified in the
related Prospectus Supplement, partial or full protection against certain
Mortgage Loan defaults and losses may be provided to a series of Certificates or
to one or more classes of Certificates in such series in the form of
subordination of one or more other classes of Certificates in such series or by
one or more other types of credit support, such as a letter of credit, reserve
fund, insurance policy or a combination thereof (any such coverage, "Credit
Support"). See "Description of Credit Support".
Each class of Certificates (other than certain Strip Certificates) will have
a Certificate Principal Balance and, unless otherwise provided in the related
Prospectus Supplement, will be entitled to payments of interest thereon based on
a specified Pass-Through Rate. See "Interest on the Certificates" and "Principal
of the Certificates" below. The specific percentage ownership interest of each
class of Certificates and the minimum denomination for each Certificate will be
set forth in the related Prospectus Supplement.
As to each series, one or more elections may be made to treat the related
Trust Fund or designated portions thereof as a "real estate mortgage investment
conduit" or "REMIC" as defined in the Internal Revenue Code of 1986 (the
"Code"). The related Prospectus Supplement will specify whether a REMIC election
is to be made and the terms and conditions applicable to the making of a REMIC
election, as well as any material federal income tax consequences to
Certificateholders not otherwise described herein. If such an election is made
with respect to a series, one of the classes of Certificates comprising such
series will be designated as evidencing all "residual interests" in the related
REMIC as defined under the Code. All other classes of Certificates in such a
series will constitute "regular interests" in the related REMIC as defined in
the Code. As to each series, all of the Certificates of each class offered
hereby will be rated in one of the four highest rating categories by one or more
nationally recognized statistical rating organizations (each, a "Rating
Agency"). As to each series with respect to which a REMIC election is to be
made, the Master Servicer or the Trustee will be obligated to take all actions
required in order to comply with applicable laws and regulations and, unless
otherwise provided in the related Prospectus Supplement, will be obligated to
pay any Prohibited Transaction Taxes or Contribution Taxes arising out of a
breach of its obligations with respect to such compliance without any right of
reimbursement therefor from the Trust Fund or from any Certificateholder. Unless
otherwise provided in the related Prospectus Supplement, a Prohibited
Transaction Tax or Contribution Tax resulting from any other cause will be
charged against the related Trust Fund, resulting in a reduction in amounts
otherwise distributable to Certificateholders. See "Certain Federal Income Tax
Consequences-REMICs-Prohibited Transactions Tax and Other Taxes".
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ASSIGNMENT OF TRUST FUND ASSETS
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of any series of Certificates, the Depositor will
cause the Mortgage Loans comprising the Mortgage Pool included in the related
Trust Fund to be assigned to the Trustee, together with all principal and
interest received by or on behalf of the Depositor on or with respect to such
Mortgage Loans after the Cut-off Date, other than principal and interest due on
or before the Cut-off Date and other than any Retained Interest. (Section 2.01)
The Trustee will, concurrently with such assignment, deliver the Certificates to
the Depositor in exchange for the Trust Fund. (Section 2.06) Each Mortgage Loan
will be identified in a schedule appearing as an exhibit to the related
Agreement. Such schedule will include information as to the outstanding
principal balance of each Mortgage Loan after application of payments due on the
Cut-off Date, as well as information regarding the Interest Rate, the Net
Interest Rate, the Retained Interest, if any, the current scheduled monthly
payment of principal and interest, the maturity of the Mortgage Note, the Value
of the Mortgaged Property, the Loan-to-Value Ratio at origination and certain
other information with respect to the Mortgage Loans. As to any Mortgage Loan,
the "Net Interest Rate" is equal to the Interest Rate minus the sum of the rates
at which the servicing fees and the Retained Interest, if any, are calculated.
(Article I)
In addition, the Depositor will, with respect to each Mortgage Loan, deliver
or cause to be delivered to the Trustee (or to the custodian hereinafter
referred to):
(1) With respect to each Single-Family Loan and Multifamily Loan, the
Mortgage Note endorsed, without recourse, to the order of the Trustee, the
Mortgage with evidence of recording indicated thereon (except for any
Mortgage not returned from the public recording office, in which case the
Depositor will deliver or cause to be delivered a copy of such Mortgage
together with its certificate that the original of such Mortgage was
delivered to such recording office) and an assignment of the Mortgage to the
Trustee in recordable form. Unless otherwise provided in the related
Prospectus Supplement, the Depositor will promptly cause the assignment of
each related Mortgage Loan to be recorded in the appropriate public office
for real property records, except in the State of California or in other
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 against the claim of any subsequent transferee or any successor to or
creditor of the Depositor, the Master Servicer, the relevant Mortgage Loan
Seller or any other prior holder of the Mortgage Loan. (Section 2.01)
(2) With respect to each Cooperative Loan, the Cooperative Note, the
original security agreement, the proprietary lease or occupancy agreement,
the related stock certificate and related stock powers endorsed in blank, and
a copy of the original filed financing statement together with an assignment
thereof to the Trustee in a form sufficient for filing. Unless otherwise
provided in the related Prospectus Supplement, the Depositor will promptly
cause the assignment and financing statement of each related Cooperative Loan
to be filed in the appropriate public office, except in states where in the
opinion of counsel acceptable to the Trustee, such filing is not required to
protect the Trustee's interest in the Cooperative Loan against the claim of
any subsequent transferee or any successor to or creditor of the Depositor,
the Master Servicer, the relevant Mortgage Loan Seller or any prior holder of
the Cooperative Loan (Section 2.01).
(3) With respect to each Contract, the original Contract endorsed, without
recourse, to the order of the Trustee and copies of documents and instruments
related to the Contract and the security interest in the Manufactured Home
securing the Contract, together with a blanket assignment to the Trustee of
all Contracts in the related Trust Fund and such documents and instruments.
In order to give notice of the right, title and
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interest of the Certificateholders to the Contracts, the Depositor will
cause to be executed and delivered to the Trustee a UCC-1 financing
statement identifying the Trustee as the secured party and identifying all
Contracts as collateral. (Section 2.01)
The Trustee (or the custodian hereinafter referred to) will review such
Mortgage Loan documents within 45 days after receipt thereof, and the Trustee
(or such custodian) 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) shall immediately notify the
Master Servicer and the Depositor, and the Master Servicer shall immediately
notify the relevant Mortgage Loan Seller. If the Mortgage Loan Seller cannot
cure the omission or defect within 60 days after receipt of such notice, the
Mortgage Loan Seller will be obligated, within 90 days of receipt of such
notice, to repurchase the related Mortgage Loan from the Trustee at the Purchase
Price or substitute for such Mortgage Loan. There can be no assurance that a
Mortgage Loan Seller will fulfill this repurchase or substitution obligation.
Although the Master Servicer is obligated to use its best efforts to enforce
such obligation to the extent described above under "Mortgage Loan
Program-Representations by or on behalf of Mortgage Loan Sellers; Repurchases",
neither the Master Servicer nor the Depositor will be obligated to repurchase or
substitute for such Mortgage Loan if the Mortgage Loan Seller defaults on its
obligation. Unless otherwise specified in the related Prospectus Supplement,
this repurchase or substitution obligation constitutes the sole remedy available
to the Certificateholders or the Trustee for omission of, or a material defect
in, a constituent document. (Section 2.03)
With respect to the Mortgage Loans in a Mortgage Pool, the Depositor will
make representations and warranties as to the types and geographical
concentration of such Mortgage Loans and as to the accuracy in all material
respects of certain identifying information furnished to the Trustee in respect
of each such Mortgage Loan (e.g., original Loan-to-Value Ratio, principal
balance as of the Cut-off Date, Interest Rate, Net Interest Rate and maturity).
In addition, unless otherwise specified in the related Prospectus Supplement,
the Depositor will represent and warrant that, as of the Cut-off Date for the
related series of Certificates, no Mortgage Loan was currently more than 30 days
delinquent as to payment of principal and interest and no Mortgage Loan was more
than 30 days delinquent more than once during the previous 12 months. Upon a
breach of any such representation of the Depositor that materially and adversely
affects the value of a Mortgage Loan or the interests of the Certificateholders
therein, the Depositor will be obligated either to cure the breach in all
material respects, repurchase the Mortgage Loan at the Purchase Price or
substitute for such Mortgage Loan as described below.
Unless otherwise provided in the related Prospectus Supplement, if the
Depositor discovers or receives notice of any breach of its representations or
warranties with respect to a Mortgage Loan, the Depositor may, rather than
repurchase the Mortgage Loan as provided above, remove such Mortgage Loan from
the Trust Fund (a "Deleted Mortgage Loan") and substitute in its place one or
more Mortgage Loans (each, a "Substitute Mortgage Loan"), but only if (i) with
respect to a Trust Fund for which a REMIC election is to be made, such
substitution is effected within two years of the date of initial issuance of the
Certificates (plus permissible extensions) or (ii) with respect to a Trust Fund
for which no REMIC election is to be made, such substitution is effected within
120 days of the date of initial issuance of the Certificates. Except as
otherwise provided in the related Prospectus Supplement, any Substitute Mortgage
Loan will, on the date of substitution, (i) have an outstanding principal
balance, after deduction of all scheduled payments due in the month of
substitution, not in excess of (and not more than $10,000 less than) the
outstanding principal balance, after deduction of all unpaid scheduled payments
due as of the date of substitution, of the Deleted Mortgage Loan, (ii) have an
Interest Rate not less than (and not more than 1% greater than) the Interest
Rate of the Deleted Mortgage Loan, (iii) have a Net Interest Rate equal to the
Net
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Interest Rate of the Deleted Mortgage Loan, (iv) have a remaining term to
maturity not greater than (and not more than one year less than) that of the
Deleted Mortgage Loan (v) have a Lockout Date, if applicable, not earlier than
the Lockout Date on the Deleted Mortgage Loan and (vi) comply with all of the
representations and warranties set forth in the Agreement as of the date of
substitution. In connection with any substitution, an amount equal to the
difference between the Purchase Price of the Deleted Mortgage Loan and the
outstanding principal balance of the Substitute Mortgage Loan (after deduction
of all scheduled payments due in the month of substitution), together with one
month's interest at the applicable Net Mortgage Rate on such balance, will be
deposited in the Certificate Account and distributed to Certificateholders on
the first Distribution Date following the Prepayment Period in which the
substitution occurred. In the event that one mortgage loan is substituted for
more than one Deleted Mortgage Loan, or more than one mortgage loan is
substituted for one or more Deleted Mortgage Loans, then the amount described in
clause (i) will be determined on the basis of aggregate principal balances, the
rates described in clauses (ii) and (iii) with respect to Deleted Mortgage Loans
will be determined on the basis of weighted average Interest Rates and Net
Interest Rates, as the case may be, and the terms described in clause (iv) will
be determined on the basis of weighted average remaining terms to maturity and
the Lockout Dates described in clause (v) will be determined on the basis of
weighted average Lockout Dates.
With respect to any series as to which credit support is provided by means of
a mortgage pool insurance policy, in addition to making the representations and
warranties described above, the Depositor or the related Mortgage Loan Seller
(or another party on behalf of the related Mortgage Loan Seller), as specified
in the related Prospectus Supplement, will represent and warrant to the Trustee
that no action has been taken or failed to be taken, no event has occurred and
no state of facts exists or has existed on or prior to the date of the initial
issuance of the Certificates which has resulted or will result in the exclusion
from, denial of or defense to coverage under any applicable primary mortgage
insurance policy, FHA insurance policy, mortgage pool insurance policy, special
hazard insurance policy or bankruptcy bond, irrespective of the cause of such
failure of coverage but excluding any failure of an insurer to pay by reason of
the insurer's own breach of its insurance policy or its financial inability to
pay (such representation being referred to herein as the "insurability
representation"). See "Description of Primary Insurance Policies" and
"Description of Credit Support" herein and in the related Prospectus Supplement
for information regarding the extent of coverage under the aforementioned
insurance policies. Upon a breach of the insurability representation which
materially and adversely affects the interests of the Certificateholders in a
Mortgage Loan, the Depositor or the Mortgage Loan Seller, as the case may be,
will be obligated either to cure the breach in all material respects or to
purchase such Mortgage Loan at the Purchase Price, subject to the limitations
specified in the related Prospectus Supplement. The related Prospectus
Supplement may provide that the performance of an obligation to repurchase
Mortgage Loans following a breach of an insurability representation will be
ensured in the manner specified therein.
The obligation to repurchase or, other than with respect to the insurability
representation if applicable, to substitute Mortgage Loans as described above
constitutes the sole remedy available to the Certificateholders or the Trustee
for any breach of the above described representations. (Section 2.03)
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Certificateholders, the Master Servicer will be obligated to cure the breach in
all material respects. (Section 2.05)
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ASSIGNMENT OF AGENCY SECURITIES
The Depositor will cause the Agency Securities to be registered in the name
of the Trustee or its nominee, and the Trustee concurrently will execute,
countersign and deliver the Certificates. Each Agency Security will be
identified in a schedule appearing as an exhibit to the Agreement, which will
specify as to each Agency Security the original principal amount and outstanding
principal balance as of the Cut-off Date, the annual pass-through rate (if any)
and the maturity date.
ASSIGNMENT OF PRIVATE MORTGAGE-BACKED SECURITIES
The Depositor will cause Private Mortgage-Backed Securities to be registered
in the name of the Trustee. The Trustee (or the custodian) 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 Agreement 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.
DEPOSITS TO CERTIFICATE ACCOUNT
The Master Servicer and/or the Trustee will, as to each Trust Fund, establish
and maintain or cause to be established and maintained one or more separate
accounts for the collection of payments on the related Trust Fund Assets
(collectively, the "Certificate Account"), which must be either (i) maintained
with a bank or trust company, and in a manner, satisfactory to the Rating Agency
or Agencies rating any class of Certificates of such series or (ii) an account
or accounts the deposits in which are insured by the BIF or the SAIF (to the
limits established by the FDIC) and the uninsured deposits in which are
otherwise secured such that the Certificateholders have a claim with respect to
the funds in the Certificate Account or a perfected first priority security
interest against any collateral securing such funds that is superior to the
claims of any other depositors or general creditors of the institution with
which the Certificate Account is maintained. The collateral eligible to secure
amounts in the Certificate Account is limited to United States government
securities and other high-quality investments specified in the Agreement
("Permitted Investments"). (Section 3.12) A Certificate Account may be
maintained as an interest bearing or a non-interest bearing account, or the
funds held therein may be invested pending each succeeding Distribution Date in
Permitted Investments. Unless otherwise provided in the related Prospectus
Supplement, any interest or other income earned on funds in the Certificate
Account will be paid to the Master Servicer or the Trustee or their designee as
additional compensation. The Certificate Account may be maintained with an
institution that is an affiliate of the Master Servicer or the Trustee, provided
that such institution meets the standards set forth above. If permitted by the
Rating Agency or Agencies and so specified in the related Prospectus Supplement,
a Certificate Account may contain funds relating to more than one series of
pass-through certificates and may, if applicable, contain other funds respecting
payments on mortgage loans belonging to the Master Servicer or serviced or
master serviced by it on behalf of others.
(Article I; Section 3.10)
Each Sub-Servicer servicing a Mortgage Loan pursuant to a Sub-Servicing
Agreement will establish and maintain one or more separate accounts which may be
interest bearing and which will comply with the standards with respect to
Certificate Accounts set forth above or such other standards as may be
acceptable to the Master Servicer (collectively, the "Sub-
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Servicing Account"). The Sub-Servicer is required to credit to the related
Sub-Servicing Account on a daily basis the amount of all proceeds of Mortgage
Loans received by the SubServicer, less its servicing compensation. The
Sub-Servicer shall remit to the Master Servicer by wire transfer of immediately
available funds all funds held in the Sub-Servicing Account with respect to each
Mortgage Loan on the monthly remittance date or dates specified in the related
Agreement. (Section 3.08)
PAYMENTS ON MORTGAGE LOANS
The Master Servicer will deposit or cause to be deposited in the Certificate
Account for each Trust Fund including Mortgage Loans on a daily basis, unless
otherwise provided in the Agreement and described in the related Prospectus
Supplement, the following payments and collections received, or advances made,
by the Master Servicer or on its behalf subsequent to the Cut-off Date (other
than payments due on or before the Cut-off Date, and exclusive of any amounts
representing a Retained Interest):
(i) all payments on account of principal, including principal prepayments,
on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, net of any
portion thereof retained by the Master Servicer or by a Sub-Servicer as its
servicing compensation and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies and any special hazard
insurance policy (to the extent such proceeds are not applied to the
restoration of the property or released to the mortgagor in accordance with
the normal servicing procedures of the Master Servicer or the related
Sub-Servicer, subject to the terms and conditions of the related Mortgage and
Mortgage Note), any primary mortgage insurance policy, any FHA insurance
policy, any VA guarantee, any bankruptcy bond and any mortgage pool insurance
policy (collectively, "Insurance Proceeds") and all other amounts received
and retained in connection with the liquidation of defaulted Mortgage Loans,
by foreclosure or otherwise ("Liquidation Proceeds"), together with the net
proceeds on a monthly basis with respect to any Mortgaged Properties acquired
for the benefit of Certificateholders by foreclosure or by deed in lieu of
foreclosure or otherwise;
(iv) any amounts required to be paid under any letter of credit, as
described below under "Description of Credit Support-Letter of Credit";
(v) any advances made as described below under "Advances in respect of
Delinquencies";
(vi) if applicable, all amounts required to be transferred to the
Certificate Account from a reserve fund, as described below under
"Description of Credit Support-Reserve Funds";
(vii) any Buydown Funds (and, if applicable, investment earnings thereon)
required to be deposited in the Certificate Account as described below;
(viii) all proceeds of any Mortgage Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any Sub-Servicer or any
Mortgage Loan Seller as described under "Mortgage Loan
Program-Representations by or on behalf of Mortgage Loan Sellers;
Repurchases" or "-Assignment of Trust Fund Assets" above, exclusive of the
Retained Interest, if any, in respect of such Mortgage Loan, and all proceeds
of any Mortgage Loan repurchased as described under "Termination" below;
(ix) all payments required to be deposited in the Certificate Account with
respect to any deductible clause in any blanket insurance policy described
under "Description of Primary Insurance Policies-Primary Hazard Insurance
Policies"; and
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(x) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the Master
Servicer of funds held in the Certificate Account. (Section 3.10)
With respect to each Buydown Mortgage Loan, the Master Servicer, or a
Sub-Servicer, will deposit related Buydown Funds in a custodial account, which
may be interest bearing, and that otherwise meets the standards for Certificate
Accounts set forth above (a "Buydown Account"). Unless otherwise specified in
the related Prospectus Supplement, the terms of all Buydown Mortgage Loans
provide for the contribution of Buydown Funds in an amount not less than either
(i) the total payments to be made from such funds pursuant to the related
buydown plan or (ii) if such Buydown Funds are present valued, that amount that,
together with investment earnings thereon at a specified rate, compounded
monthly, will support the scheduled level of payments due under the Buydown
Mortgage Loan. Neither the Master Servicer, the Sub-Servicer nor the Depositor
will be obligated to add to such Buydown Funds any of its own funds should
investment earnings prove insufficient to maintain the scheduled level of
payments. To the extent that any such insufficiency is not recoverable from the
borrower, distributions to Certificateholders will be affected. With respect to
each Buydown Mortgage Loan, the Master Servicer will deposit in the Certificate
Account the amount, if any, of the Buydown Funds (and, if applicable, investment
earnings thereon) for each Buydown Mortgage Loan that, when added to the amount
due from the borrower on such Buydown Mortgage Loan, equals the full monthly
payment which would be due on the Buydown Mortgage Loan if it were not subject
to the buydown plan.
Unless otherwise specified in the related Prospectus Supplement, in the event
a Buydown Mortgage Loan is prepaid in full or liquidated, the related Buydown
Funds will be applied as follows. If the mortgagor on a Buydown Mortgage Loan
prepays such loan in its entirety during the Buydown Period, the Master Servicer
will withdraw from the Buydown Account and remit to the mortgagor in accordance
with the related buydown plan any Buydown Funds remaining in the Buydown
Account. If a prepayment by a mortgagor during the Buydown Period together with
Buydown Funds will result in a prepayment in full, the Master Servicer will
withdraw from the Buydown Account for deposit in the Certificate Account the
Buydown Funds and investment earnings thereon, if any, which together with such
prepayment will result in a prepayment in full. If the mortgagor defaults during
the Buydown Period with respect to a Buydown Mortgage Loan and the Mortgaged
Property is sold in liquidation (either by the Master Servicer or the insurer
under any related insurance policy), the Master Servicer will withdraw from the
Buydown Account the Buydown Funds and all investment earnings thereon, if any,
for deposit in the Certificate 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 Buydown Mortgage Loan the Buydown Funds in respect of which were
supplemented by investment earnings, the Master Servicer will withdraw from the
Buydown Account and either deposit in the Certificate Account or remit to the
borrower, depending upon the terms of the buydown plan, any investment earnings
remaining in the related Buydown Account.
Any Buydown Funds, and any investment earnings thereon, deposited in the
Certificate Account in connection with a full prepayment of the related Mortgage
Loan will be deemed to reduce the amount that would be required to be paid by
the borrower to repay fully the related Mortgage Loan if the Mortgage Loan were
not subject to the buydown plan. (Section 3.25)
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PAYMENTS ON AGENCY SECURITIES AND PRIVATE MORTGAGE-BACKED SECURITIES
The Agency Securities and Private Mortgage-Backed Securities included in a
Trust Fund will be registered in the name of the Trustee so that all
distributions thereon will be made directly to the Trustee. The Trustee will
deposit or cause to be deposited into the Certificate Account for each Trust
Fund including Agency Securities and Private Mortgage-Backed Securities as and
when received, unless otherwise provided in the Agreement, all distributions
received by the Trustee with respect to the related Agency Securities and
Private MortgageBacked Securities (other than payments due on or before the
Cut-off Date and exclusive of any trust administration fee and amounts
representing the Retained Interest, if any).
DISTRIBUTIONS
Distributions allocable to principal and interest on the Certificates of each
series will be made by or on behalf of the Trustee on each Distribution Date as
specified in the related Prospectus Supplement. Except as otherwise specified in
the related Prospectus Supplement, distributions will be made to the persons in
whose names the Certificates are registered at the close of business on the last
business day of the month preceding the month in which the Distribution Date
occurs (the "Record Date"), and the amount of each distribution will be
determined as of the close of business on the date specified in the related
Prospectus Supplement (the "Determination Date"). All distributions with respect
to each class of Certificates on each Distribution Date will be allocated pro
rata among the outstanding Certificates in such class. Payments to the holders
of Certificates of any class on each Distribution Date will be made to the
Certificateholders of the respective class of record on the next preceding
Record Date (other than in respect of the final distribution), based on the
aggregate fractional undivided interests in that class represented by their
respective Certificates. Payments will be made either by wire transfer in
immediately available funds to the account of a Certificateholder at a bank or
other entity having appropriate facilities therefor, if such Certificateholder
has so notified the Depositor or its designee no later than the date specified
in the related Prospectus Supplement (and, if so provided in the related
Prospectus Supplement, holds Certificates in the requisite amount specified
therein), or by check mailed to the address of the person entitled thereto as it
appears on the Certificate Register; provided, however, that the final
distribution in retirement of the Certificates will be made only upon
presentation and surrender of the Certificates at the office or agency of the
Depositor or its agent specified in the notice to Certificateholders of such
final distribution.
(Sections 4.01 and 9.01)
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Certificates of each series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement. Unless
provided otherwise in the related Prospectus Supplement, the "Available
Distribution Amount" for each Distribution Date equals the sum of the following
amounts:
(i) the total amount of all cash on deposit in the related Certificate
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected but due
on a date subsequent to the related Due Period (unless the related
Prospectus Supplement provides otherwise, a "Due Period" with respect to
any Distribution Date will commence on the second day of the month in
which the immediately preceding Distribution Date occurs, or the day after
the Cut-off Date in the case of the first Due Period, and will end on the
first day of the month of the related Distribution Date),
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(b) all prepayments, together with related payments of the interest
thereon, Liquidation Proceeds, Insurance Proceeds and other unscheduled
recoveries received subsequent to the related Prepayment Period, and
(c) all amounts in the Certificate Account that are due or
reimbursable to the Depositor, the Trustee, a Mortgage Loan Seller, a
Sub-Servicer or the Master Servicer or that are payable in respect of
certain expenses of the related Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Certificate Account;
(iii) all advances with respect to such Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so provides,
amounts paid with respect to interest shortfalls resulting from prepayments
during the related Prepayment Period; and
(v) to the extent not on deposit in the related Certificate Account as of
the corresponding Determination Date, any amounts collected under, from or in
respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Certificates (including any Certificates not
offered hereby) on each Distribution Date, and accordingly will be released from
the Trust Fund and will not be available for any future distributions.
INTEREST ON THE CERTIFICATES
Each class of Certificates (other than certain classes of Strip Certificates)
may have a different Pass-Through Rate, which may be a fixed, variable or
adjustable Pass-Through Rate. The related Prospectus Supplement will specify the
Pass-Through Rate for each class, or, in the case of a variable or adjustable
Pass-Through Rate, the method for determining the PassThrough Rate. Unless
otherwise specified 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.
With respect to each series of Certificates and each Distribution Date, the
"Accrued Certificate Interest" distributable on each Certificate, other than
certain classes of Strip Certificates, will be equal to one month's interest on
the outstanding Certificate Principal Balance thereof immediately prior to the
Distribution Date, at the applicable Pass-Through Rate, subject to the
following. As to each Strip Certificate with no or, in certain cases, a nominal
Certificate Principal Balance, the Accrued Certificate Interest with respect to
any Distribution Date will equal one month's Stripped Interest. Unless otherwise
specified in the related Prospectus Supplement, the Accrued Certificate Interest
on each Certificate of a series will be reduced in the event of shortfalls in
collections of interest resulting from prepayments on Mortgage Loans, with that
shortfall allocated among all of the Certificates of that series in the manner
specified in the related Prospectus Supplement. See "Yield Considerations".
PRINCIPAL OF THE CERTIFICATES
Unless the related Prospectus Supplement provides otherwise, each Certificate
will have a "Certificate Principal Balance" which, at any time, will equal the
maximum amount that the holder will be entitled to receive in respect of
principal out of the future cash flow on the Trust Fund Assets and other assets
included in the related Trust Fund. With respect to each such Certificate,
distributions generally will be applied to undistributed accrued interest
thereon, and thereafter to principal. The outstanding Certificate Principal
Balance of a Certificate will be reduced to the extent of distributions of
principal thereon, and in the case of Certificates
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evidencing an interest in Mortgage Loans, by the amount of any Realized Losses,
as defined below, allocated thereto. Unless the related Prospectus Supplement
provides otherwise, the initial aggregate Certificate Principal Balance of all
classes of Certificates of a series will equal the outstanding aggregate
principal balance of the related Trust Fund Assets as of the applicable Cut-off
Date. The initial aggregate Certificate Principal Balance of a series and each
class thereof will be specified in the related Prospectus Supplement. Unless
otherwise provided in the related Prospectus Supplement, distributions of
principal will be made on each Distribution Date to the class or classes of
Certificates entitled thereto until the Certificate Principal Balance of such
class has been reduced to zero. With respect to a Senior/Subordinate Series,
unless otherwise provided in the related Prospectus Supplement, distributions
allocable to principal of a class of Certificates will be based on the
percentage interest in the related Trust Fund evidenced by such class (with
respect to the Senior Certificates, the "Senior Percentage"), which in turn will
be based on the Certificate Principal Balance of such class as compared to the
Certificate Principal Balance of all classes of Certificates of such series.
Distributions of principal of any class of Certificates will be made on a pro
rata basis among all of the Certificates of such class. Strip Certificates with
no Certificate Principal Balance will not receive distributions of principal.
ALLOCATION OF LOSSES
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale or otherwise (a "Liquidated Loan"), the amount of the
Realized Loss incurred in connection with such liquidation will equal the
excess, if any, of the unpaid principal balance of the Liquidated Loan
immediately prior to liquidation, over the aggregate amount of Liquidation
Proceeds derived from such liquidation remaining after application of such
proceeds to unpaid accrued interest on the Liquidated Loan and to reimburse the
Master Servicer or any Sub-Servicer for related unreimbursed servicing expenses.
With respect to certain Mortgage Loans the principal balances of which have been
reduced in connection with bankruptcy proceedings, the amount of such reduction
(a "Deficient Valuation") also will be treated as a Realized Loss. As to any
series of Certificates other than a Senior/Subordinate Series, unless specified
otherwise in the related Prospectus Supplement, any Realized Loss not covered as
described under "Description of Credit Support" will be allocated among all of
the Certificates on a pro rata basis.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Certificates evidencing interests in a Trust
Fund consisting of Mortgage Loans, other than a Senior/Subordinate Series,
unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will advance on or before each Distribution Date its own funds or funds
held in the Certificate Account that are not included in the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of payments of principal and interest (net of related servicing fees
and Retained Interest) that were due during the related Due Period and were
delinquent on the related Determination Date, subject to the Master Servicer's
good faith determination that such advances will be reimbursable from Related
Proceeds (as defined below). See "Description of Primary Insurance Policies" and
"Description of Credit Support".
With respect to any Senior/Subordinate Series, unless otherwise provided in
the related Prospectus Supplement, the Master Servicer will advance on each
Distribution Date its own funds or funds held in the Certificate Account which
are not included in the Available Distribution Amount for such Distribution
Date, in an aggregate amount equal to the lesser of (a) the total of all amounts
required to be distributed on each class of Senior Certificates and Strip
Certificates, if any, on such Distribution Date which remain after applying
towards such payment the entire Available Distribution Amount, including funds
otherwise payable to the
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Subordinate Certificateholders but excluding such advance, and (b) the aggregate
of payments of principal and interest (net of related servicing fees and
Retained Interest) that were due during the related Due Period and were
delinquent on the related Determination Date. Alternatively, for a
Senior/Subordinate Series, the Master Servicer may be obligated to make advances
in the manner provided in the preceding paragraph. In either case, the Master
Servicer will, unless the related Prospectus Supplement provides otherwise, be
obligated to make such advances regardless of recoverability from the related
Mortgage Loans to the extent that the Certificate Principal Balance of the
Subordinate Certificates is greater than zero. Thereafter, such advances are
required to be made only to the extent they are deemed by the Master Servicer to
be recoverable from Related Proceeds, unless otherwise specified in the related
Prospectus Supplement. See "Description of Primary Insurance Policies" and
"Description of Credit Support".
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Unless otherwise
provided in the related Prospectus Supplement, advances of the Master Servicer's
funds will be reimbursable only out of related recoveries on the Mortgage Loans
(including amounts received under any form of Credit Support) respecting which
such advances were made (as to any Mortgage Loan, "Related Proceeds") and, in
the case of a Senior/Subordinate Series, out of any amounts otherwise
distributable on the Subordinate Certificates of such series; provided, however,
that any such advance will be reimbursable from any amounts in the Certificate
Account to the extent that the Master Servicer shall determine that such advance
(a "Nonrecoverable Advance") is not ultimately recoverable from Related Proceeds
and, in the case of a Senior/Subordinate Series, the Certificate Principal
Balance of the Subordinate Certificates has been reduced to zero. If advances
have been made by the Master Servicer from excess funds in the Certificate
Account, the Master Servicer will replace such funds in the Certificate Account
on any future Distribution Date to the extent that funds in the Certificate
Account on such Distribution Date are less than payments required to be made to
Certificateholders on such date. (Section 4.03) If so specified in the related
Prospectus Supplement, the obligations of the Master Servicer to make advances
may be secured by a cash advance reserve fund or a surety bond. If applicable,
information regarding the characteristics of, and the identity of any obligor
on, any such surety bond, will be set forth in the related Prospectus
Supplement.
REPORTS TO CERTIFICATEHOLDERS
With each distribution to holders of any class of Certificates of a series,
the Master Servicer or the Trustee, will forward or cause to be forwarded to
each such holder, to the Depositor and to such other parties as may be specified
in the related Agreement, a statement setting forth:
(i) the amount of such distribution to holders of Certificates of such
class applied to reduce the Certificate Principal Balance thereof;
(ii) the amount of such distribution to holders of Certificates of such
class allocable to Accrued Certificate Interest;
(iii) the amount of related administration or servicing compensation
received by the Trustee or the Master Servicer and any Sub-Servicer and such
other customary information as the Master Servicer deems necessary or
desirable, or that a Certificateholder reasonably requests, to enable
Certificateholders to prepare their tax returns;
(iv) if applicable, the aggregate amount of advances included in such
distribution, and the aggregate amount of unreimbursed advances at the close
of business on such Distribution Date;
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(v) the aggregate Stated Principal Balance of the Mortgage Loans at the
close of business on such Distribution Date;
(vi) the number and aggregate Stated Principal Balance of Mortgage
Loans (a) delinquent one month, (b) delinquent two or more months, and (c) as
to which foreclosure proceedings have been commenced;
(vii) with respect to any Mortgaged Property acquired on behalf of
Certificateholders through foreclosure or deed in lieu of foreclosure during
the preceding calendar month, the Stated Principal Balance of the related
Mortgage Loan as of the close of business on the Distribution Date in such
month;
(viii) the book value of any Mortgaged Property acquired on behalf of
Certificateholders through foreclosure or deed in lieu of foreclosure as of
the close of business on the last business day of the calendar month
preceding the Distribution Date;
(ix) the aggregate Certificate Principal Balance of each class of
Certificates (including any class of Certificates not offered hereby) at the
close of business on such Distribution Date, separately identifying any
reduction in such Certificate Principal Balance due to the allocation of any
Realized Loss;
(x) the Special Hazard Subordination Amount, if any, at the close of
business on such Distribution Date;
(xi) the aggregate amount of principal prepayments made and Realized
Losses incurred during the related Prepayment Period;
(xii) the amount deposited in the Reserve Fund, if any, on such
Distribution Date;
(xiii) the amount remaining in the Reserve Fund, if any, as of the
close of business on such Distribution Date;
(xiv) the aggregate unpaid Accrued Certificate Interest, if any, on
each class of Certificates at the close of business on such Distribution
Date;
(xv) in the case of Certificates with a variable Pass-Through Rate, the
PassThrough Rate applicable to such Distribution Date, as calculated in
accordance with the method specified in the related Prospectus Supplement;
(xvi) in the case of Certificates with an adjustable Pass-Through Rate,
for statements to be distributed in any month in which an adjustment date
occurs, the adjustable Pass-Through Rate applicable to the next succeeding
Distribution Date as calculated in accordance with the method specified in
the related Prospectus Supplement; and
(xvii) as to any series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of the
close of business on such Distribution Date.
In the case of information furnished pursuant to subclauses (i)-(iii) above,
the amounts shall be expressed as a dollar amount per minimum denomination of
Certificates or for such other specified portion thereof.
Within a reasonable period of time after the end of each calendar year, the
Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Certificate a statement containing the information set
forth in subclauses (i)-(iii) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Certificateholder.
Such obligation of the Master Servicer or the Trustee shall be deemed to have
been satisfied to the extent that
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substantially comparable information shall be provided by the Master Servicer or
the Trustee pursuant to any requirements of the Code as are from time to time in
force. (Section 4.02)
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Sub-Servicers, will make reasonable
efforts to collect all scheduled payments under the Mortgage Loans and will
follow or cause to be followed such collection procedures as it would follow
with respect to mortgage loans that are comparable to the Mortgage Loans and
held for its own account, provided such procedures are consistent with the
Agreement and any related insurance policy, bankruptcy bond, letter of credit or
other instrument described under "Description of Primary Insurance Policies" or
"Description of Credit Support" (any such instrument providing coverage as to
losses resulting from physical damage, a "Hazard Insurance Instrument", any such
instrument providing coverage as to credit or other risks, a "Credit Insurance
Instrument", and collectively, the "Insurance Instruments"). Consistent with the
above, the Master Servicer may, in its discretion, waive any late payment charge
in respect of a late Mortgage Loan payment and, only upon determining that the
coverage under any related Insurance Instrument will not be affected, extend or
cause to be extended the due dates for payments due on a Mortgage Note for a
period not greater than 125 days. (Section 3.07)
In any case in which property securing a Mortgage Loan, other than a
Multifamily Loan, has been, or is about to be, conveyed by the borrower, or in
any case in which property securing a Multifamily Loan has been, or is about to
be encumbered by the borrower, the Master Servicer will, to the extent it has
knowledge of such conveyance, encumbrance, proposed conveyance or encumbrance,
exercise or cause to be exercised on behalf of the related Trust Fund the
lender's rights to accelerate the maturity of such Mortgage Loan under any
due-on-sale or due-on-encumbrance clause applicable thereto, but only if the
exercise of any such rights is permitted by applicable law and will not impair
or threaten to impair any recovery under any related Insurance Instrument. If
these conditions are not met or if the Master Servicer reasonably believes it is
unable under applicable law to enforce such due-on-sale or due-on-encumbrance
clause, the Master Servicer will enter into or cause to be entered into an
assumption and modification agreement with the person to whom such property has
been or is about to be conveyed or encumbered, pursuant to which such person
becomes liable under the Mortgage Note, Cooperative Note or Contract and, to the
extent permitted by applicable law, the borrower remains liable thereon. Any fee
collected by or on behalf of the Master Servicer for entering into an assumption
agreement will be retained by or on behalf of the Master Servicer as additional
servicing compensation. See "Certain Legal Aspects of Mortgage
Loans-Enforceability of Certain Provisions". In connection with any such
assumption, the terms of the related Mortgage Loan may not be changed. (Section
3.15)
With respect to Multifamily Loans, the related mortgagor's failure to make
required payments may reflect inadequate operating income or the diversion of
that income from the service of payments due under the Multifamily Loan, and may
call into question such mortgagor's ability to make timely payment of taxes and
to pay for necessary maintenance of the related Mortgaged Property. The Master
Servicer will monitor any Multifamily Loan which is in default, contact the
mortgagor concerning the default, evaluate whether the causes of the default can
be cured over a reasonable period without significant impairment of the value of
the Mortgaged Property, initiate corrective action in cooperation with the
mortgagor if cure is likely, inspect the Mortgaged Property and take such other
actions as it would normally take with respect to similar loans serviced for its
own portfolio. A significant period of time may elapse before the Master
Servicer is able to assess the success of such corrective action or the need for
additional initiatives. Alternatively, the Master Servicer may determine to
institute foreclosure proceedings with respect to a Multifamily Loan soon after
default.
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SUB-SERVICING
Any Master Servicer may delegate its servicing obligations in respect of the
Mortgage Loans to third-party servicers (each, a "Sub-Servicer"), but such
Master Servicer will remain obligated under the related Agreement. Each
Sub-Servicer will be required to perform the customary functions of a servicer
of comparable loans, including collecting payments from borrowers and remitting
such collections to the Master Servicer; maintaining primary hazard insurance as
described herein and in any related Prospectus Supplement, and filing and
settling claims thereunder, subject in certain cases to the right of the Master
Servicer to approve in advance any such settlement; maintaining escrow or
impoundment accounts of borrowers for payment of taxes, insurance and other
items required to be paid by any borrower pursuant to the Mortgage Loan;
processing assumptions or substitutions, although, unless otherwise specified in
the related Prospectus Supplement, the Master Servicer is generally required to
exercise due-on-sale clauses to the extent such exercise is permitted by law and
would not adversely affect insurance coverage; attempting to cure delinquencies;
supervising foreclosures or repossessions; inspecting and managing Mortgaged
Properties under certain circumstances; and maintaining accounting records
relating to the Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will be responsible for filing and
settling claims in respect of Mortgage Loans in a particular Mortgage Pool under
any applicable mortgage pool insurance policy, bankruptcy bond, special hazard
insurance policy or letter of credit. See "Description of Credit Support".
The sub-servicing agreement between any Master Servicer and a Sub-Servicer (a
"SubServicing Agreement") will be consistent with the terms of the related
Pooling and Servicing Agreement and will not result in a withdrawal or
downgrading of any class of Certificates issued pursuant to such Pooling and
Servicing Agreement. Although each Sub-Servicing Agreement will be a contract
solely between the Master Servicer and the Sub-Servicer, the Agreement pursuant
to which a series of Certificates is issued will provide that, if for any reason
the Master Servicer for such series of Certificates is no longer acting in such
capacity, the Trustee or any successor Master Servicer must recognize the
Sub-Servicer's rights and obligations under such Sub-Servicing Agreement.
The Master Servicer will be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of whether the Master Servicer's compensation
pursuant to the related Agreement is sufficient to pay such fees. However, a
Sub-Servicer may be entitled to a Retained Interest in certain Mortgage Loans.
Each Sub-Servicer will be reimbursed by the Master Servicer for certain
expenditures which it makes, generally to the same extent the Master Servicer
would be reimbursed under a Pooling and Servicing Agreement. See "Description of
the Certificates-Retained Interest, Servicing Compensation and Payment of
Expenses".
The Master Servicer may require any Sub-Servicer to agree to indemnify the
Master Servicer for any liability or obligation sustained by the Master Servicer
in connection with any act or failure to act by the Sub-Servicer in its
servicing capacity. Unless otherwise provided in the related Prospectus
Supplement, each Sub-Servicer is required to maintain a fidelity bond and an
errors and omissions policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the Master Servicer.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
As servicer of the Mortgage Loans, the Master Servicer, on behalf of itself,
the Trustee and the Certificateholders, will present claims to the insurer under
each Insurance Instrument, and will take such reasonable steps as are necessary
to receive payment or to permit recovery thereunder with respect to defaulted
Mortgage Loans. As set forth above, all collections by or on behalf of the
Master Servicer under any Insurance Instrument, other than amounts to
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be applied to the restoration of a Mortgaged Property or released to the
mortgagor, are to be deposited in the Certificate Account for the related Trust
Fund, subject to withdrawal as heretofore described. Unless otherwise provided
in the Prospectus Supplement relating to a series of Certificates, the Master
Servicer or its designee will not receive payment under any letter of credit
included as an Insurance Instrument with respect to a defaulted Mortgage Loan
unless all Liquidation Proceeds and Insurance Proceeds which it deems to be
finally recoverable have been realized; however, the Master Servicer will be
entitled to reimbursement for any unreimbursed advances and reimbursable
expenses thereunder.
(Section 3.16)
If any property securing a defaulted Mortgage Loan is damaged and proceeds,
if any, from the related Hazard Insurance Instrument are insufficient to restore
the damaged property to a condition sufficient to permit recovery under the
related Credit Insurance Instrument, if any, the Master Servicer is not required
to expend its own funds to restore the damaged property unless it determines (i)
that such restoration will increase the proceeds to 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 from related
Insurance Proceeds or Liquidation Proceeds. (Section 3.16)
If recovery on a defaulted Mortgage Loan under any related Credit Insurance
Instrument is not available for the reasons set forth in the preceding
paragraph, the Master Servicer nevertheless will be obligated to follow or cause
to be followed such normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted Mortgage Loan. (Section 3.16) If the
proceeds of any liquidation of the property securing the defaulted Mortgage Loan
are less than the outstanding principal balance of the defaulted Mortgage Loan
plus interest accrued thereon at the Interest Rate plus the aggregate amount of
expenses incurred by the Master Servicer in connection with such proceedings and
which are reimbursable under the Agreement, the Trust Fund will realize a loss
in the amount of such difference. The Master Servicer will be entitled to
withdraw or cause to be withdrawn from the Certificate Account out of the
Liquidation Proceeds recovered on any defaulted Mortgage Loan, prior to the
distribution of such Liquidation Proceeds to Certificateholders, amounts
representing its normal servicing compensation on the Mortgage Loan,
unreimbursed servicing expenses incurred with respect to the Mortgage Loan and
any unreimbursed advances of delinquent monthly payments made with respect to
the Mortgage Loan. (Section 3.11)
If the Master Servicer or its designee recovers Insurance Proceeds with
respect to any defaulted Mortgage Loan, the Master Servicer will be entitled to
withdraw or cause to be withdrawn from the Certificate Account out of such
proceeds, prior to distribution thereof to Certificateholders, amounts
representing its normal servicing compensation on such Mortgage Loan,
unreimbursed servicing expenses incurred with respect to the Mortgage Loan and
any unreimbursed advances of delinquent monthly payments made with respect to
the Mortgage Loan. (Section 3.11) In the event that the Master Servicer has
expended its own funds to restore damaged property and such funds have not been
reimbursed under any Insurance Instrument, it will be entitled to withdraw from
the Certificate Account out of related Liquidation Proceeds or Insurance
Proceeds an amount equal to such expenses incurred by it, in which event the
Trust Fund may realize a loss up to the amount so charged. (Section 3.11)
Because Insurance Proceeds cannot exceed deficiency claims and certain expenses
incurred by the Master Servicer, no such payment or recovery will result in a
recovery to the Trust Fund which exceeds the principal balance of the defaulted
Mortgage Loan together with accrued interest thereon at the Net Interest Rate.
In addition, when property securing a defaulted Mortgage Loan can be resold for
an amount exceeding the outstanding principal balance of the related Mortgage
Loan together with accrued interest and expenses, it may be expected that, if
retention of any such amount is legally permissible, the insurer will exercise
its right under any related mortgage pool insurance policy to purchase such
property and
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realize for itself any excess proceeds. See "Description of Primary Insurance
Policies" and "Description of Credit Support".
With respect 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 the Cooperative
Loan. See "Certain Legal Aspects of Mortgage LoansForeclosure on Cooperatives".
This approval is usually based on the purchaser's income and net worth and
numerous other factors. The necessity of acquiring such approval could limit the
number of potential purchasers for those shares and otherwise limit the Master
Servicer's ability to sell, and realize the value of, those shares.
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RETAINED INTEREST; SERVICING OR ADMINISTRATION COMPENSATION AND PAYMENT OF
EXPENSES
The Prospectus Supplement for a series of Certificates will specify whether
there will be any Retained Interest in the Trust Fund Assets, and, if so, the
owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related Agreement.
A Retained Interest in a Trust Fund Asset represents a specified portion of the
interest payable thereon. The Retained Interest will be deducted from borrower
payments as received and will not be part of the related Trust Fund. Any partial
recovery of interest on a Mortgage Loan, after deduction of all applicable
servicing fees, will be allocated between Retained Interest (if any) and
interest at the Net Interest Rate on a pari passu basis.
The Master Servicer's (or in the case of a Trust Fund consisting of Agency
Securities or Private Mortgage-Backed Securities if specified in the related
Prospectus Supplement, the Trustee's) primary compensation with respect to a
series of Certificates will come from the monthly payment to it, with respect to
each interest payment on a Trust Fund Asset, of an amount equal to one-twelfth
of the difference between the Interest Rate (minus the rate at which the
Retained Interest, if any, is calculated) and the Net Interest Rate times the
scheduled principal balance of such Trust Fund Asset. Since any Retained
Interest and the Master Servicer's (or the Trustee's) primary compensation are
percentages of the scheduled principal balance of each Trust Fund Asset, such
amounts will decrease in accordance with the amortization schedule of the Trust
Fund Assets. As additional compensation in connection with a series of
Certificates relating to Mortgage Loans, the Master Servicer or the SubServicers
will retain all assumption fees, prepayment penalties and late payment charges,
to the extent collected from mortgagors. Unless otherwise specified in the
related Prospectus Supplement, any interest or other income which may be earned
on funds held in the Certificate Account or any Sub-Servicing Account may be
paid as additional compensation to the Trustee, the Master Servicer or the
Sub-Servicers, as the case may be. Any Sub-Servicer will receive a portion of
the Master Servicer's primary compensation as its sub-servicing compensation.
(Section 3.18)
With respect to a series of Certificates consisting of Mortgage Loans, in
addition to amounts payable to any Sub-Servicer, the Master Servicer will pay
from its servicing compensation certain expenses incurred in connection with its
servicing of the Mortgage Loans, including, without limitation, payment of the
fees and disbursements of the Trustee and independent accountants, payment of
expenses incurred in connection with distributions and reports to
Certificateholders, and payment of any other expenses described in the related
Prospectus Supplement. (Section 3.18)
The Master Servicer is entitled to reimbursement for certain expenses
incurred by it in connection with the liquidation of defaulted Mortgage Loans,
including under certain circumstances reimbursement of expenditures incurred by
it in connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Certificateholders to receive any
related Liquidation Proceeds. The Master Servicer is also entitled to
reimbursement from the Certificate Account for Advances. With respect to a
series of Certificates relating to Agency Securities, the Trustee shall pay all
expenses incurred in administration thereof, subject to the limitations
described in the related Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Agreement with respect to a series of Certificates consisting of
Mortgage Loans, will provide that on or before a specified date in each year,
beginning with the first such date at least six months after the related Cut-off
Date, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with either the Uniform Single Program for
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Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
servicing by or on behalf of the Master Servicer of mortgage loans under pooling
and servicing agreements substantially similar to each other (including the
related Agreement) was conducted in compliance with the terms of such agreements
except for any significant exceptions or errors in records that, in the opinion
of the firm, either the Audit Program for Mortgages serviced for FHLMC, or
paragraph 4 of the Uniform Single Program for Mortgage Bankers, requires it to
report. In rendering its statement such firm may rely, as to matters relating to
the direct servicing of mortgage loans by Sub-Servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC (rendered within one year of such statement) of
firms of independent public accountants with respect to the related
Sub-Servicer. (Section 3.21)
Each Agreement will also provide for delivery to the Trustee, on or before a
specified date in each year, of an annual statement signed by two officers of
the Master Servicer to the effect that the Master Servicer has fulfilled its
obligations under the Agreement throughout the preceding year. (Section 3.20)
Copies of the annual accountants' statement and the statement of officers of
the Master Servicer may be obtained by Certificateholders without charge upon
written request to the Master Servicer at the address set forth in the related
Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer may be an affiliate
of the Depositor and may have other normal business relationships with the
Depositor or the Depositor's affiliates.
Each Agreement will provide that the Master Servicer may resign from its
obligations and duties under the Agreement only if such resignation, and the
appointment of a successor, will not result in a downgrading of any class of
Certificates or upon a determination that its duties under the Agreement are no
longer permissible under applicable law. No such resignation will become
effective until the Trustee or a successor servicer has assumed the Master
Servicer's obligations and duties under the Agreement. (Section 6.04)
Each Agreement will further provide that neither the Master Servicer, the
Depositor nor any director, officer, employee, or agent of the Master Servicer
or the Depositor will be under any liability to the related Trust Fund or
Certificateholders for any action taken, or for refraining from the taking of
any action, in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the Master Servicer, the Depositor nor any such
person will be protected against any liability which would otherwise be imposed
by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. Each Agreement will further provide that the
Master Servicer, the Depositor and any director, officer, employee or agent of
the Master Servicer or the Depositor will be entitled to indemnification by 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 Agreement
or the Certificates, other than any loss, liability or expense is related to any
specific Mortgage Loan or Mortgage Loans (unless any such loss, liability or
expense otherwise reimbursable pursuant to the Agreement) and any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, each
Agreement will provide that neither the Master Servicer nor the Depositor will
be under any obligation to appear in, prosecute or defend any legal action which
is not incidental to its respective responsibilities under the Agreement and
which in its opinion may involve it in any expense or liability. The Master
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Servicer or the Depositor may, however, in its discretion undertake any such
action which it may deem necessary or desirable with respect to the 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 Certificateholders, and the Master Servicer or the Depositor,
as the case may be, will be entitled to be reimbursed therefor and to charge the
Certificate Account. Except in the case of a series of Senior/Subordinate
Certificates, any such obligation of the Certificateholders will be borne among
them on a pro rata basis in proportion to the Accrued Certificate Interest
payable thereto, and, notwithstanding any other provision, their respective
distributions will be reduced accordingly. (Section 6.03)
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement,
provided that such person is qualified to sell mortgage loans to, and service
mortgage loans on behalf of, FNMA or FHLMC. (Section 6.02)
EVENTS OF DEFAULT
Unless otherwise provided in the related Prospectus Supplement for a series
of Certificates that includes Mortgage Loans, Events of Default under each
Agreement will consist of (i) any failure by the Master Servicer to distribute
or cause to be distributed to Certificateholders, or to remit to the Trustee for
distribution to Certificateholders, any required payment that continues
unremedied for five days after the giving of written notice of such failure to
the Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Certificates evidencing not less
than 25% of the Voting Rights; (ii) any failure by the Master Servicer duly to
observe or perform in any material respect any of its other covenants or
obligations under the Agreement which continues unremedied for thirty days
(fifteen days in the case of a failure to pay the premium for any insurance
instrument required to be maintained pursuant to the Agreement) after the giving
of written notice of such failure to the Master Servicer by the Trustee or the
Depositor, or to the Master Servicer, the Depositor and the Trustee by the
holders of Certificates evidencing not less than 25% of the Voting Rights; and
(iii) certain events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and certain actions by or on behalf of
the Master Servicer indicating its insolvency or inability to pay its
obligations. (Section 7.01)
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Certificates
evidencing not less than 51% of the Voting Rights, the Trustee shall, terminate
all of the rights and obligations of the Master Servicer under the Agreement
relating to such Trust Fund and in and to the Mortgage Loans (other than any
Retained Interest of the Master Servicer), whereupon the Trustee will succeed to
all of the responsibilities, duties and liabilities of the Master Servicer under
the Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent mortgage loans, then the Trustee
will not be so obligated) and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable so to act, it
may or, at the written request of the holders of Certificates entitled to at
least 51% of the Voting Rights, it shall appoint, or petition a court of
competent jurisdiction for the appointment of, a housing loan servicing
institution acceptable to the Rating Agency with a net worth at the time of such
appointment of at least $15,000,000 to act as successor to the Master Servicer
under the Agreement. Pending such appointment, the Trustee is obligated to act
in such capacity. The Trustee and any such successor may agree upon the
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servicing compensation to be paid, which in no event may be greater than the
compensation payable to the Master Servicer under the Agreement. (Sections 7.01
and 7.02)
No Certificateholder will have the right under any Agreement to institute any
proceeding with respect thereto unless such holder previously has given to the
Trustee written notice of default and unless the holders of Certificates
evidencing not less than 25% of the Voting Rights 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
fifteen days has neglected or refused to institute any such proceeding. (Section
10.03) The Trustee, however, is under no obligation to exercise any of the
trusts or powers vested in it by any Agreement or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the holders of Certificates covered by such Agreement, unless such
Certificateholders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby. (Section 8.02)
AMENDMENT
Each Agreement may be amended by the Depositor, the Master Servicer, if any,
and the Trustee, without the consent of any of the holders of Certificates
covered by the Agreement, to cure any ambiguity, to correct, modify or
supplement any provision therein, or to make any other provisions with respect
to matters or questions arising under the Agreement which are not inconsistent
with the provisions thereof, provided that such action will not adversely affect
in any material respect the interests of any holder of Certificates covered by
the Agreement. Each Agreement may also be amended by the Depositor, the Master
Servicer, if any, and the Trustee, with the consent of the holders of
Certificates evidencing not less than 66% of the Voting Rights, for any purpose;
provided, however, that no such amendment may (i) reduce in any manner the
amount of or delay the timing of, payments received on Trust Fund Assets which
are required to be distributed on any Certificate without the consent of the
holder of such Certificate, (ii) adversely affect in any material respect the
interests of the holders of any class of Certificates in a manner other than as
described in (i), without the consent of the holders of Certificates of such
class evidencing not less than 66% of the aggregate Voting Rights of such class
or (iii) reduce the aforesaid percentage of Voting Rights required for the
consent to any such amendment without the consent of the holders of all
Certificates covered by such Agreement then outstanding. However, with respect
to any series of Certificates as to which a REMIC election is to be made, the
Trustee will not consent to any amendment of the Agreement unless it shall first
have received an opinion of counsel to the effect that such amendment will not
cause the Trust Fund to fail to qualify as a REMIC at any time that the related
Certificates are outstanding. (Section 10.01) The Voting Rights evidenced by any
Certificate will be the portion of the voting rights of all of the Certificates
in the related series allocated in the manner described in the related
Prospectus Supplement. (Article I)
TERMINATION
The obligations created by the Agreement for each series of Certificates will
terminate upon the payment to Certificateholders of that series of all amounts
held in the Certificate Account or by the Master Servicer and required to be
paid to them pursuant to such Agreement following the earlier of (i) the final
payment or other liquidation of the last Trust Fund Asset subject thereto or the
disposition of all property acquired upon foreclosure of any such Trust Fund
Asset and (ii) the purchase of all of the assets of the Trust Fund by the party
entitled to effect such termination, under the circumstances and in the manner
set forth in the related Prospectus Supplement. In no event, however, will the
trust created by the Agreement continue beyond the date specified in the related
Prospectus Supplement. Written notice of termination of the Agreement will be
given to each Certificateholder, and the final distribution
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will be made only upon surrender and cancellation of the Certificates at an
office or agency appointed by the Trustee which will be specified in the notice
of termination. (Section 9.01)
Any such purchase of assets of the Trust Fund shall be made at a price
approximately equal to (A) in the case of a series of Certificates evidencing
interests in a Trust Fund that includes Mortgage Loans, the greater of (i) the
sum of (a) 100% of the Stated Principal Balance of each Mortgage Loan as of the
day of such purchase plus accrued interest thereon at the applicable Net
Interest Rate to the first day of the month following such purchase plus (b) the
appraised value of any property acquired for the benefit of Certificateholders
in respect of such loans, and (ii) the aggregate fair market value of all of the
assets in the Trust Fund (as determined by the Trustee, the Servicer, and, if
different than both such persons, the person entitled to effect such
termination), in each case taking into account accrued interest at the
applicable Net Interest Rate to the first day of the month following such
purchase and (B) in the case of a series of Certificates evidencing interests in
a Trust Fund that includes Agency Securities or Private Mortgage-Backed
Securities, the sum of 100% of the unpaid principal balance of each outstanding
Trust Fund Asset as of the day of such purchase plus accrued interest thereon at
the Net Interest Rate to the first day of the month of such purchase, or at such
other price as may be specified in the related Prospectus Supplement. The
exercise of such right will effect early retirement of the Certificates of that
series, but the right of the person entitled to effect such termination is
subject to the aggregate principal balance of the outstanding Trust Fund Assets
for such series at the time of purchase being less than the percentage of the
aggregate principal balance of the Mortgage Loans at the Cut-off Date for that
series specified in the related Prospectus Supplement. (Section 9.01)
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of any
Agreement, the Certificates or any Mortgage Loan or related document and is not
accountable for the use or application by or on behalf of the Master Servicer of
any funds paid to the Master Servicer or its designee in respect of the
Certificates or the Mortgage Loans, or deposited into or withdrawn from the
Certificate Account or any other account by or on behalf of the Master Servicer.
(Section 8.03) If no Event of Default has occurred and is continuing, the
Trustee is required to perform only those duties specifically required under the
related Agreement. However, upon receipt of the various certificates, reports or
other instruments required to be furnished to it, the Trustee is required to
examine such documents and to determine whether they conform to the requirements
of the Agreement. (Section 8.01)
THE TRUSTEE
The Trustee under each Agreement will be named in the related Prospectus
Supplement. The commercial bank, national banking association or trust company
serving as Trustee may have normal banking relationships with the Depositor and
its affiliates and with the Master Servicer and its affiliates.
DESCRIPTION OF CREDIT SUPPORT
If so provided in the related Prospectus Supplement, the Trust Fund for a
series of Certificates may include Credit Support for such series or for one or
more classes of Certificates comprising such Series, which Credit Support may
consist of any combination of the following separate components, any of which
may be limited to a specified percentage of the aggregate principal balance of
the Mortgage Loans covered thereby or a specified dollar amount: (i) coverage
with respect to Realized Losses incurred on Liquidated Loans (the "Defaulted
Mortgage Amount"); (ii) coverage with respect to Special Hazard Realized Losses,
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as defined below (the "Special Hazard Amount"); and (iii) coverage with respect
to certain actions that may be taken by a bankruptcy court in connection with a
Mortgage Loan, including a Deficient Valuation or a reduction by a bankruptcy
court of the Interest Rate on a Mortgage Loan or an extension of its maturity
(collectively, the "Bankruptcy Amount"). As set forth below and in the related
Prospectus Supplement, such coverage may be provided by subordination of one or
more other classes of Certificates, one or more insurance policies, a bankruptcy
bond, a letter of credit, a reserve fund or any combination of the foregoing.
The amount and type of any Credit Support with respect to a series of
Certificates or with respect to one or more classes of Certificates comprising
such series, and the obligors on such Credit Support, will be set forth in the
related Prospectus Supplement. See "Description of the Certificates".
SUBORDINATION
With respect to any Senior/Subordinate Series, in the event of any Realized
Losses on Mortgage Loans not in excess of the limitations described below, the
rights of the Subordinate Certificateholders to receive distributions with
respect to the Mortgage Loans will be subordinate to the rights of the Senior
Certificateholders to the extent described in the related Prospectus Supplement.
All Realized Losses will be allocated to the Subordinate Certificates of the
related series (or, if such series includes more than one class of Subordinated
Certificates, to the outstanding class of Subordinate Certificates having the
first priority for allocation of Realized Losses and then to additional
outstanding classes of Subordinate Certificates, if any), until the Certificate
Principal Balance thereof has been reduced to zero. Any additional Realized
Losses will be allocated to the Senior Certificates (or, if such series includes
more than one class of Senior Certificates, either on a pro rata basis among all
of the Senior Certificates in proportion to their respective outstanding
Certificate Principal Balances or as otherwise provided in the related
Prospectus Supplement). However, with respect to Realized Losses that are
attributable to physical damage to Mortgaged Properties of a type that is not
covered by standard hazard insurance policies ("Special Hazard Realized
Losses"), the amount thereof that may be allocated to the Subordinate
Certificates of the related series may be limited to an amount (the "Special
Hazard Subordination Amount") specified in the related Prospectus Supplement. If
so, any Special Hazard Realized Losses in excess of the Special Hazard
Subordination Amount will be allocated among all outstanding classes of
Certificates of the related series, on a pro rata basis in proportion to their
respective outstanding Certificate Principal Balances, regardless of whether any
Subordinate Certificates remain outstanding, or as otherwise provided in the
related Prospectus Supplement.
Any allocation of a Realized Loss to a Certificate will be made by reducing
the Certificate Principal Balance thereof as of the Distribution Date following
the Prepayment Period in which such Realized Loss was incurred. If so provided
in the related Prospectus Supplement, in the event of a Realized Loss incurred
in connection with the liquidation of a defaulted Mortgage Loan, the Senior
Certificateholders may be entitled to receive a distribution of principal, to be
paid from and to the extent of funds otherwise distributable to the Subordinate
Certificateholders, equal to the amount, if any (the "Unrecovered Senior
Portion"), by which (i) the then applicable Senior Percentage times the
Scheduled Principal Balance of the Liquidated Loan immediately prior to
liquidation exceeds (ii) the portion of the related unscheduled recovery that is
allocable to principal, reduced by the principal portion of all monthly payments
due but unpaid as of the date of liquidation. Payments to the Senior
Certificateholders in respect of any Unrecovered Senior Portion on any
Distribution Date will only be made with respect to Realized Losses incurred in
connection with Mortgage Loans that became Liquidated Loans during the preceding
Prepayment Period and will not be made as to any Special Hazard Realized Losses
in excess of the Special Hazard Subordination Amount,
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if applicable. As with any other distribution of principal, any payment to the
holders of Senior Certificates attributable to an Unrecovered Senior Portion
will be applied to reduce the Certificate Principal Balance thereof. Unless
otherwise provided in the related Prospectus Supplement, the "Scheduled
Principal Balance" of any Mortgage Loan as of any date of determination is equal
to the unpaid principal balance thereof as of the date of determination, reduced
by the principal portion of all monthly payments due but unpaid as of the date
of determination.
As set forth under "Description of the Certificates-Principal of the
Certificates", the rights of holders of the various classes of Certificates of
any series to receive distributions of principal and interest is determined by
the aggregate Certificate Principal Balance of each such class. The Certificate
Principal Balance of any Certificate will be reduced by all amounts previously
distributed on such Certificate in respect of principal, and by any Realized
Losses allocated thereto. If there were no Realized Losses or prepayments of
principal on any of the Mortgage Loans, the respective rights of the holders of
Certificates of any series to future distributions would not change. However, to
the extent so provided in the related Prospectus Supplement, holders of Senior
Certificates may be entitled to receive a disproportionately larger amount of
prepayments received, which will have the effect of accelerating the
amortization of the Senior Certificates and increasing the respective percentage
interest in future distributions evidenced by the Subordinate Certificates in
the related Trust Fund (with a corresponding decrease in the Senior Percentage),
as well as preserving the availability of the subordination provided by the
Subordinate Certificates. In addition, as set forth above, Realized Losses will
be first allocated to Subordinate Certificates by reduction of the Certificate
Principal Balance thereof, which will have the effect of increasing the
respective interest in future distributions evidenced by the Senior Certificates
in the related Trust Fund.
If so provided in the related Prospectus Supplement, certain amounts
otherwise payable on any Distribution Date to holders of Subordinate
Certificates may be deposited into a reserve fund. Amounts held in any reserve
fund may be applied as described below under "Reserve Funds" and in the related
Prospectus Supplement.
With respect to any Senior/Subordinate Series, the terms and provisions of
the subordination may vary from those described above; any such variation will
be described in the related Prospectus Supplement.
If so provided in the related Prospectus Supplement, the Credit Support for
the Senior Certificates of a Senior/Subordinate Series may include, in addition
to the subordination of the Subordinate Certificates of such series and the
establishment of a reserve fund, any of the other forms of Credit Support
described below. If any of such other forms of Credit Support described below is
maintained solely for the benefit of the Senior Certificates of a
Senior/Subordinate Series, then the coverage described below as being provided
by such Credit Support with respect to a series of Certificates may be limited
to the extent necessary to make required distributions on such Senior
Certificates or as otherwise specified in the related Prospectus Supplement. If
so provided in the related Prospectus Supplement, the obligor on any such other
forms of Credit Support maintained for the benefit of the Senior Certificates of
a Senior/Subordinate Series may be reimbursed for amounts paid thereunder out of
amounts otherwise payable on the Subordinate Certificates.
LETTER OF CREDIT
As to any series of Certificates to be covered by a Letter of Credit, a bank
(the "Letter of Credit Bank") will deliver to the Trustee an irrevocable Letter
of Credit. The Master Servicer or Trustee will exercise its best reasonable
efforts to keep or cause to be kept the Letter of Credit in full force and
effect, unless coverage thereunder has been exhausted through payment of claims.
The Master Servicer will agree to pay the fees for the Letter of Credit on
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a timely basis unless, as described in the related Prospectus Supplement, the
payment of such fees is otherwise provided for.
The Master Servicer or the Trustee will make or cause to be made draws on the
Letter of Credit Bank under each Letter of Credit. Subject to such differences
as will be described in the related Prospectus Supplement, Letters of Credit may
cover all or any of the following amounts:
(i) to the extent of any Defaulted Mortgage Amount, for any Mortgage
Loan that became a Liquidated Loan during the related Prepayment Period
(other than Mortgage Loans as to which amounts paid or payable under any
related Hazard Insurance Instrument, including the Letter of Credit as
described in (ii) below, are not sufficient either to restore the Mortgaged
Property or to pay the outstanding principal balance of the Mortgage Loan
plus accrued interest), an amount which, together with all Liquidation
Proceeds, Insurance Proceeds, and other collections on such Liquidated Loan
(net of amounts payable or reimbursable therefrom to the Master Servicer for
related unpaid servicing fees and unreimbursed servicing expenses), will
equal the sum of (A) the unpaid principal balance of such Liquidated Loan
(plus accrued interest at the applicable Net Interest Rate) plus (B) the
amount of related servicing expenses, if any, not reimbursed to the Master
Servicer from Liquidation Proceeds, Insurance Proceeds and other collections
on such Liquidation Loan (which shall be paid to the Master Servicer);
(ii) to the extent of any Special Hazard Amount, as to each Mortgage
Loan that is delinquent and as to which the Mortgaged Property has suffered
damage (other than physical damage caused by hostile or warlike action in
time of war or peace, by any weapons of war, by any insurrection or
rebellion, or by any nuclear reaction or nuclear radiation or nuclear
contamination whether controlled or uncontrolled, or by any action taken by
any governmental authority in response to any of the foregoing) and for which
any amounts paid or payable under the related primary hazard insurance policy
or any Special Hazard Insurance Policy are not sufficient to pay either of
the following amounts, an amount which, together with all Insurance Proceeds
paid or payable under the related primary hazard insurance policy or any
Special Hazard Insurance Policy (net, if such proceeds are not to be applied
to restore such Mortgaged Property, of all amounts payable or reimbursable
therefrom to the Master Servicer for related unpaid servicing fees and
unreimbursed servicing expenses), will be equal to the lesser of (A) the
amount required to restore such Mortgaged Property and (B) the sum of (1) the
unpaid principal balance of such Mortgage Loan (plus accrued interest at the
applicable Net Interest Rate) plus (2) the amount of related servicing
expenses, if any, not reimbursed to the Master Servicer from Insurance
Proceeds paid under the related primary hazard insurance policy or any
Special Hazard Insurance Policy; and
(iii) to the extent of any Bankruptcy Amount, with respect to any
Mortgage Loan that has been subject to bankruptcy proceedings as described
above, the amount of any debt service reduction or Deficient Valuation.
If the related Prospectus Supplement so provides, at such time as the Letter
of Credit Bank makes a payment as described above with respect to a Liquidated
Loan, or a payment of the full amount owing on a Mortgage Loan as to which the
Mortgaged Property has been damaged (as described in (ii)(B) above), the
Liquidated Loan will be removed from the related Trust Fund in accordance with
the terms set forth in the related Prospectus Supplement and will no longer be
subject to the Agreement. Unless otherwise provided in the related Prospectus
Supplement, Mortgage Loans that have been subject to bankruptcy proceedings as
described above, or as to which payment under the Letter of Credit has been made
for the purpose of restoring the related Mortgaged Property (as described in
(ii)(A) above), will remain part of the related Trust Fund. Any Defaulted
Mortgage Amount, Special Hazard Amount and Bankruptcy Amount
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covered by any Letter of Credit will each be reduced to the extent of related
unreimbursed draws thereunder.
In the event that the Letter of Credit Bank ceases to be a duly organized
commercial bank, or its debt obligations are rated lower than the highest rating
on any class of the Certificates on the date of issuance by the Rating Agency or
Agencies, the Master Servicer or Trustee will use its best reasonable efforts to
obtain or cause to be obtained, as to each Letter of Credit, a substitute Letter
of Credit issued by a commercial bank that meets such requirements and providing
the same coverage; provided, however, that, unless otherwise provided in the
related Prospectus Supplement, if the fees charged or collateral required by
such successor Letter of Credit Bank shall be more than the fees charged or
collateral required by such predecessor Letter of Credit Bank, each component of
coverage thereunder may be reduced proportionately to such a level as results in
such fees and collateral being not more than the fees then charged and
collateral then required by such predecessor Letter of Credit Bank.
MORTGAGE POOL INSURANCE POLICY
As to any series of Certificates to be covered by a Mortgage Pool Insurance
Policy with respect to any Defaulted Mortgage Amount, the Master Servicer will
exercise its best reasonable efforts to maintain or cause to be maintained the
Mortgage Pool Insurance Policy in full force and effect, unless coverage
thereunder has been exhausted through payment of claims. The Master Servicer
will agree to pay the premiums for each Mortgage Pool Insurance Policy on a
timely basis unless, as described in the related Prospectus Supplement, the
payment of such fees is otherwise provided.
The Master Servicer will present or cause to be presented claims to the
insurer under each Mortgage Pool Insurance Policy. Mortgage Pool Insurance
Policies, however, are not blanket policies against loss, since claims
thereunder may be made only upon satisfaction of certain conditions, as
described below and, if applicable, in the related Prospectus Supplement.
Mortgage Pool Insurance Policies do not cover losses arising out of the
matters excluded from coverage under the primary mortgage insurance policy, or
losses due to a failure to pay or denial of a claim under a primary mortgage
insurance policy, irrespective of the reason therefor.
Mortgage Pool Insurance Policies in general provide that no claim may validly
be presented thereunder with respect to a Mortgage Loan unless (i) an acceptable
primary mortgage insurance policy, if the initial Loan-to-Value Ratio of the
Mortgage Loan exceeded 80%, has been kept in force until such Loan-to-Value
Ratio is reduced to 80%; (ii) premiums on the primary hazard insurance policy
have been paid by the insured and real estate taxes and foreclosure, protection
and preservation expenses have been advanced by or on behalf of the insured, as
approved by the insurer; (iii) if there has been physical loss or damage to the
Mortgaged Property, it has been restored to its physical condition at the time
the Mortgage Loan became insured under the Mortgage Pool Insurance Policy,
subject to reasonable wear and tear; and (iv) the insured has acquired good and
merchantable title to the Mortgaged Property, free and clear of all liens and
encumbrances, except permitted encumbrances, including any right of redemption
by or on behalf of the mortgagor, and if required by the insurer, has sold the
property with the approval of the insurer.
Assuming the satisfaction of these conditions, the insurer has the option to
either (i) acquire the property securing the defaulted Mortgage Loan for a
payment equal to the principal balance thereof plus accrued and unpaid interest
at the Interest Rate to the date of acquisition and certain expenses described
above advanced by or on behalf of the insured, on condition that the insurer
must be provided with good and merchantable title to the Mortgaged Property
(unless the property has been conveyed pursuant to the terms of the applicable
primary mortgage insurance policy) or (ii) pay the amount by which the sum of
the principal balance
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of the defaulted Mortgage Loan and accrued and unpaid interest at the Interest
Rate to the date of the payment of the claim and such expenses exceed the
proceeds received from a sale of the Mortgaged Property which the insurer has
approved. In both (i) and (ii), the amount of payment under a Mortgage Pool
Insurance Policy will be reduced by the amount of such loss paid under the
primary mortgage insurance policy.
Unless earlier directed by the insurer, a claim under a Mortgage Pool
Insurance Policy must be filed (i) in the case when a primary mortgage insurance
policy is in force, within a specified number of days (typically, 60 days) after
the claim for loss has been settled or paid thereunder, or after acquisition by
the insured or a sale of the property approved by the insurer, whichever is
later, or (ii) in the case when a primary mortgage insurance policy is not in
force, within a specified number of days (typically, 60 days) after acquisition
by the insured or a sale of the property approved by the insurer. A claim must
be paid within a specified period (typically, 30 days) after the claim is made
by the insured.
Unless otherwise specified in the Prospectus Supplement relating to a series
of Certificates, the amount of coverage under each Mortgage Pool Insurance
Policy will be reduced over the life of the Certificates of any series by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the insurer upon disposition of all acquired properties. The amount
of claims paid includes certain expenses incurred by the Master Servicer as well
as accrued interest on delinquent Mortgage Loans to the date of payment of the
claim. See "Certain Legal Aspects of Mortgage Loans-Foreclosure on Mortgages"
and "-Repossession with respect to Contracts". Accordingly, if aggregate net
claims paid under a Mortgage Pool Insurance Policy reach the applicable policy
limit, coverage thereunder will be exhausted and any further losses will be
borne by Certificateholders of the related series.
In the event that an insurer under a Mortgage Pool Insurance Policy ceases to
be a Qualified Insurer (such term being defined to mean a private mortgage
guaranty insurance company duly qualified as such under applicable laws and
approved as an insurer by FHLMC, FNMA, or any successor entity, and having a
claims-paying ability acceptable to the Rating Agency or Agencies), the Master
Servicer will use its best reasonable efforts to obtain or cause to be obtained
from another Qualified Insurer a replacement insurance policy comparable to the
Mortgage Pool Insurance Policy with a total coverage equal to the then
outstanding coverage of such Mortgage Pool Insurance Policy; provided, however,
that, unless otherwise provided in the related Prospectus Supplement, if the
cost of the replacement policy is greater than the cost of such Mortgage Pool
Insurance Policy, the coverage of the replacement policy may be reduced to the
level such that its premium rate does not exceed the premium rate on such
Mortgage Pool Insurance Policy. However, in the event that the insurer ceases to
be a Qualified Insurer solely because it ceases to be approved as an insurer by
FHLMC, FNMA, or any successor entity, the Master Servicer will review, or cause
to be reviewed, the financial condition of the insurer with a view towards
determining whether recoveries under the Mortgage Pool Insurance Policy are
jeopardized for reasons related to the financial condition of the insurer. If
the Master Servicer determines that recoveries are so jeopardized, it will
exercise its best reasonable efforts to obtain from another Qualified Insurer a
replacement policy as described above, subject to the same cost limitation.
Because each Mortgage Pool Insurance Policy will require that the property
subject to a defaulted Mortgage Loan be restored to its original condition prior
to claiming against the insurer, such policy will not provide coverage against
hazard losses. As set forth below, the primary hazard insurance policies
covering the Mortgage Loans typically exclude from coverage physical damage
resulting from a number of causes and, even when the damage is covered, may
afford recoveries that are significantly less than the full replacement cost of
such losses. Further, a special hazard insurance policy (or a Letter of Credit
to the extent of the Special Hazard Amount) will not cover all risks, and the
coverage thereunder will be limited
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in amount. Certain hazard risks will, as a result, be uninsured and will
therefore be borne by Certificateholders. (Section 3.13)
SPECIAL HAZARD INSURANCE POLICY
As to any series of Certificates to be covered by an Insurance Instrument
that does not cover any Special Hazard Amount, unless otherwise provided in the
related Prospectus Supplement, the Master Servicer will exercise its best
reasonable efforts to maintain or cause to be maintained a Special Hazard
Insurance Policy in full force and effect covering the Special Hazard Amount,
unless coverage thereunder has been exhausted through payment of claims;
provided, however, that the Master Servicer is under no obligation to maintain
such policy in the event that any Insurance Instrument covering such series as
to any Defaulted Mortgage Amount is no longer in effect. The Master Servicer
will agree to pay the premiums on each Special Hazard Insurance Policy on a
timely basis unless, as described in the related Prospectus Supplement, payment
of such premiums is otherwise provided for.
Each Special Hazard Insurance Policy will, subject to the limitations
described below, protect holders of Certificates of the related series from (i)
loss by reason of damage to Mortgaged Properties caused by certain hazards
(including earthquakes and mudflows) not insured against under the primary
hazard insurance policies or a flood insurance policy if the property is in a
designated flood area and (ii) loss from partial damage caused by reason of the
application of the co-insurance clause contained in the primary hazard insurance
policies. Special Hazard Insurance Policies will not cover losses occasioned by
normal wear and tear, war, civil insurrection, certain governmental actions,
errors in design, nuclear or chemical reaction or contamination, faulty
workmanship or materials (except under certain circumstances), flood (if the
property is located in a designated flood area) and certain other risks.
Subject to the foregoing limitations, each Special Hazard Insurance Policy
will provide that, when there has been damage to property securing a defaulted
Mortgage Loan acquired by the insured and to the extent the damage is not
covered by the related primary hazard insurance policy or flood insurance
policy, the insurer will pay the lesser of (i) the cost of repair to the
property and (ii) upon transfer of the property to the insurer, the unpaid
principal balance of such Mortgage Loan at the time of acquisition of the
property by foreclosure, deed in lieu of foreclosure or repossession, plus
accrued interest to the date of claim settlement and certain expenses incurred
by or on behalf of the Master Servicer with respect to the property. The amount
of coverage under the Special Hazard Insurance Policy will be reduced by the sum
of (a) the unpaid principal balance plus accrued interest and certain expenses
paid by the insurer, less any net proceeds realized by the insurer from the sale
of the property, plus (b) any amount paid as the cost of repair of the property.
Restoration of the property with the proceeds described under clause (i) of
the immediately preceding paragraph will satisfy the condition under a Credit
Insurance Instrument that the property be restored before a claim thereunder may
be validly presented with respect to the defaulted Mortgage Loan secured by such
property. The payment described under clause (ii) of the immediately preceding
paragraph will render unnecessary presentation of a claim in respect of such
Mortgage Loan under a Credit Insurance Instrument as to any Defaulted Mortgage
Amount. Therefore, so long as the Credit Insurance Instrument remains in effect,
the payment by the insurer of either of the above alternative amounts will not
affect the total insurance proceeds paid to Certificateholders, but will affect
the relative amounts of coverage remaining under any Special Hazard Insurance
Policy and any Credit Insurance Instrument.
The sale of a Mortgaged Property must be approved by the insurer under any
Special Hazard Insurance Policy and funds received by the insured in excess of
the unpaid principal balance of the Mortgage Loan plus interest thereon to the
date of sale plus certain expenses
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incurred by or on behalf of the Master Servicer with respect to the property
(not to exceed the amount actually paid by the insurer) must be refunded to such
insurer and, to that extent, coverage under the Special Hazard Insurance Policy
will be restored. If aggregate claim payments under a Special Hazard Insurance
Policy reach the policy limit, coverage thereunder will be exhausted and any
further losses will be borne by Certificateholders.
A claim under a Special Hazard Insurance Policy generally must be filed
within a specified number of days (typically, 60 days) after the insured has
acquired good and merchantable title to the property, and a claim payment is
payable within a specified number of days (typically, 30 days) after a claim is
accepted by the insurer. Special Hazard Insurance Policies provide that no claim
may be paid unless primary hazard insurance policy premiums, flood insurance
premiums (if the property is located in a federally designated flood area) and,
as approved by the insurer, real estate property taxes, property protection and
preservation expenses and foreclosure or repossession costs have been paid by or
on behalf of the insured, and unless the insured has maintained the primary
hazard insurance policy and, if the property is located in a federally
designated flood area, flood insurance, as required by the Special Hazard
Insurance Policy.
If a Special Hazard Insurance Policy is cancelled or terminated for any
reason (other than the exhaustion of total policy coverage), the Master Servicer
will use its best reasonable efforts to obtain or cause to be obtained from
another Insurer a replacement policy comparable to such Special Hazard Insurance
Policy with a total coverage that is equal to the then existing coverage of such
Special Hazard Insurance Policy; provided, however, that, unless otherwise
provided in the related Prospectus Supplement, if the cost of the replacement
policy is greater than the cost of such Special Hazard Insurance Policy, the
coverage of the replacement policy may be reduced to a level such that its
premium rate does not exceed the premium rate on such Special Hazard Insurance
Policy.
Since each Special Hazard Insurance Policy is designed to permit full
recoveries as to any Defaulted Mortgage Amount under a Credit Insurance
Instrument in circumstances in which such recoveries would otherwise be
unavailable because property has been damaged by a cause not insured against by
a primary hazard insurance policy and thus would not be restored, each Agreement
provides that, if the related Credit Insurance Instrument shall have lapsed or
terminated or been exhausted through payment of claims, the Master Servicer will
be under no further obligation to maintain the Special Hazard Insurance Policy.
BANKRUPTCY BOND
As to any series of Certificates to be covered by a Bankruptcy Bond with
respect to any Bankruptcy Amount, the Master Servicer will exercise its best
reasonable efforts to maintain or cause to be maintained the Bankruptcy Bond in
full force and effect, unless coverage thereunder has been exhausted through
payment of claims. The Master Servicer will pay or cause to be paid the premiums
for each Bankruptcy Bond on a timely basis, unless, as described in the related
Prospectus Supplement, payment of such premiums is otherwise provided for.
Subject to the limit of the dollar amount of coverage provided, each Bankruptcy
Bond will cover certain losses resulting from an extension of the maturity of a
Mortgage Loan, or a reduction by the bankruptcy court of the principal balance
of or the Interest Rate on a Mortgage Loan, and the unpaid interest on the
amount of a principal reduction during the pendency of a proceeding under the
Bankruptcy Code. See "Certain Legal Aspects of Mortgage Loans-Foreclosure on
Mortgages" and "-Repossession with respect to Contracts".
CERTIFICATE GUARANTEE INSURANCE
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
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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 that is subsequently recovered as a "voidable preference"
payment under federal bankruptcy law. A copy of the Certificate Guarantee
Insurance policy for a series, if any, will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed with the Commission within
15 days of issuance of the Certificates of the related series.
RESERVE FUND
If so provided in the related Prospectus Supplement, the Depositor will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash, one or more irrevocable letters of credit or one or more
Permitted Investments in specified amounts, or any other instrument satisfactory
to the Rating Agency or Agencies, which will be applied and maintained in the
manner and under the conditions specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, to the extent described in the
Prospectus Supplement for a Senior/Subordinate Series, a Reserve Fund may be
funded through application of all or a portion of amounts otherwise payable on
the Subordinate Certificates. Amounts in a Reserve Fund may be distributed to
Certificateholders, or applied to reimburse the Master Servicer for outstanding
advances, or may be used for other purposes, in the manner and to the extent
specified in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, any such Reserve Fund will not be deemed to be
part of the related Trust Fund.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, the Master Servicer or any
other person named in the related Prospectus Supplement.
DESCRIPTION OF PRIMARY INSURANCE POLICIES
Each Mortgage Loan will be covered by a primary hazard insurance policy and,
if required as described below, a primary mortgage insurance policy.
PRIMARY MORTGAGE INSURANCE POLICIES
As set forth under "Description of the Certificates-Realization Upon
Defaulted Mortgage Loans", the Master Servicer will maintain or cause to be
maintained with respect to each Mortgage Loan, other than a Multifamily Loan, a
primary mortgage insurance policy in accordance with the underwriting standards
described herein and in the related Prospectus Supplement. Although the terms
and conditions of primary mortgage insurance policies differ, each primary
mortgage insurance policy will generally cover losses up to an amount equal to
the excess of the unpaid principal amount of a defaulted Mortgage Loan (plus
accrued and unpaid interest thereon and certain approved expenses) over a
specified percentage of the Value of the related Mortgaged Property.
As conditions precedent to the filing or payment of a claim under a primary
mortgage insurance policy, the insured will typically be required, in the event
of default by the borrower, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
insurer, real estate taxes, protection and preservation expenses and foreclosure
and related costs; (ii) in the event of any physical loss
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or damage to the Mortgaged Property, have the Mortgaged Property restored to at
least its condition at the effective date of the primary mortgage insurance
policy (ordinary wear and tear excepted); and (iii) tender to the insurer good
and merchantable title to, and possession of, the Mortgaged Property.
PRIMARY HAZARD INSURANCE POLICIES
Each Agreement will require the Master Servicer to cause the borrower on each
Mortgage Loan to maintain a primary hazard insurance policy providing for
coverage of the standard form of fire insurance policy with extended coverage
customary in the state in which the Mortgaged Property is located. Unless
otherwise specified in the related Prospectus Supplement, such coverage will be
in general in an amount equal to the lesser of the principal balance owing on
such Mortgage Loan and the amount necessary to fully compensate for any damage
or loss to the improvements on the Mortgaged Property on a replacement cost
basis, but in either case not less than the amount necessary to avoid the
application of any co-insurance clause contained in the hazard insurance policy.
The ability of the Master Servicer to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any primary hazard insurance policy and under any flood insurance
policy referred to below, or upon the extent to which information in this regard
is furnished by borrowers. All amounts collected by the Master Servicer under
any such policy (except for amounts to be applied to the restoration or repair
of the Mortgaged Property or released to the borrower in accordance with the
Master Servicer's normal servicing procedures, subject to the terms and
conditions of the related Mortgage and Mortgage Note) will be deposited in the
Certificate Account. The Agreement provides that the Master Servicer may satisfy
its obligation to cause each borrower to maintain such a hazard insurance policy
by the Master Servicer's maintaining a blanket policy insuring against hazard
losses on the Mortgage Loans. If such blanket policy contains a deductible
clause, the Master Servicer will deposit in the Certificate Account all sums
that would have been deposited therein but for such clause. The Master Servicer
also is required to maintain a fidelity bond and errors and omissions policy
with respect to its officers and employees that provides coverage against losses
that may be sustained as a result of an officer's or employee's misappropriation
of funds or errors and omissions in failing to maintain insurance, subject to
certain limitations as to amount of coverage, deductible amounts, conditions,
exclusions and exceptions.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, 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. When a
Mortgaged Property is located at origination in a federally designated flood
area, each Agreement requires the Master Servicer to cause the borrower to
acquire and maintain flood insurance in an amount equal in general to the lesser
of (i) the amount necessary to fully compensate for any damage or loss to the
improvements which are part of the Mortgaged Property on a replacement cost
basis and (ii) the maximum amount of insurance available under the federal flood
insurance program, whether or not the area is participating in the program.
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The hazard insurance policies covering the Mortgaged Properties typically
contain a co-insurance clause that in effect requires the insured at all times
to carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause generally provides that the insurer's
liability in the event of partial loss does not exceed the lesser of (i) the
replacement cost of the improvements less physical depreciation and (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
The Master Servicer will not require that a 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 a Cooperative
and the related borrower on a Cooperative Note do not maintain such insurance or
do not maintain adequate coverage or any insurance proceeds are not applied to
the restoration of the damaged property, damage to such borrower's Cooperative
apartment or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Note.
Since the amount of hazard insurance the Master Servicer will cause to be
maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, in the event of partial loss hazard
insurance proceeds may be insufficient to restore fully the damaged property.
Under the terms of the Mortgage Loans, borrowers are required to present claims
to insurers under hazard insurance policies maintained on the Mortgaged
Properties. The Master Servicer, on behalf of the Trustee and
Certificateholders, is obligated to present or cause to be presented claims
under any blanket insurance policy insuring against hazard losses on Mortgaged
Properties. However, the ability of the Master Servicer to present or cause to
be presented such claims is dependent upon the extent to which information in
this regard is furnished to the Master Servicer by borrowers. (Section 3.14)
FHA INSURANCE
The FHA is responsible for administering various federal programs, including
mortgage insurance, authorized under The Housing Act and the United States
Housing Act of 1937, as amended.
There are two primary FHA insurance programs that are available for
multifamily mortgage loans. Sections 221(d)(3) and (d)(4) of the Housing Act
allow the Department of Housing and Urban Development ("HUD") to insure mortgage
loans that are secured by newly constructed and substantially rehabilitated
multifamily rental projects. Section 244 of the Housing Act provides for
co-insurance of such mortgage loans made under Sections 221(d)(3) and (d)(4) by
HUD/FHA and a HUD-approved co-insurer. Generally the term of such a mortgage
loan may be up to 40 years and the ratio of the loan amount to property
replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans made
for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan to value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
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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. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be obligated to purchase any such debenture
issued in satisfaction of a defaulted FHA insured Mortgage Loan serviced by it
for an amount equal to the principal amount of any such debenture.
The Master Servicer will be required to take such steps as are reasonably
necessary to keep FHA insurance in full force and effect.
VA GUARANTEES
The VA is an Executive Branch Department of the United States, headed by the
Secretary of Veterans Affairs. VA currently administers a variety of federal
assistance programs on behalf of eligible veterans and their dependents and
beneficiaries. VA administers a loan guaranty program pursuant to which VA
guarantees a portion of loans made to eligible veterans.
Under the VA loan guaranty program, a VA Loan may be made to any eligible
veteran by an approved private sector mortgage lender. VA guarantees payment to
the holder of that loan of a fixed percentage of the loan indebtedness, up to a
maximum dollar amount, in the event of default by the veteran borrower. When a
delinquency is reported to VA and no realistic alternative to foreclosure is
developed by the loan holder or through VA's supplemental servicing of the loan,
VA determines, through an economic analysis, whether VA will (a) authorize the
holder to convey the property securing the VA Loan to the Secretary of Veterans
Affairs following termination or (b) pay the loan guaranty amount to the holder.
The decision as to disposition of properties securing defaulted VA Loans is made
on a case-by-case basis using the procedures set forth in 38 U.S.C. Section
3732(c), as amended.
The Master Servicer will be required to take such steps as are reasonably
necessary to keep the VA guarantees in full force and effect.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal aspects
of loans secured by residential properties. Because 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 security
for the Mortgage Loans is situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Mortgage Loans. See "The Trust Funds-The Mortgage Loans".
GENERAL
All of the Mortgage Loans, except as described below, are loans to homeowners
and all of the Single-Family Loans and Multifamily Loans are evidenced by notes
or bonds and secured by instruments which may be mortgages, deeds of trust,
security deeds or deeds to secure debt, depending upon the type of security
instrument customary to grant a security interest in real property in the state
in which the Single-Family Property or Multifamily Property, as the case may be,
is located. If specified in the Prospectus Supplement relating to a series of
Certificates, a Trust Fund may also contain (i) Cooperative Loans evidenced by
promissory notes secured by security interests in shares issued by private
cooperative housing corporations and in the related proprietary leases or
occupancy agreements granting exclusive
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rights to occupy specific dwelling units in the related buildings or (ii)
Contracts evidencing both (a) the obligation of the obligor to repay the loan
evidenced thereby and (b) the grant of a security interest in the related
Manufactured Home to secure repayment of such loan. Any of the foregoing types
of encumbrance will create a lien upon, or grant a title interest in, the
subject property, the priority of which will depend on the terms of the
particular security instrument as well as the order of recordation or filing of
the instrument in the appropriate public office. Such a lien is not prior to the
lien for real estate taxes and assessments.
SINGLE-FAMILY LOANS AND MULTIFAMILY LOANS
The Single-Family Loans and Multifamily Loans will be secured by either
mortgages, deeds of trust, security deeds or deeds to secure debt depending upon
the type of security instrument customary to grant a security interest according
to the prevailing practice in the state in which the property subject to a
Single-Family Loan or Multifamily Loan is located. The filing of a mortgage or a
deed of trust creates a lien upon or conveys title to the real property
encumbered 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. Priority with respect
to mortgages and deeds of trust depends on their terms 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, title to the property is
held by a land trustee under a land trust agreement, while the
borrower/homeowner is the beneficiary of the land trust; at origination of a
mortgage loan, the borrower executes a separate undertaking to make payments on
the mortgage note.) Although a deed of trust is similar to a mortgage, a deed of
trust normally has three parties, the trustor (similar to a mortgagor), who may
or may not be the borrower, the beneficiary (similar to a mortgagee), 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. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The mortgagee's
authority under a mortgage and the trustee's authority under a deed of trust,
security deed or deed to secure debt are governed by the law of the state in
which the real property is located, the express provisions of the mortgage, deed
of trust, security deed or deed to secure debt and, in some cases, the
directions of the beneficiary.
LEASES AND RENTS
Mortgages and deeds of trust which encumber Multifamily Property often
contain an assignment of rents and leases, pursuant to which the borrower
assigns its right, title and interest as landlord under each lease and the
income derived therefrom to the lender, while retaining a license to collect the
rents for so long as there is no default. If the borrower defaults, the license
terminates and the lender is entitled to collect the rents. Local law may
require that the lender take possession of the property and appoint a receiver
before becoming entitled to collect the rents.
Even after a foreclosure or the enforcement of an assignment of rents and
leases, the potential rent payments from the property may not be sufficient to
service the mortgage debt. For instance, the net income that would otherwise be
generated from the property may be insufficient to service the mortgage debt if
the leases on the property are at below-market rents, or as the result of
excessive maintenance, repair or other obligations inherited by the
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lender as landlord. In the event of a borrower's default, the amount of rent the
lender is able to collect from the tenants can significantly affect the value of
the lender's security interest.
COOPERATIVE LOANS
The Cooperative owns or has a leasehold interest in all the real property and
owns in fee or leases the building and all separate dwelling units therein. The
Cooperative is directly responsible for project management and, in most cases,
payment of real estate taxes, other governmental impositions and hazard and
liability insurance. If there is a blanket mortgage 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 project
mortgagor, or lessee, as the case may be, is also responsible for meeting these
blanket mortgage or rental obligations. A blanket mortgage is ordinarily
incurred by the Cooperative in connection with either the construction or
purchase of the Cooperative's apartment building or the obtaining of capital by
the Cooperative. The interests of the occupants under proprietary leases or
occupancy agreements as to which the Cooperative is the landlord are generally
subordinate to the interests of the holder of the 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 its blanket mortgage, the mortgagee
holding the 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 landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements.
Also, the 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 final maturity. The inability of the
Cooperative to refinance this 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. In either event, foreclosure by the holder of
the blanket mortgage or the termination of the underlying lease could eliminate
or significantly diminish the value of any collateral held by the lender that
financed the purchase by an individual tenant-stockholder of Cooperative shares
or, in the case of the Trust Fund, the collateral securing the Cooperative
Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenantstockholder 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 is financed through
a Cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related Cooperative shares. The lender
generally 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
tenantstockholder, 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 "Foreclosure on Cooperative
Shares" below.
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CONTRACTS
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the state or
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for manufactured homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC which has been adopted by all states. Such financing statements are
effective for five years and must be renewed at the end of each five years. The
certificate of title laws adopted by the majority of states provide that
ownership of motor vehicles and manufactured housing shall be evidenced by a
certificate of title issued by the motor vehicles department (or a similar
entity) of such state. In the states that have enacted certificate of title
laws, a security interest in a unit of manufactured housing, so long as it is
not attached to land in so permanent a fashion as to become a fixture, is
generally perfected by the recording of such interest on the certificate of
title to the unit in the appropriate motor vehicle registration office or by
delivery of the required documents and payment of a fee to such office,
depending on state law.
The Master Servicer will be required under the related Agreement to effect
such notation or delivery of the required documents and fees, and to obtain
possession of the certificate of title, as appropriate under the laws of the
state in which any Manufactured Home is registered. In the event the Master
Servicer fails, due to clerical errors or otherwise, to effect such notation or
delivery, or files the security interest under the wrong law (for example, under
a motor vehicle title statute rather than under the UCC, in a few states), the
Trustee may not have a first priority security interest in the Manufactured Home
securing a Contract. As manufactured homes have become larger and often have
been attached to their sites without any apparent intention by the borrowers to
move them, courts in many states have held that manufactured homes may, under
certain circumstances, 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 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. Generally, Contracts will contain provisions
prohibiting the obligor from permanently attaching the Manufactured Home to its
site. So long as the obligor does not violate this agreement, a security
interest in the Manufactured Home will be governed by the certificate of title
laws or the UCC, and the notation of the security interest on the certificate of
title or the filing of a UCC financing statement will be effective to maintain
the priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to its site, other parties could
obtain an interest in the Manufactured Home that is prior to the security
interest originally retained by the seller and transferred to the Depositor.
The Depositor will assign or cause to be assigned a security interest in the
Manufactured Homes to the Trustee, on behalf of the Certificateholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Depositor,
the Master Servicer nor the Trustee will amend the certificates of title to
identify the Trustee, on behalf of the Certificateholders, as the new secured
party and, accordingly, the Depositor or the Mortgage Loan Seller will continue
to be named as the secured party on the certificates of title relating to the
Manufactured Homes. In most states, such 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 Depositor'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,
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such assignment of the security interest might not be held effective against
creditors of the Depositor or Mortgage Loan Seller.
In the absence of fraud, forgery or permanent affixation of the Manufactured
Home to its site by the Manufactured Home owner, or administrative error by
state recording officials, the notation of the lien of the Depositor on the
certificate of title or delivery of the required documents and fees will be
sufficient to protect the Trustee against the rights of subsequent purchasers of
a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the Depositor
has failed to perfect or cause to be perfected the security interest assigned to
the Trust Fund, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the Trustee, on
behalf of the Certificateholders, as the new secured party on the certificate of
title that, through fraud or negligence, the security interest of the Trustee
could be released.
In the event that the owner of a Manufactured Home moves it 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 until the
owner re-registers the Manufactured Home in such state. If the owner were to
relocate a Manufactured Home to another state and re-register the Manufactured
Home in such state, and if the Depositor did not take steps to re-perfect its
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, the
Depositor must surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
that provide for notation of lien, the Depositor would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Depositor would have the opportunity to
re-perfect its security interest in the Manufactured Home in the state of
relocation. In states that do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under each related Agreement, the Master Servicer will be obligated to
take such steps, at the Master Servicer's expense, as are necessary to maintain
perfection of security interests in the Manufactured Homes.
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
obtain the representation of the Mortgage Loan Seller that it has no knowledge
of any such liens with respect to any Manufactured Home securing a Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee or Certificateholders in the event such a
lien arises.
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 lienholder. The
trustor, borrower, or any
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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
attorneys' fees, that 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 in and to the mortgaged
property. 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 its own
default. However, since a foreclosure action is equitable in nature and is
addressed to a court of equity, the court may relieve a mortgagor of a default
and deny the mortgagee foreclosure on proof that the mortgagor's default was
neither willful nor in bad faith and that the mortgagee's action was such as to
establish a waiver, or fraud, bad faith, oppressive or unconscionable conduct 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 or sale pursuant to a power of sale 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,
recent judicial decisions suggest that a non-collusive, regularly conducted
foreclosure sale or sale pursuant to a power of 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.
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 the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee for an amount equal to the principal amount of the mortgage or deed of
trust plus accrued and unpaid interest and the expenses of foreclosure.
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. 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 insurance proceeds.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those Mortgage Loans which are
junior mortgage loans, if the lender purchases the property, the
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lender's title will be subject to all senior liens and claims and certain
governmental liens. The proceeds received by the referee or trustee from the
sale are applied first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust under
which the sale was conducted. Any remaining proceeds are generally payable to
the holders of junior mortgages or deeds of trust and other liens and claims in
order of their priority, whether or not the borrower is in default. Any
additional proceeds are generally payable to the mortgagor or trustor. The
payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgagee or may require the institution of
separate legal proceeds.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its 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 foreclose if the default under the mortgage instrument is not
monetary, such as the borrower's failure to adequately maintain the property or
the borrower's execution of a second mortgage or deed of trust 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 deeds of trust or mortgages 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 the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protection to the borrower.
Certain states impose a statutory lien for associated costs on property that
is the subject of a cleanup action by the state on account of hazardous wastes
or hazardous substances released or disposed of on the property. Such a lien
generally will have priority over all subsequent liens on the property and, in
certain of these states, will have priority over prior recorded liens, including
the lien of a mortgage. In addition, under federal environmental legislation and
possibly under state law in a number of states, a secured party that takes a
deed in lieu of foreclosure or acquires a mortgaged property at a foreclosure
sale may be liable for the costs of cleaning up a contaminated site. Although
such costs could be substantial, it is unclear whether they would be imposed on
a secured lender on residential properties. In the event that title to a
Mortgaged Property was acquired on behalf of Certificateholders and cleanup
costs were incurred in respect of the Mortgaged Property, such
Certificateholders might realize a loss if such costs were required to be paid
by the related Trust Fund.
FORECLOSURE ON COOPERATIVE SHARES
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, and 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. Typically, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
that are owed to the Cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the Cooperative to
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terminate such lease or agreement in the event the tenant-stockholder fails to
make payments or defaults in the performance of covenants required thereunder.
Typically, the lender and the Cooperative enter into a recognition agreement
that, together with any lender protection provisions contained in the
proprietary lease, 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 notice of and 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 that 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 of a foreclosure on 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. Generally, the lender is
not limited in any rights it may have to dispossess the tenantstockholders.
Under the laws applicable in most states, foreclosure on the Cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to those shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner.
Whether a foreclosure sale has been conducted in a "commercially reasonable"
manner will depend on the facts in each case. In determining commercial
reasonableness, a court will look to the notice given the debtor and the method,
manner, time, place and terms of the foreclosure. 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.
REPOSSESSION WITH RESPECT TO CONTRACTS
Repossession of manufactured housing is governed by state law. A few states
have enacted legislation that requires that the debtor be given an opportunity
to cure its default (typically 30 days to bring the account current) before
repossession can commence. So long as a manufactured home has not become so
attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such
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home in the event of a default by the obligor will generally be governed by the
UCC (except in Louisiana). Article 9 of the UCC provides the statutory framework
for the repossession of manufactured housing. While the UCC as adopted by the
various states may vary in certain small particulars, the general repossession
procedure established by the UCC is as follows:
(i) Except in those states where the debtor must receive notice of the
right to cure a default, repossession can commence immediately upon default
without prior notice. Repossession may be effected either through self-help
(peaceable retaking without court order), voluntary repossession or through
judicial process (repossession pursuant to courtissued writ of replevin). The
self-help and/or voluntary repossession methods are more commonly employed,
and are accomplished simply by retaking possession of the manufactured home.
In cases in which the debtor objects or raises a defense to repossession, a
court order must be obtained from the appropriate state court, and the
manufactured home must then be repossessed in accordance with that order.
Whether the method employed is self-help, voluntary repossession or judicial
repossession, the repossession can be accomplished either by an actual
physical removal of the manufactured home to a secure location for
refurbishment and resale or by removing the occupants and their belongings
from the manufactured home and maintaining possession of the manufactured
home on the location where the occupants were residing. Various factors may
affect whether the manufactured home is physically removed or left on
location, such as the nature and term of the lease of the site on which it is
located and the condition of the unit. In many cases, leaving the
manufactured home on location is preferable, in the event that the home is
already set up, because the expenses of retaking and redelivery will be
saved. However, in those cases where the home is left on location, expenses
for site rentals will usually be incurred.
(ii) Once repossession has been achieved, preparation for the subsequent
disposition of the manufactured home can commence. The disposition may be by
public or private sale provided the method, manner, time, place and terms of
the sale are commercially reasonable.
(iii) Sale proceeds are to be applied first to repossession expenses
(expenses incurred in retaking, storage, preparing for sale to include
refurbishing costs and selling) and then to satisfaction of the indebtedness.
While some states impose prohibitions or limitations on deficiency judgments
if the net proceeds from resale do not cover the full amount of the
indebtedness, the remainder may be sought from the debtor in the form of a
deficiency judgment in those states that do not prohibit or limit such
judgments. The deficiency judgment is a personal judgment against the debtor
for the shortfall. Occasionally, after resale of a manufactured home and
payment of all expenses and indebtedness, there is a surplus of funds. In
that case, the UCC requires the party suing for the deficiency judgment to
remit the surplus to the debtor. Because the defaulting owner of a
manufactured home generally has very little capital or income available
following repossession, a deficiency judgment may not be sought in many cases
or, if obtained, will be settled at a significant discount in light of the
defaulting owner's strained financial condition.
LOUISIANA LAW
Any contract secured by a manufactured home located in Louisiana will be
governed by Louisiana law rather than Article 9 of the UCC. Louisiana laws
provide similar mechanisms for perfection and enforcement of security interests
in manufactured housing used as collateral for an installment sale contract or
installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently affixed to
real estate will nevertheless remain subject to the motor vehicle registration
laws unless the obligor and any holder of a security interest in the property
execute and file in the real estate records
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for the parish in which the property is located a document converting the unit
into real property. A manufactured home that is converted into real property but
is then removed from its site can be converted back to personal property
governed by the motor vehicle registration laws if the obligor executes and
files various documents in the appropriate real estate records and all
mortgagees under real estate mortgages on the property and the land to which it
was affixed file releases with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor vehicle
laws, liens are recorded on the certificate of title by the motor vehicle
commissioner and repossession can be accomplished by voluntary consent of the
obligor, executory process (repossession proceedings which must be initiated
through the courts but which involve minimal court supervision) or a civil suit
for possession. In connection with a voluntary surrender, the obligor must be
given a full release from liability for all amounts due under the contract. In
executory process repossessions, a sheriff's sale (without court supervision) is
permitted, unless the obligor brings suit to enjoin the sale, and the lender is
prohibited from seeking a deficiency judgment against the obligor unless the
lender obtained an appraisal of the manufactured home prior to the sale and the
property was sold for at least two-thirds of its appraised value.
RIGHTS OF REDEMPTION WITH RESPECT TO SINGLE-FAMILY PROPERTIES AND MULTIFAMILY
PROPERTIES
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and certain 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
acquired at a public sale. Consequently, the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership and maintenance of the property until the redemption period has
expired. In some states, there is no right to redeem property after a trustee's
sale under a deed of trust.
NOTICE OF SALE; REDEMPTION RIGHTS WITH RESPECT TO MANUFACTURED HOMES
While state laws do not usually require notice to be given to debtors prior
to repossession, many states do require delivery of a notice of default and of
the debtor's right to cure defaults before repossession. The law in most states
also requires that the debtor be given notice of sale prior to the resale of the
home so that the owner may redeem at or before resale. In addition, the sale
must comply with the requirements of the UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the remedies of
a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against
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the former borrower following a judicial sale to the excess of the outstanding
debt over the fair market value of the property at the time of the public sale.
The purpose of these statutes is generally to prevent a beneficiary or a
mortgagee from obtaining a large deficiency judgment against the former borrower
as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage 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 of collection of a
debt. Moreover, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 13 rehabilitative plan to cure a monetary default
with respect to a mortgage loan on a debtor's residence by paying arrearages
within a reasonable time period and reinstating the original mortgage loan
payment schedule even though the lender accelerated the mortgage loan and final
judgment of a foreclosure had been entered in state court (provided no sale of
the property had 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 mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage 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, attorneys' fees and costs to the extent
the value of the security exceeds the debt.
The Code provides priority to certain tax liens over the lien of the
mortgage. This may have the effect of delaying or interfering with the
enforcement of rights in respect of a defaulted Mortgage Loan. In addition,
substantive requirements are imposed upon mortgage 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. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
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FOR COOPERATIVE LOANS
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares and
the related proprietary lease or occupancy agreement. 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.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are junior to senior mortgages or deeds of trust which are not part
of the Trust Fund. The rights of the Certificateholders as the holders of a
junior deed of trust or a junior mortgage are subordinate in lien priority and
in payment priority to those of the holder of the senior mortgage or deed of
trust, including the prior rights of the senior mortgagee or beneficiary to
receive and apply hazard insurance and condemnation proceeds and, upon default
of the mortgagor, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage or the sale
pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's
lien will be extinguished unless the junior lienholder satisfies the defaulted
senior loan or asserts its subordinate interest in a property in foreclosure
proceedings. See "-Foreclosure on Mortgages" herein.
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a senior mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity Act,
Regulation "B", the Fair Credit Reporting Act, and related statutes. These laws
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions. In some cases, this liability may affect an assignee's ability
to enforce a contract.
Manufactured housing contracts often contain provisions obligating the
obligor to pay late charges if payments are not timely made. In certain cases,
federal and state law may specifically limit the amount of late charges that may
be collected. Unless otherwise provided in the related Prospectus Supplement,
under the Agreement, late charges will be retained by the Master Servicer as
additional servicing compensation, and any inability to collect these amounts
will not affect payments to Certificateholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th
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Amendment to the Constitution of the United States. For the most part, courts
have upheld the notice provisions of the UCC and related laws as reasonable or
have found that the repossession and resale by the creditor does not involve
sufficient state action to afford constitutional protection to consumers.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses which the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due thereunder.
Most of the Contracts in a Trust Fund will be subject to the requirements of
the FTC Rule. Accordingly, the Trustee, as holder of the Contracts, will be
subject to any claims or defenses that the purchaser of the related manufactured
home may assert against the seller of the manufactured home, subject to a
maximum liability equal to the amounts paid by the obligor on the Contract. If
an obligor is successful in asserting any such claim or defense, and if the
Mortgage Loan Seller had or should have had knowledge of such claim or defense,
the Master Servicer will have the right to require the Mortgage Loan Seller to
repurchase the Contract because of a breach of its Mortgage Loan Seller's
representation and warranty that no claims or defenses exist that would affect
the obligor's obligation to make the required payments under the Contract. The
Mortgage Loan Seller would then have the right to require the originating dealer
to repurchase the Contract from it and might also have the right to recover from
the dealer for any losses suffered by the Mortgage Loan Seller with respect to
which the dealer would have been primarily liable to the obligor.
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a lender to
realize upon collateral and/or enforce a deficiency judgment. For example, in a
Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a
lender from repossessing a home, and, as part of the rehabilitation plan, reduce
the amount of the secured indebtedness to the market value of the home at the
time of bankruptcy (as determined by the court), leaving the party providing
financing as a general unsecured creditor for the remainder of the indebtedness.
A bankruptcy court may also reduce the monthly payments due under a contract or
change the rate of interest and time of repayment of the indebtedness.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, all the related
Mortgage Loans will contain due-on-sale clauses. These clauses permit the lender
to accelerate the maturity of the loan if the borrower sells, transfers, or
conveys the property without the prior consent of the lender. The enforceability
of these clauses has been impaired in various ways in certain states by statute
or decisional law. The ability of lenders and their assignees and transferees to
enforce due-on-sale clauses was addressed by the Garn-St Germain Depository
Institutions Act of 1982 (the "Garn-St Germain Act"), which was enacted on
October 15, 1982. This legislation, subject to certain exceptions, preempts
state constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses. The Garn-St Germain Act does "encourage" lenders to permit
assumptions of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
SINGLE-FAMILY LOANS AND MULTIFAMILY LOANS
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Exempted from this preemption pursuant to the Garn-St Germain Act are
mortgage loans (originated other than by federal savings and loan associations
and federal savings banks) that were made or assumed during the period beginning
on the date a state, by statute or final appellate court decision having
statewide effect, prohibited the exercise of due-on-sale clauses and ending on
October 15, 1982 ("Window Period Loans"). However, this exception applies only
to transfers of property underlying Window Period Loans occurring between
October 15, 1982 and October 15, 1985 and does not restrict enforcement of a
due-on-sale clause in connection with current transfers of property underlying
Window Period Loans unless the property underlying such Window Period Loan is
located in one of the five "window period states" identified below. Due-on-sale
clauses contained in mortgage loans originated by federal savings and loan
associations or federal savings banks are fully enforceable pursuant to
regulations of the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision, which preempt state law restrictions on the enforcement of
due-on-sale clauses. Mortgage Loans originated by such institutions are
therefore not deemed to be Window Period Loans.
With the expiration of the exemption for Window Period Loans on October 15,
1985, due-on-sale clauses have become generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period", which ended in all cases not
later than October 15, 1982, and (ii) originated by lenders other than national
banks, federal savings institutions and federal credit unions. FHLMC has taken
the position in its published mortgage servicing standards that, out of a total
of eleven "window period states", five states (Arizona, Michigan, Minnesota, New
Mexico and Utah) have enacted statutes extending, on various terms and for
varying periods, the prohibition on enforcement of due-on-sale clauses with
respect to certain categories of Window Period Loans. The Garn-St Germain Act
also sets forth nine specific instances in which a mortgage lender covered by
the Garn-St Germain Act (including federal savings and loan associations and
federal savings banks) may not exercise a due-on-sale clause, notwithstanding
the fact that a transfer of the property may have occurred. These include
intra-family transfers, certain transfers by operation of law, leases of fewer
than three years and the creation of a junior encumbrance. Regulations
promulgated under the Garn-St Germain Act also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan pursuant to a due-on-sale
clause.
The inability to enforce a due-on-sale clause may result in a Mortgage 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 Mortgage Loans related to a series and the number of such Mortgage
Loans which may be outstanding until maturity.
TRANSFER OF MANUFACTURED HOMES
Generally, manufactured housing contracts contain provisions prohibiting the
sale or transfer of the related manufactured homes without the consent of the
obligee on the contract and permitting the acceleration of the maturity of such
contracts by the obligee on the contract upon any such sale or transfer that is
not consented to. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will, to the extent it has knowledge of such
conveyance or proposed conveyance, exercise or cause to be exercised its rights
to accelerate the maturity of the related Contracts through enforcement of
due-on-sale clauses, subject to applicable state law. In certain cases, the
transfer may be made by a delinquent obligor in order to avoid a repossession
proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the due-on-sale clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement
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of due-on-sale clauses applicable to the Manufactured Homes. Consequently, in
some cases the Master Servicer may be prohibited from enforcing a due-on-sale
clause in respect of certain Manufactured Homes.
PREPAYMENT CHARGES AND PREPAYMENTS
Generally, Mortgage Loans may be prepaid in full or in part without penalty.
Generally, Multifamily Loans may contain provisions limiting prepayments on such
loans, including prohibiting prepayment for a specified period after
origination, prohibiting partial prepayments entirely or requiring the payment
of a prepayment penalty upon prepayment in full or in part. The regulations of
the Federal Home Loan Bank Board, predecessor to the Office of Thrift
Supervision, 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 to a refinancing lender.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
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. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision that expressly
rejects application of the federal law. 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. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor has been advised by counsel that a court interpreting Title V
would hold that mortgage loans 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
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date of such state action will be eligible for inclusion in a Trust Fund 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.
Title V also provides that, subject to the following conditions, state usury
limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. The Contracts 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. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the Trust Fund.
ALTERNATIVE MORTGAGE INSTRUMENTS
ARM Loans 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 simplified 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, (i)
state-chartered banks may originate "alternative mortgage instruments"
(including ARM Loans) in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks, (ii) 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 (iii) all other
non-federally chartered housing creditors, including, without limitation,
state-chartered savings and loan associations, savings banks and mutual savings
banks and mortgage banking companies may originate alternative mortgage
instruments in accordance with the regulations promulgated by the Federal Home
Loan Bank Board, predecessor to the Office of Thrift Supervision with respect to
origination of alternative mortgage instruments by federal savings and loan
associations. Title VIII further 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 ARM Loans that were originated by
state-chartered lenders before the date of enactment of any state law or
constitutional provision rejecting applicability of Title VIII would not be
subject to state laws imposing restrictions or prohibitions on the ability of
state-chartered lenders to originate alternative mortgage instruments.
All of the ARM Loans that were originated by a state-chartered lender after
the enactment of a state law or constitutional provision rejecting the
applicability of Title VIII complied with applicable state law. All of the ARM
Loans that were originated by federally chartered lenders or that were
originated by state-chartered lenders prior to enactment of a state law or
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constitutional provision rejecting the applicability of Title VIII were
originated in compliance with all applicable federal regulations.
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including such components of manufactured housing as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. The Depositor is aware of a limited number
of cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any Contract secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Contract and may be
unable to collect amounts still due under the Contract. The successful assertion
of such claim constitutes a breach of a representation or warranty of the
Mortgage Loan Seller, and the Certificateholders would suffer a loss only to the
extent that (i) the Mortgage Loan Seller breached its obligation to repurchase
the Contract in the event an obligor is successful in asserting such a claim,
and (ii) the Mortgage Loan Seller, the Depositor or the Trustee were
unsuccessful in asserting any claim of contribution or subrogation on behalf of
the Certificateholders against the manufacturer or other persons who were
directly liable to the plaintiff for the damages. Typical products liability
insurance policies held by manufacturers and component suppliers of manufactured
homes may not cover liabilities arising from formaldehyde in manufactured
housing, with the result that recoveries from such manufacturers, suppliers or
other persons may be limited to their corporate assets without the benefit of
insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a borrower who enters military service after the
origination of such borrower's Mortgage Loan (including a borrower who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
borrowers who are members of the Army, Navy, Air Force, Marines, National Guard,
Reserves, Coast Guard, and officers of the U.S. Public Health Service assigned
to duty with the military. Because the Relief Act applies to borrowers who enter
military service (including reservists who are called to active duty) after
origination of the related Mortgage Loan, no information can be provided as to
the number of loans that may be affected by the Relief Act. Application of the
Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Master Servicer to collect full amounts of interest on certain of
the Mortgage Loans. Any shortfalls in interest collections resulting from the
application of the Relief Act would result in a reduction of the amounts
distributable to the holders of the related series of Certificates, and would
not be covered by advances or, unless otherwise specified in the related
Prospectus Supplement, any form of Credit Support provided in connection with
such Certificates. In addition, the Relief Act imposes limitations that would
impair the ability of the Master Servicer to foreclose on an affected
Single-Family Loan or enforce rights under a Contract during the borrower's
period of active duty status, and, under certain circumstances, during an
additional three month period thereafter. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned
thereby.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Certificates offered hereunder. This discussion is directed solely to
Certificateholders that hold the Certificates as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986 (the "Code") and
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinion referred to
below, are based are subject to change or differing interpretations, which could
apply retroactively. Taxpayers and preparers of tax returns (including those
filed by any REMIC or other issuer) should be aware that under applicable
Treasury regulations a provider of advice on specific issues of law is not
considered an income tax return preparer unless the advice (i) is given with
respect to events that have occurred at the time the advice is rendered and is
not given with respect to the consequences of contemplated actions, and (ii) is
directly relevant to the determination of an entry on a tax return. Accordingly,
taxpayers should consult their own tax advisors and tax return preparers
regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein. In addition to the federal
income tax consequences described herein, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership and
disposition of the Certificates. See "State and Other Tax Consequences."
Certificateholders are advised to consult their own tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Certificates offered hereunder.
The following discussion addresses securities of four general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, that the Trustee will elect to have treated as a real estate
mortgage investment conduit ("REMIC") under Sections 860A through 860G (the
"REMIC Provisions") of the Code, (ii) certificates ("Grantor Trust
Certificates") representing interests in a Trust Fund ("Grantor Trust Fund") as
to which no such election will be made, (iii) certificates ("Partnership
Certificates") representing interests in a Trust Fund ("Partnership Trust Fund")
which is treated as a partnership for federal income tax purposes, and (iv)
certificates ("Debt Certificates") representing indebtedness of a Partnership
Trust Fund for federal income tax purposes. The Prospectus Supplement for each
series of Certificates will indicate which of the foregoing treatments will
apply to such series and, if a REMIC election (or elections) will be made for
the related Trust Fund, will identify all "regular interests" and "residual
interests" in the REMIC. For purposes of this tax discussion, (i) references to
a "Certificateholder" or a "holder" are to the beneficial owner of a Certificate
and (ii) unless indicated otherwise in the applicable Prospectus Supplement,
references to "Mortgage Loans" include Agency Securities and Private
Mortgage-Backed Securities..
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code and
in the Treasury regulations issued thereunder (the "OID Regulations"), and in
part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the "REMIC Regulations"). The OID Regulations do not adequately address certain
issues relevant to, and in some instances provide that they are not applicable
to, securities such as the Certificates.
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REMICS
CLASSIFICATION OF REMICS
Upon the issuance of each series of REMIC Certificates, Thacher Proffitt &
Wood or Cadwalader, Wickersham & Taft, counsel to the Depositor, as specified in
the applicable Prospectus Supplement, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement, the related Trust Fund (or each applicable portion thereof)
will qualify as a REMIC and the REMIC Certificates offered with respect thereto
will be considered to evidence ownership of "regular interests" ("REMIC Regular
Certificates") or "residual interests" ("REMIC Residual Certificates") in that
REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC will
include provisions designed to maintain the Trust Fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any Trust Fund as
a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES
In general, the REMIC Certificates will be "qualifying real property loans"
within the meaning of Section 593(d) of the Code, "real estate assets" within
the meaning of Section 856(c)(5)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
underlying such Certificates would be so treated. Moreover, if 95% or more of
the assets of the REMIC qualify for any of the foregoing treatments at all times
during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and income
allocated to the class of REMIC Residual Certificates will be interest described
in Section 856(c)(3)(B) of the Code to the extent that such Certificates are
treated as "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code. In addition, the REMIC Regular Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3) of the Code if transferred
to another REMIC on its startup day in exchange for regular or residual
interests therein. The determination as to the percentage of the REMIC's assets
that constitute assets described in the foregoing sections of the Code will be
made with respect to each calendar quarter based on the average adjusted basis
of each category of the assets held by the REMIC during such calendar quarter.
The REMIC will report those determinations to Certificateholders in the manner
and at the times required by applicable Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans, payments
on Mortgage Loans held pending distribution on the REMIC Certificates and
property acquired by foreclosure held pending sale, and may include amounts in
reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same
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treatment as the Mortgage Loans for purposes of all of the foregoing sections.
In addition, in some instances Mortgage Loans may not be treated entirely as
assets described in the foregoing sections. If so, the related Prospectus
Supplement will describe the Mortgage Loans that may not be so treated. The
REMIC Regulations do provide, however, that payments on Mortgage Loans held
pending distribution are considered part of the Mortgage Loans for purposes of
Sections 593(d) and 856(c)(5)(A) of the Code. Furthermore, foreclosure property
will qualify as "real estate assets" under Section 856(c)(5)(A) of the Code and
as "qualifying real property loans" under Section 593(d) of the Code.
TIERED REMIC STRUCTURES
For certain series of REMIC Certificates, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
series of REMIC Certificates, Thacher Proffitt & Wood or Cadwalader, Wickersham
& Taft, counsel to the Depositor, as specified in the applicable Prospectus
Supplement, will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the Tiered REMICs will each qualify as a REMIC and the REMIC Certificates issued
by the Tiered REMICs, respectively, will be considered to evidence ownership of
REMIC Regular Certificates or REMIC Residual Certificates in the related REMIC
within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
GENERAL
Except as otherwise stated in this discussion, REMIC Regular Certificates
will be treated for federal income tax purposes as debt instruments issued by
the REMIC and not as ownership interests in the REMIC or its assets. Moreover,
holders of REMIC Regular Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to REMIC
Regular Certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with the method described below, in advance of the receipt of the
cash attributable to such income. In addition, Section 1272(a)(6) of the Code
provides special rules applicable to REMIC Regular Certificates and certain
other debt instruments issued with original issue discount. Regulations have not
been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the
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prepayment assumption. The prepayment assumption is to be determined in a manner
prescribed in Treasury regulations; as noted above, those regulations have not
been issued. The Conference Committee Report accompanying the Tax Reform Act of
1986 (the "Committee Report") indicates that the regulations will provide that
the prepayment assumption used with respect to a REMIC Regular Certificate must
be the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Depositor, nor the Master Servicer
will make any representation that the Mortgage Loans will in fact prepay at a
rate conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for such class will be the fair market
value of such class on the Closing Date. Under the OID Regulations, the stated
redemption price of a REMIC Regular Certificate is equal to the total of all
payments to be made on such Certificate other than "qualified stated interest."
"Qualified stated interest" includes interest that is unconditionally payable at
least annually at a single fixed rate, or at a "qualified floating rate," an
"objective rate," a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate," or a
combination of "qualified floating rates" that does not operate in a manner that
accelerates or defers interest payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest rates,
the determination of the total amount of original issue discount and the timing
of the inclusion thereof will vary according to the characteristics of such
REMIC Regular Certificates. If the original issue discount rules apply to such
Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the Internal Revenue Service
(the "IRS").
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined below) for original issue discount is each monthly period that ends on
the day prior to each Distribution Date, in some cases, as a consequence of this
"long first accrual period," some or all interest payments may be required to be
included in the stated redemption price of the REMIC Regular Certificate and
accounted for as original issue discount. Because interest on REMIC Regular
Certificates must in any event be accounted for under an accrual method,
applying this analysis would result in only a slight difference in the timing of
the inclusion in income of the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns to the
Certificateholders and the IRS will be based on the position that the portion of
the purchase price paid for the interest accrued with respect to periods prior
to the Closing Date is treated as part of the overall cost of such REMIC Regular
Certificate (and not as a separate asset the cost of which is recovered entirely
out of interest received on the next Distribution Date) and that portion of the
interest paid on the first Distribution Date in excess of interest accrued for a
number of days corresponding to the number of days from the
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Closing Date to the first Distribution Date should be included in the stated
redemption price of such REMIC Regular Certificate. However, the OID Regulations
state that all or some portion of such accrued interest may be treated as a
separate asset the cost of which is recovered entirely out of interest paid on
the first Distribution Date. It is unclear how an election to do so would be
made under the OID Regulations and whether such an election could be made
unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of such REMIC Regular Certificate. Under the OID Regulations, original
issue discount of only a de minimis amount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each payment of stated principal
is made, based on the product of the total amount of such de minimis original
issue discount and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "Taxation
of Owners of REMIC Regular Certificates-Market Discount" for a description of
such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the related
Prospectus Supplement, each period that ends on a date that corresponds to the
day prior to each Distribution Date and begins on the first day following the
immediately preceding accrual period (or in the case of the first such period,
begins on the Closing Date), a calculation will be made of the portion of the
original issue discount that accrued during such accrual period. The portion of
original issue discount that accrues in any accrual period will equal the
excess, if any, of (i) the sum of (A) the present value, as of the end of the
accrual period, of all of the distributions remaining to be made on the REMIC
Regular Certificate, if any, in future periods and (B) the distributions made on
such REMIC Regular Certificate during the accrual period of amounts included in
the stated redemption price, over (ii) the adjusted issue price of such REMIC
Regular Certificate at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated (i) assuming that distributions on the REMIC Regular Certificate will
be received in future periods based on the Mortgage Loans being prepaid at a
rate equal to the Prepayment Assumption and (ii) using a discount rate equal to
the original yield to maturity of the Certificate. For these purposes, the
original yield to maturity of the Certificate will be calculated based on its
issue price and assuming that distributions on the Certificate will be made in
all accrual periods based on the Mortgage Loans being prepaid at a rate equal to
the Prepayment Assumption. The adjusted issue price of a REMIC Regular
Certificate at the beginning of any accrual period will equal the issue price of
such Certificate, increased by the aggregate amount of original issue discount
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that accrued with respect to such Certificate in prior accrual periods, and
reduced by the amount of any distributions made on such REMIC Regular
Certificate in prior accrual periods of amounts included in the stated
redemption price. The original issue discount accruing during any accrual
period, computed as described above, will be allocated ratably to each day
during the accrual period to determine the daily portion of original issue
discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price," in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day.
MARKET DISCOUNT
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount, that is, in the case of a REMIC Regular Certificate issued without
original issue discount, at a purchase price less than its remaining stated
principal amount, or in the case of a REMIC Regular Certificate issued with
original issue discount, at a purchase price less than its adjusted issue price
will recognize gain upon receipt of each distribution representing stated
redemption price. In particular, under Section 1276 of the Code such a
Certificateholder generally will be required to allocate the portion of each
such distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent. A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method. If such an election were made
with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "Taxation of Owners of REMIC
Regular Certificates-Premium" below. Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate will be
considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount,
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presumably taking into account the Prepayment Assumption. If market discount is
treated as de minimis under this rule, it appears that the actual discount would
be treated in a manner similar to original issue discount of a de minimis
amount. See "Taxation of Owners of REMIC Regular Certificates-Original Issue
Discount" above. Such treatment would result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
PREMIUM
A REMIC Regular Certificate purchased at a cost (excluding any portion of
such cost attributable to accrued qualified stated interest) greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of such a REMIC Regular Certificate may elect under Section
171 of the Code to amortize such premium under the constant yield method over
the life of the Certificate. If made, such an election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related
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debt instrument, rather than as a separate interest deduction. The OID
Regulations also permit Certificateholders to elect to include all interest,
discount and premium in income based on a constant yield method, further
treating the Certificateholder as having made the election to amortize premium
generally. See "Taxation of Owners of REMIC Regular Certificates-Market
Discount" above. The Committee Report states that the same rules that apply to
accrual of market discount (which rules will require use of a Prepayment
Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether such Certificates have original issue
discount) will also apply in amortizing bond premium under Section 171 of the
Code.
REALIZED LOSSES
Under Section 166 of the Code, both corporate holders of the REMIC Regular
Certificates and noncorporate holders of the REMIC Regular Certificates that
acquire such Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their 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 REMIC Regular Certificate 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 Certificate becomes wholly worthless
(i.e., until its outstanding principal balance has been reduced to zero) and
that the loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates 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
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that as the result of a realized loss
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL
As residual interests, the REMIC Residual Certificates will be subject to tax
rules that differ significantly from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Mortgage Loans or as debt instruments issued by the
REMIC.
A holder of a REMIC Residual Certificate generally will be required to report
its daily portion of the taxable income or, subject to the limitations noted in
this discussion, the net loss of the REMIC for each day during a calendar
quarter that such holder owned such REMIC Residual Certificate. For this
purpose, the taxable income or net loss of the REMIC will be allocated to each
day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
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regard to the timing or amount of cash distributions by the REMIC. Ordinary
income derived from REMIC Residual Certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Code on the deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased such Certificate from
a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations, however,
do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions,"
residual interests without "significant value" and "noneconomic" residual
interests discussed below. The fact that the tax liability associated with the
income allocated to REMIC Residual Certificateholders may exceed the cash
distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders' after-tax rate of return.
TAXABLE INCOME OF THE REMIC
The taxable income of the REMIC will equal the income from the Mortgage Loans
and other assets of the REMIC plus any cancellation of indebtedness income due
to the allocation of realized losses to REMIC Regular Certificates, less the
deductions allowed to the REMIC for interest (including original issue discount
and reduced by any premium on issuance) on the REMIC Regular Certificates (and
any other class of REMIC Certificates constituting "regular interests" in the
REMIC not offered hereby), amortization of any premium on the Mortgage Loans,
bad debt losses with respect to the Mortgage Loans and, except as described
below, for servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under "-Taxation
of Owners of REMIC
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Regular Certificates-Original Issue Discount." The issue price of a REMIC
Certificate received in exchange for an interest in the Mortgage Loans or other
property will equal the fair market value of such interests in the Mortgage
Loans or other property. Accordingly, if one or more classes of REMIC
Certificates are retained initially rather than sold, the Trustee may be
required to estimate the fair market value of such interests in order to
determine the basis of the REMIC in the Mortgage Loans and other property held
by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant yield basis. See "-Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Mortgage Loans
with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described above for accruing original issue
discount on the REMIC Regular Certificates. It is anticipated that each REMIC
will elect under Section 171 of the Code to amortize any premium on the Mortgage
Loans. Premium on any Mortgage Loan to which such election applies may be
amortized under a constant yield method, presumably taking into account a
Prepayment Assumption. Further, such an election would not apply to any Mortgage
Loan originated on or before September 27, 1985. Instead, premium on such a
Mortgage Loan should be allocated among the principal payments thereon and be
deductible by the REMIC as those payments become due or upon the prepayment of
such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount," except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess "Issue Premium"), the net
amount of interest deductions that are allowed the REMIC in each taxable year
with respect to the REMIC Regular Certificates of such class will be reduced by
an amount equal to the portion of the Issue Premium that is considered to be
amortized or repaid in that year. Although the matter is not entirely certain,
it is likely that Issue Premium would be amortized under a constant yield method
in a manner analogous to the method of accruing original issue discount
described above under "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount."
As a general rule, the taxable income of a REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "-Prohibited Transactions Tax
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and Other Taxes" below. Further, the limitation on miscellaneous itemized
deductions imposed on individuals by Section 67 of the Code (which allows such
deductions only to the extent they exceed in the aggregate two percent of the
taxpayer's adjusted gross income) will not be applied at the REMIC level so that
the REMIC will be allowed deductions for servicing, administrative and other
non-interest expenses in determining its taxable income. All such expenses will
be allocated as a separate item to the holders of REMIC Certificates, subject to
the limitation of Section 67 of the Code. See "-Possible Pass-Through of
Miscellaneous Itemized Deductions" below. If the deductions allowed to the REMIC
exceed its gross income for a calendar quarter, such excess will be the net loss
for the REMIC for that calendar quarter.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS
The adjusted basis of a REMIC Residual Certificate will be equal to the
amount paid for such REMIC Residual Certificate, increased by amounts included
in the income of the REMIC Residual Certificateholder and decreased (but not
below zero) by distributions made, and by net losses allocated, to such REMIC
Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not currently deductible by reason of this limitation
may be carried forward indefinitely to future calendar quarters and, subject to
the same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the REMIC. However, such bases increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may not
amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "-Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder, see "-Taxation of Owners of REMIC
Residual Certificates-General" above.
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EXCESS INCLUSIONS
Any "excess inclusions" with respect to a REMIC Residual Certificate will,
with an exception discussed below for certain REMIC Residual Certificates held
by thrift institutions, be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "-Foreign Investors
in REMIC Certificates," below.
As an exception to the general rules described above, thrift institutions are
allowed to offset their excess inclusions with unrelated deductions, losses or
loss carryovers, but only if the REMIC Residual Certificates are considered to
have "significant value." The REMIC Regulations provide that in order to be
treated as having significant value, the REMIC Residual Certificates must have
an aggregate issue price at least equal to two percent of the aggregate issue
prices of all of the related REMIC's Regular and Residual Certificates. In
addition, based on the Prepayment Assumption, the anticipated weighted average
life of the REMIC Residual Certificates must equal or exceed 20 percent of the
anticipated weighted average life of the REMIC, based on the Prepayment
Assumption and on any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. Although it
has not done so, the Treasury also has authority to issue regulations that would
treat the entire amount of income accruing on a REMIC Residual Certificate as an
excess inclusion if the REMIC Residual Certificates are considered not to have
"significant value." The related Prospectus Supplement will disclose whether
offered REMIC Residual Certificates may be considered to have "significant
value" under the REMIC Regulations; provided, however, that any disclosure that
a REMIC Residual Certificate will have "significant value" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will have "significant value" for purposes of the
above-described rules. The above-described exception for thrift institutions
applies only to those residual interests held directly by, and deductions,
losses and loss carryovers incurred by, such institutions (and not by other
members of an affiliated group of corporations filing a consolidated income tax
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return) or by certain wholly owned direct subsidiaries of such institutions
formed or operated exclusively in connection with the organization and operation
of one or more REMICs.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If such transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on such "noneconomic" REMIC Residual Certificate. The REMIC Regulations
provide that a REMIC Residual Certificate is noneconomic unless, based on the
Prepayment Assumption and on any required or permitted clean up calls, or
required liquidation provided for in the REMIC's organizational documents, (1)
the present value of the expected future distributions (discounted using the
"applicable Federal rate" for obligations whose term ends on the close of the
last quarter in which excess inclusions are expected to accrue with respect to
the REMIC Residual Certificate, which rate is computed and published monthly by
the IRS) on the REMIC Residual Certificate equals at least the present value of
the expected tax on the anticipated excess inclusions, and (2) the transferor
reasonably expects that the transferee will receive distributions with respect
to the REMIC Residual Certificate at or after the time the taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy the accrued
taxes. Accordingly, all transfers of REMIC Residual Certificates that may
constitute noneconomic residual interests will be subject to certain
restrictions under the terms of the related Pooling and Servicing Agreement that
are intended to reduce the possibility of any such transfer being disregarded.
Such restrictions will require each party to a transfer to provide an affidavit
that no purpose of such transfer is to impede the assessment or collection of
tax, including certain representations as to the financial condition of the
prospective transferee, as to which the transferor is also required to make a
reasonable investigation to determine such transferee's historic payment of its
debts and ability to continue to pay its debts as they come due in the future.
Prior to purchasing a REMIC Residual Certificate, prospective purchasers should
consider the possibility that a purported transfer of such REMIC Residual
Certificate by such a purchaser to another purchaser at some future date may be
disregarded in accordance with the above-described rules which would result in
the retention of tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "-Foreign Investors in REMIC Certificates-REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
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MARK-TO-MARKET RULES
Prospective purchasers of a REMIC Residual Certificate should be aware that
on January 3, 1995, the IRS released proposed regulations (the "Proposed
Mark-to-Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities owned by a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The Proposed Mark-to-Market Regulations provide that for purposes of this
mark-to-market requirement, a REMIC Residual Certificate is not treated as a
security and thus may not be marked to market. The Proposed Mark-to-Market
Regulations apply to all REMIC Residual Certificates acquired on or after
January 4, 1995.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS
Fees and expenses of a REMIC generally will be allocated to the holders of
the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of such fees and expenses should be allocated to
the holders of the related REMIC Regular Certificates. Unless otherwise stated
in the related Prospectus Supplement, such fees and expenses will be allocated
to holders of the related REMIC Residual Certificates in their entirety and not
to the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates the
holders of which receive an allocation of fees and expenses in accordance with
the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate two percent of a taxpayer's adjusted gross
income. In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by REMIC Certificateholders that
are subject to the limitations of either Section 67 or Section 68 of the Code
may be substantial. Furthermore, in determining the alternative minimum taxable
income of such a holder of a REMIC Certificate that is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should carefully
consult with their own tax advisors prior to making an investment in such
Certificates.
SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the selling Certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale and
its adjusted basis in the REMIC Certificate. The adjusted basis of a REMIC
Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to such REMIC Regular Certificate (including
original issue
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discount and market discount income) and reduced (but not below zero) by
distributions on such REMIC Regular Certificate received by such
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described under "-Taxation of Owners
of REMIC Residual Certificates-Basis Rules, Net Losses and Distributions."
Except as provided in the following two paragraphs, any such gain or loss will
be capital gain or loss, provided such REMIC Certificate is held as a capital
asset (generally, property held for investment) within the meaning of Section
1221 of the Code. The Code as of the date of this Prospectus provides for a top
marginal tax rate of 39.6% for individuals and a maximum marginal rate for
long-term capital gains of individuals of 28%. No such rate differential exists
for corporations. In addition, the distinction between a capital gain or loss
and ordinary income or loss remains relevant for other purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the "applicable Federal
rate" (generally, a rate based on an average of current yields on Treasury
securities having a maturity comparable to that of the Certificate based on the
application of the Prepayment Assumption to such Certificate, which rate is
computed and published monthly by the IRS), determined as of the date of
purchase of such REMIC Regular Certificate, over (ii) the amount of ordinary
income actually includible in the seller's income prior to such sale. In
addition, gain recognized on the sale of a REMIC Regular Certificate by a seller
who purchased such REMIC Regular Certificate at a market discount will be
taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period such REMIC Certificate was held by such
holder, reduced by any market discount included in income under the rules
described above under "-Taxation of Owners of REMIC Regular Certificates-Market
Discount" and "-Premium."
REMIC Certificates will be "evidences of indebtedness" within the meaning of
Section 582(c)(1) of the Code, so that gain or loss recognized from the sale of
a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that might
otherwise be capital gain may be treated as ordinary income to the extent that
such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six
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months after, the date of such sale, such sale will be subject to the "wash
sale" rules of Section 1091 of the Code. In that event, any loss realized by the
REMIC Residual Certificateholder on the sale will not be deductible, but instead
will be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived from
"prohibited transactions" (a "Prohibited Transactions Tax"). In general, subject
to certain specified exceptions a prohibited transaction means the disposition
of a Mortgage Loan, the receipt of income from a source other than a Mortgage
Loan or certain other permitted investments, the receipt of compensation for
services, or gain from the disposition of an asset purchased with the payments
on the Mortgage Loans for temporary investment pending distribution on the REMIC
Certificates. It is not anticipated that any REMIC will engage in any prohibited
transactions in which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the day on which the
REMIC issues all of its interests could result in the imposition of a tax on the
REMIC equal to 100% of the value of the contributed property (a "Contributions
Tax"). Each Pooling and Servicing Agreement will include provisions designed to
prevent the acceptance of any contributions that would be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property," determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer or Trustee in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling and Servicing Agreement and in respect of
compliance with applicable laws and regulations. Any such tax not borne by the
Master Servicer or the Trustee will be charged against the related Trust Fund
resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) of the total anticipated excess inclusions
with respect to such REMIC Residual Certificate for periods after the transfer
and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be
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determined as of the date that the REMIC Residual Certificate is transferred and
must be based on events that have occurred up to the time of such transfer, the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. Such a tax
generally would be imposed on the transferor of the REMIC Residual Certificate,
except that where such transfer is through an agent for a disqualified
organization, the tax would instead be imposed on such agent. However, a
transferor of a REMIC Residual Certificate would in no event be liable for such
tax with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a disqualified organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. Moreover, an entity will not qualify as a REMIC unless there
are reasonable arrangements designed to ensure that (i) residual interests in
such entity are not held by disqualified organizations and (ii) information
necessary for the application of the tax described herein will be made
available. Restrictions on the transfer of REMIC Residual Certificates and
certain other provisions that are intended to meet this requirement will be
included in the Pooling and Servicing Agreement, and will be discussed more
fully in any Prospectus Supplement relating to the offering of any REMIC
Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in income
excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (ii) a statement under penalties of perjury that such record
holder is not a disqualified organization.
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
TERMINATION
A REMIC will terminate immediately after the Distribution Date following
receipt by the REMIC of the final payment in respect of the Mortgage Loans or
upon a sale of the REMIC's assets following the adoption by the REMIC of a plan
of complete liquidation. The last distribution on a REMIC Regular Certificate
will be treated as a payment in retirement of a debt instrument. In the case of
a REMIC Residual Certificate, if the last distribution on such REMIC Residual
Certificate is less than the REMIC Residual Certificateholder's adjusted basis
in such Certificate, such REMIC Residual Certificateholder should (but may not)
be treated as realizing a loss equal to the amount of such difference, and such
loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
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Solely for purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and REMIC Residual Certificateholders will be
treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Trustee will file REMIC federal income tax returns on behalf of
the related REMIC, and under the terms of the related Agreement, will be
irrevocably appointed by the holders of the largest percentage interest in the
related REMIC Residual Certificates as their agent to perform all of the duties
of the "tax matters person" with respect to the REMIC in all respects.
As agent for the tax matters person, the Trustee, subject to certain notice
requirements and various restrictions and limitations, generally will have the
authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC Residual Certificateholders generally will be required to
report such REMIC items consistently with their treatment on the REMIC's tax
return and may in some circumstances be bound by a settlement agreement between
the Trustee, as agent for the tax matters person, and the Service concerning any
such REMIC item. Adjustments made to the REMIC tax return may require a REMIC
Residual Certificateholder to make corresponding adjustments on its return, and
an audit of the REMIC's tax return, or the adjustments resulting from such an
audit, could result in an audit of a REMIC Residual Certificateholder's return.
No REMIC will be registered as a tax shelter pursuant to Section 6111 of the
Code because it is not anticipated that any REMIC will have a net loss for any
of the first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
the REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
Service; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other non-individuals will be provided interest
and original issue discount income information and the information set forth in
the following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC Regular Certificate issued with original issue discount to
disclose on its face the amount of original issue discount and the issue date,
and requiring such information to be reported to the Service. Reporting with
respect to the REMIC Residual Certificates, including income, excess inclusions,
investment expenses and relevant information regarding qualification of the
REMIC's assets will be made as required under the Treasury regulations,
generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will include
a statement of the adjusted issue price of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "-Taxation of Owners of REMIC Regular
Certificates-Market Discount."
Unless otherwise specified in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the Trustee.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES
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Payments of interest and principal, as well as payments of proceeds from the
sale of REMIC Certificates, may be subject to the "backup withholding tax" under
Section 3406 of the Code at a rate of 31% if recipients of such payments fail to
furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax. Furthermore,
certain penalties may be imposed by the IRS on a recipient of payments that is
required to supply information but that does not do so in the proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES
A REMIC Regular Certificateholder that is not a "United States person" (as
defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not, unless otherwise disclosed in the
related Prospectus Supplement, be subject to United States federal income or
withholding tax in respect of a distribution on a REMIC Regular Certificate,
provided that the holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States person and providing the name and
address of such Certificateholder). For these purposes, "United States person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in, or under the laws of, the United States or
any political subdivision thereof, or an estate or trust whose income is subject
to United States federal income tax regardless of its source. It is possible
that the IRS may assert that the foregoing tax exemption should not apply with
respect to a REMIC Regular Certificate held by a REMIC Residual
Certificateholder that owns directly or indirectly a 10% or greater interest in
the REMIC Residual Certificates. If the holder does not qualify for exemption,
distributions of interest, including distributions in respect of accrued
original issue discount, to such holder may be subject to a tax rate of 30%,
subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included in
the estate of a non-resident alien individual and would not be subject to United
States estate taxes. However, Certificateholders who are non-resident alien
individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States persons will
be prohibited under the related Pooling and Servicing Agreement.
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
With respect to each series of Grantor Trust Certificates, Thacher Proffitt &
Wood or Cadwalader, Wickersham & Taft, counsel to the Depositor, as specified in
the applicable Prospectus Supplement, will deliver its opinion to the effect
that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement, the related Grantor Trust Fund will be classified as a
grantor trust under subpart E, part I of subchapter J of the Code and not as a
partnership or an association taxable as a corporation. Accordingly, each holder
of a Grantor Trust Certificate generally will be treated as the owner of an
interest in the Mortgage Loans included in the Grantor Trust Fund.
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For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate." A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees and any Spread) and interest paid to the holders of Grantor
Trust Fractional Interest Certificates issued with respect to such Grantor Trust
Fund will be referred to as a "Grantor Trust Strip Certificate." A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
In the case of Grantor Trust Fractional Interest Certificates, unless
otherwise disclosed in the related Prospectus Supplement and subject to the
discussion below with respect to Buydown Mortgage Loans, counsel to the
Depositor will deliver an opinion that, in general, Grantor Trust Fractional
Interest Certificates will represent interests in (i) "qualifying real property
loans" within the meaning of Section 593(d) of the Code; (ii) "loans . . .
secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code; (iii) "obligation[s] (including any participation
or Certificate of beneficial ownership therein) which . . .[are] principally
secured by an interest in real property" within the meaning of Section
860G(a)(3) of the Code; and (iv) "real estate assets" within the meaning of
Section 856(c)(5)(A) of the Code, in each case to the extent the Mortgage Loans
qualify for such treatment. In addition, counsel to the Depositor will deliver
an opinion that interest on Grantor Trust Fractional Interest Certificates will
to the same extent be considered "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.
The assets constituting certain Grantor Trust Funds may include Buydown
Mortgage Loans. The characterization of an investment in Buydown Mortgage Loans
will depend upon the precise terms of the related Buydown Agreement, but to the
extent that such Buydown Mortgage Loans are secured by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. No directly applicable precedents exist
with respect to the federal income tax treatment or the characterization of
investments in Buydown Mortgage Loans. Accordingly, holders of Grantor Trust
Certificates should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Grantor Trust Fund that includes Buydown Mortgage Loans.
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GRANTOR TRUST STRIP CERTIFICATES
Even if Grantor Trust Strip Certificates evidence an interest in a Grantor
Trust Fund consisting of Mortgage Loans that are "loans . . . secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code, "qualifying real property loans" within the meaning of Section 593(d)
of the Code, and "real estate assets" within the meaning of Section 856(c)(5)(A)
of the Code, and the interest on which is "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code, it is unclear whether the Grantor Trust Strip Certificates, and the income
therefrom, will be so characterized. However, the policies underlying such
sections (namely, to encourage or require investments in mortgage loans by
thrift institutions and real estate investment trusts) may suggest that such
characterization is appropriate. Counsel to the Depositor will not deliver any
opinion on these questions. Prospective purchasers to which such
characterization of an investment in Grantor Trust Strip Certificates is
material should consult their tax advisors regarding whether the Grantor Trust
Strip Certificates, and the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which . . .[are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
Holders of a particular series of Grantor Trust Fractional Interest
Certificates generally will be required to report on their federal income tax
returns their shares of the entire income from the Mortgage Loans (including
amounts used to pay reasonable servicing fees and other expenses) and will be
entitled to deduct their shares of any such reasonable servicing fees and other
expenses. Because of stripped interests, market or original issue discount, or
premium, the amount includible in income on account of a Grantor Trust
Fractional Interest Certificate may differ significantly from the amount
distributable thereon representing interest on the Mortgage Loans. Under Section
67 of the Code, an individual, estate or trust holding a Grantor Trust
Fractional Interest Certificate directly or through certain pass-through
entities will be allowed a deduction for such reasonable servicing fees and
expenses only to the extent that the aggregate of such holder's miscellaneous
itemized deductions exceeds two percent of such holder's adjusted gross income.
In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by holders of Grantor Trust
Fractional Interest Certificates who are subject to the limitations of either
Section 67 or Section 68 of the Code may be substantial. Further,
Certificateholders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holder's alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple classes of Grantor Trust
Certificates (including Grantor Trust Strip Certificates) are issued, such fees
and expenses should be allocated among the classes of Grantor Trust Certificates
using a method that recognizes that each such class benefits from the related
services. In the absence of statutory or administrative clarification as to the
method to be used, it currently is intended to base information returns or
reports to the IRS and Certificateholders on a method that allocates such
expenses among classes of Grantor Trust Certificates with respect to each period
based on the distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286
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of the Code. Grantor Trust Fractional Interest Certificates may be subject to
those rules if (i) a class of Grantor Trust Strip Certificates is issued as part
of the same series of Certificates or (ii) the Depositor or any of its
affiliates retains (for its own account or for purposes of resale) a right to
receive a specified portion of the interest payable on the Mortgage Loans.
Further, the IRS has ruled that an unreasonably high servicing fee retained by a
seller or servicer will be treated as a retained ownership interest in mortgages
that constitutes a stripped coupon. For purposes of determining what constitutes
reasonable servicing fees for various types of mortgages the IRS has established
certain "safe harbors." The servicing fees paid with respect to the Mortgage
Loans for certain series of Grantor Trust Certificates may be higher than the
"safe harbors" and, accordingly, may not constitute reasonable servicing
compensation. The related Prospectus Supplement will include information
regarding servicing fees paid to the Master Servicer, any subservicer or their
respective affiliates necessary to determine whether the preceding "safe harbor"
rules apply.
IF STRIPPED BOND RULES APPLY
If the stripped bond rules apply, each Grantor Trust Fractional Interest
Certificate will be treated as having been issued with "original issue discount"
within the meaning of Section 1273(a) of the Code, subject, however, to the
discussion below regarding the treatment of certain stripped bonds as market
discount bonds and the discussion regarding de minimis market discount. See
"-Taxation of Owners of Grantor Trust Fractional Interest Certificates-Market
Discount" below. Under the stripped bond rules, the holder of a Grantor Trust
Fractional Interest Certificate (whether a cash or accrual method taxpayer) will
be required to report interest income from its Grantor Trust Fractional Interest
Certificate for each month in an amount equal to the income that accrues on such
Certificate in that month calculated under a constant yield method, in
accordance with the rules of the Code relating to original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified stated
interest," if any, as well as such Certificate's share of reasonable servicing
fees and other expenses. See "-Taxation of Owners of Grantor Trust Fractional
Interest Certificates-If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest." In general, the amount of such income that accrues
in any month would equal the product of such holder's adjusted basis in such
Grantor Trust Fractional Interest Certificate at the beginning of such month
(see "Sales of Grantor Trust Certificates") and the yield of such Grantor Trust
Fractional Interest Certificate to such holder. Such yield would be computed at
the rate (compounded based on the regular interval between payment dates) that,
if used to discount the holder's share of future payments on the Mortgage Loans,
would cause the present value of those future payments to equal the price at
which the holder purchased such Certificate. In computing yield under the
stripped bond rules, a Certificateholder's share of future payments on the
Mortgage Loans will not include any payments made in respect of any ownership
interest in the Mortgage Loans retained by the Depositor, the Master Servicer,
any subservicer or their respective affiliates, but will include such
Certificateholder's share of any reasonable servicing fees and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption, with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions to the Grantor Trust
Fractional Interest Certificates. It is unclear whether those provisions
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would be applicable to the Grantor Trust Fractional Interest Certificates or
whether use of a reasonable prepayment assumption may be required or permitted
without reliance on these rules. It is also uncertain, if a prepayment
assumption is used, whether the assumed prepayment rate would be determined
based on conditions at the time of the first sale of the Grantor Trust
Fractional Interest Certificate or, with respect to any holder, at the time of
purchase of the Grantor Trust Fractional Interest Certificate by that holder.
Certificateholders are advised to consult their own tax advisors concerning
reporting original issue discount in general and, in particular, whether a
prepayment assumption should be used in reporting original issue discount with
respect to Grantor Trust Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired at a
price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan prepays in
full, the holder of a Grantor Trust Fractional Interest Certificate acquired at
a discount or a premium generally will recognize ordinary income or loss equal
to the difference between the portion of the prepaid principal amount of the
Mortgage Loan that is allocable to such Certificate and the portion of the
adjusted basis of such Certificate that is allocable to such Certificateholder's
interest in the Mortgage Loan. If a prepayment assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on REMIC Regular Certificates. See "-REMICs-Taxation of
Owners of REMIC Regular Certificates-Original Issue Discount." It is unclear
whether any other adjustments would be required to reflect differences between
an assumed prepayment rate and the actual rate of prepayments.
In the absence of statutory or administrative clarification, it is currently
intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Depositor nor the Trustee will make any representation that the
Mortgage Loans will in fact prepay at a rate conforming to such Prepayment
Assumption or any other rate and Certificateholders should bear in mind that the
use of a representative initial offering price will mean that such information
returns or reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial Certificateholders of each series
who bought at that price.
Under Treasury regulation Section 1.1286-1T, certain stripped bonds are to be
treated as market discount bonds and, accordingly, any purchaser of such a bond
is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest
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rate payable on the Mortgage Loans, the related Prospectus Supplement will
disclose that fact. If the original issue discount or market discount on a
Grantor Trust Fractional Interest Certificate determined under the stripped bond
rules is less than 0.25% of the stated redemption price multiplied by the
weighted average maturity of the Mortgage Loans, then such original issue
discount or market discount will be considered to be de minimis. Original issue
discount or market discount of only a de minimis amount will be included in
income in the same manner as de minimis original issue and market discount
described in "-Taxation of Owners of Grantor Trust Fractional Interest
Certificates-If Stripped Bond Rules Do Not Apply" and "-Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY
Subject to the discussion below on original issue discount, if the stripped
bond rules do not apply to a Grantor Trust Fractional Interest Certificate, the
Certificateholder will be required to report its share of the interest income on
the Mortgage Loans in accordance with such Certificateholder's normal method of
accounting. The original issue discount rules will apply to a Grantor Trust
Fractional Interest Certificate to the extent it evidences an interest in
Mortgage Loans issued with original issue discount.
The original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of such Mortgage Loans and their
issue price. Under the OID Regulations, the stated redemption price is equal to
the total of all payments to be made on such Mortgage Loan other than "qualified
stated interest." "Qualified stated interest" includes interest that is
unconditionally payable at least annually at a single fixed rate, or at a
"qualified floating rate," an "objective rate," a combination of a single fixed
rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on such
Mortgage Loan. In general, the issue price of a Mortgage Loan will be the amount
received by the borrower from the lender under the terms of the Mortgage Loan,
less any "points" paid by the borrower, and the stated redemption price of a
Mortgage Loan will equal its principal amount, unless the Mortgage Loan provides
for an initial below-market rate of interest or the acceleration or the deferral
of interest payments.
In the case of Mortgage Loans bearing adjustable or variable interest rates,
the related Prospectus Supplement will describe the manner in which such rules
will be applied with respect to those Mortgage Loans by the Trustee in preparing
information returns to the Certificateholders and the IRS.
Notwithstanding the general definition of original issue discount, original
issue discount will be considered to be de minimis if such original issue
discount is less than 0.25% of the stated redemption price multiplied by the
weighted average maturity of the Mortgage Loan. For this purpose, the weighted
average maturity of the Mortgage Loan will be computed as the sum of the amounts
determined, as to each payment included in the stated redemption price of such
Mortgage Loan, by multiplying (i) the number of complete years (rounding down
for partial years) from the issue date until such payment is expected to be made
by (ii) a fraction, the numerator of which is the amount of the payment and the
denominator of which is the stated redemption price of the Mortgage Loan. Under
the OID Regulations, original issue discount of only a de minimis amount (other
than de minimis original issue discount attributable to a so-called "teaser"
rate or initial interest holiday) will be included in income as each payment of
stated principal is made, based on the product of the total amount of such de
minimis original issue discount and a fraction, the numerator of which is the
amount of each such payment and the denominator of which is the outstanding
stated principal amount of the Mortgage Loan. The OID Regulations also permit a
Certificateholder to elect to accrue de minimis original issue discount into
income currently based on a constant yield method. See
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"-Taxation of Owners of Grantor Trust Fractional Interest Certificates-Market
Discount" below.
If original issue discount is in excess of a de minimis amount, all original
issue discount with respect to a Mortgage Loan will be required to be accrued
and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption for certificates backed
by whole mortgage loans and not subject to the stripped bond rules. However,
Section 1272(a)(6) of the Code may require that a prepayment assumption be made
in computing yield with respect to all mortgage-backed securities.
Certificateholders are advised to consult their own tax advisors concerning
whether a prepayment assumption should be used in reporting original issue
discount with respect to Grantor Trust Fractional Interest Certificates.
Certificateholders should refer to the related Prospectus Supplement with
respect to each series to determine whether and in what manner the original
issue discount rules will apply to Mortgage Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that purchases
such Grantor Trust Fractional Interest Certificate at a cost less than such
Certificate's allocable portion of the aggregate remaining stated redemption
price of the Mortgage Loans held in the related Trust Fund will also be required
to include in gross income such Certificate's daily portions of any original
issue discount with respect to such Mortgage Loans. However, each such daily
portion will be reduced, if the cost of such Grantor Trust Fractional Interest
Certificate to such purchaser is in excess of such Certificate's allocable
portion of the aggregate "adjusted issue prices" of the Mortgage Loans held in
the related Trust Fund, approximately in proportion to the ratio such excess
bears to such Certificate's allocable portion of the aggregate original issue
discount remaining to be accrued on such Mortgage Loans. The adjusted issue
price of a Mortgage Loan on any given day equals the sum of (i) the adjusted
issue price (or, in the case of the first accrual period, the issue price) of
such Mortgage Loan at the beginning of the accrual period that includes such day
and (ii) the daily portions of original issue discount for all days during such
accrual period prior to such day. The adjusted issue price of a Mortgage Loan at
the beginning of any accrual period will equal the issue price of such Mortgage
Loan, increased by the aggregate amount of original issue discount with respect
to such Mortgage Loan that accrued in prior accrual periods, and reduced by the
amount of any payments made on such Mortgage Loan in prior accrual periods of
amounts included in its stated redemption price.
In addition to its regular reports, the Trustee, unless otherwise provided in
the related Prospectus Supplement, will provide to any holder of a Grantor Trust
Fractional Interest Certificate such information as such holder may reasonably
request from time to time with respect to original issue discount accruing on
Grantor Trust Fractional Interest Certificates.
See "Grantor Trust Reporting" below.
MARKET DISCOUNT
If the stripped bond rules do not apply to the Grantor Trust Fractional
Interest Certificate, a Certificateholder may be subject to the market discount
rules of Sections 1276 through 1278 of the Code to the extent an interest in a
Mortgage Loan is considered to have been purchased at a "market discount," that
is, in the case of a Mortgage Loan issued without original issue discount, at a
purchase price less than its remaining stated redemption price (as defined
above, or in the case of a Mortgage Loan issued with original issue discount, at
a purchase price less than its adjusted issue price (as defined above). If
market discount is in excess of a de minimis amount (as described below), the
holder generally will be required to include in income in each month the amount
of such discount that has accrued (under the
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rules described in the next paragraph) through such month that has not
previously been included in income, but limited, in the case of the portion of
such discount that is allocable to any Mortgage Loan, to the payment of stated
redemption price on such Mortgage Loan that is received by (or, in the case of
accrual basis Certificateholders, due to) the Trust Fund in that month. A
Certificateholder may elect to include market discount in income currently as it
accrues (under a constant yield method based on the yield of the Certificate to
such holder) rather than including it on a deferred basis in accordance with the
foregoing. If made, such election will apply to all market discount bonds
acquired by such Certificateholder during or after the first taxable year to
which such election applies. In addition, the OID Regulations would permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were made with respect to
a Mortgage Loan with market discount, the Certificateholder would be deemed to
have made an election to include currently market discount in income with
respect to all other debt instruments having market discount that such
Certificateholder acquires during the taxable year of the election and
thereafter, and possibly previously acquired instruments. Similarly, a
Certificateholder that made this election for a Certificate acquired at a
premium would be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See "-REMICs-Taxation of Owners of REMIC
Regular Certificates-Premium" below. Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest is irrevocable.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report will apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
Certificateholder's option: (i) on the basis of a constant yield method, (ii) in
the case of a Mortgage Loan issued without original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the Mortgage Loan as of the beginning of the accrual period, or
(iii) in the case of a Mortgage Loan issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
original issue discount accrued in the accrual period bears to the total
original issue discount remaining at the beginning of the accrual period. The
prepayment assumption, if any, used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. The effect
of using a prepayment assumption could be to accelerate the reporting of such
discount income. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a Mortgage Loan purchased at a discount in the
secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans generally will be considered
to be de minimis if it is less than 0.25% of the stated redemption price of the
Mortgage Loans multiplied by the number of complete years to maturity remaining
after the date of its purchase. In interpreting a similar rule with respect to
original issue discount on obligations payable in installments, the OID
Regulations refer to the weighted average maturity of obligations, and it is
likely that the same rule will be applied with respect to market discount,
presumably taking into account the prepayment assumption used, if any. The
effect of using a prepayment assumption could be to accelerate the reporting of
such discount income. If
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market discount is treated as de minimis under the foregoing rule, it appears
that actual discount would be treated in a manner similar to original issue
discount of a de minimis amount. See "-Taxation of Owners of Grantor Trust
Fractional Interest Certificates-If Stripped Bond Rules Do Not Apply."
Further, under the rules described in "-REMICs-Taxation of Owners of REMIC
Regular Certificates-Market Discount," above, any discount that is not original
issue discount and exceeds a de minimis amount may require the deferral of
interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues.
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PREMIUM
If a Certificateholder is treated as acquiring the underlying Mortgage Loans
at a premium, that is, at a price in excess of their remaining stated redemption
price, such Certificateholder may elect under Section 171 of the Code to
amortize using a constant yield method the portion of such premium allocable to
Mortgage Loans originated after September 27, 1985. Amortizable premium is
treated as an offset to interest income on the related debt instrument, rather
than as a separate interest deduction. However, premium allocable to Mortgage
Loans originated before September 28, 1985 or to Mortgage Loans for which an
amortization election is not made, should be allocated among the payments of
stated redemption price on the Mortgage Loan and be allowed as a deduction as
such payments are made (or, for a Certificateholder using the accrual method of
accounting, when such payments of stated redemption price are due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss, equal to the difference between
the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a prepayment assumption
is used to amortize such premium, it appears that such a loss would be
unavailable. Instead, if a prepayment assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "REMICs-Taxation of Owners of REMIC Regular Certificates
- -Original Issue Discount." It is unclear whether any other adjustments would be
required to reflect differences between the prepayment assumption used, and the
actual rate of prepayments.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES
The "stripped coupon" rules of Section 1286 of the Code will apply to the
Grantor Trust Strip Certificates. Except as described above in "-Taxation of
Owners of Grantor Trust Fractional Interest Certificates-If Stripped Bond Rules
Apply," no regulations or published rulings under Section 1286 of the Code have
been issued and some uncertainty exists as to how it will be applied to
securities such as the Grantor Trust Strip Certificates. Accordingly, holders of
Grantor Trust Strip Certificates should consult their own tax advisors
concerning the method to be used in reporting income or loss with respect to
such Certificates.
The OID Regulations do not apply to "stripped coupons," although they provide
general guidance as to how the original issue discount sections of the Code will
be applied. In addition, the discussion below is subject to the discussion under
"Possible Application of Proposed Contingent Payment Rules" and assumes that the
holder of a Grantor Trust Strip Certificate will not own any Grantor Trust
Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount will
be required to be accrued in each month on the Grantor Trust Strip Certificates
based on a constant yield method. In effect, each holder of Grantor Trust Strip
Certificates would include as interest income in each month an amount equal to
the product of such holder's adjusted basis in such Grantor Trust Strip
Certificate at the beginning of such month and the yield of such Grantor Trust
Strip Certificate to such holder. Such yield would be calculated based on the
price paid for that Grantor Trust Strip Certificate by its holder and the
payments remaining to be made thereon at the time of the purchase, plus an
allocable portion of the servicing fees and expenses to be paid with respect to
the Mortgage Loans. See "-Taxation of Owners of Grantor Trust Fractional
Interest Certificates-If Stripped Bond Rules Apply" above.
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As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be made
in the amount and rate of accrual of such discount when prepayments do not
conform to such prepayment assumption. Regulations could be adopted applying
those provisions to the Grantor Trust Strip Certificates. It is unclear whether
those provisions would be applicable to the Grantor Trust Strip Certificates or
whether use of a prepayment assumption may be required or permitted in the
absence of such regulations. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Strip Certificate
or, with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. However, neither the Depositor nor the Trustee will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series who bought at that price. Prospective
purchasers of the Grantor Trust Strip Certificates should consult their own tax
advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a Mortgage
Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete Mortgage Loans, or if the Prepayment
Assumption is not used, then when a Mortgage Loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the Grantor Trust Strip Certificate that
is allocable to such Mortgage Loan.
POSSIBLE APPLICATION OF PROPOSED CONTINGENT PAYMENT RULES
The coupon stripping rules' general treatment of stripped coupons is to
regard them as newly issued debt instruments in the hands of each purchaser. To
the extent that payments on the Grantor Trust Strip Certificates would cease if
the Mortgage Loans were prepaid in full, the Grantor Trust Strip Certificates
could be considered to be debt instruments providing for contingent payments.
Under the OID Regulations, debt instruments providing for contingent payments
are not subject to the same rules as debt instruments providing for
noncontingent payments, but no final regulations have been promulgated with
respect to contingent payment debt instruments. Proposed regulations were
promulgated on December 16, 1994 regarding contingent payment debt instruments
but it appears that Grantor Trust Strip Certificates, due to their similarity to
other mortgage-backed securities (such as REMIC regular interests) that are
expressly excepted from the application of such proposed regulations, may be
excepted from such proposed regulations. Like the OID Regulations, such proposed
regulations do not specifically address securities, such as the Grantor Trust
Strip Certificates, that are subject to the stripped bond rules of Section 1286
of the Code.
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If the contingent payment rules under the proposed regulations were to apply,
the holder of a Grantor Trust Strip Certificate would be required to apply the
"noncontingent bond method". Under the "noncontingent bond method", the issuer
of a Grantor Trust Strip Certificate determines a projected payment schedule on
which interest will accrue. Holders of Grantor Trust Strip Certificates are
bound by the issuer's projected payment schedule. The projected payment schedule
consists of all noncontingent payments and a projected amount for each
contingent payment based on the projected yield (as described below) of the
Grantor Trust Strip Certificate.
The projected amount of each payment is determined so that the projected
payment schedule reflects the projected yield. The projected amount of each
payment must reasonably reflect the relative expected values of the payments to
be received by the holders of a Grantor Trust Strip Certificate. The projected
yield referred to above is a reasonable rate, not less than the "applicable
Federal rate" that, as of the issue date, reflects general market conditions,
the credit quality of the issuer, and the terms and conditions of the Mortgage
Loans. The holder of a Grantor Trust Strip Certificate would be required to
include as interest income in each month the adjusted issue price of the Grantor
Trust Strip Certificate at the beginning of the period multiplied by the
projected yield.
Assuming that a prepayment assumption were used, if the proposed regulations
or their principles were applied to Grantor Trust Strip Certificates, the amount
of income reported with respect thereto would be substantially similar to that
described under "Taxation of Owners of Grantor Trust Strip Certificates".
Certificateholders should consult their tax advisors concerning the possible
application of the contingent payment rules to the Grantor Trust Strip
Certificates.
SALES OF GRANTOR TRUST CERTIFICATES
Any gain or loss equal to the difference between the amount realized on the
sale of a Grantor Trust Certificate, recognized on the sale or exchange of a
Grantor Trust Certificate by an investor who holds such Grantor Trust
Certificate as a capital asset, will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial institutions)
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Certificate generally will equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions with respect to such Grantor Trust
Certificate. The Code as of the date of this Prospectus provides a top marginal
tax rate of 39.6% for individuals and a maximum marginal rate for long-term
capital gains of individuals of 28%. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be partially or
wholly ordinary and not capital in certain circumstances. Gain attributable to
accrued and unrecognized market discount will be treated as ordinary income, as
will gain or loss recognized by banks and other financial institutions subject
to Section 582(c) of the Code. Furthermore, a portion of any gain that might
otherwise be capital gain may be treated as ordinary income to the extent that
the Grantor Trust Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the taxpayer's
net investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the
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appropriate "applicable Federal rate" (which rate is computed and published
monthly by the IRS) at the time the taxpayer enters into the conversion
transaction, subject to appropriate reduction for prior inclusion of interest
and other ordinary income items from the transaction. Finally, a taxpayer may
elect to have net capital gain taxed at ordinary income rates rather than
capital gains rates in order to include such net capital gain in total net
investment income for that taxable year, for purposes of the rule that limits
the deduction of interest on indebtedness incurred to purchase or carry property
held for investment to a taxpayer's net investment income.
GRANTOR TRUST REPORTING
Unless otherwise provided in the related Prospectus Supplement, the Trustee
will furnish to each holder of a Grantor Trust Fractional Interest Certificate
with each distribution a statement setting forth the amount of such distribution
allocable to principal on the underlying Mortgage Loans and to interest thereon
at the related Pass-Through Rate. In addition, the Trustee will furnish, within
a reasonable time after the end of each calendar year, to each holder of a
Grantor Trust Certificate who was such a holder at any time during such year,
information regarding the amount of servicing compensation received by the
Master Servicer and sub-servicer (if any) and such other customary factual
information as the Trustee deems necessary or desirable to enable holders of
Grantor Trust Certificates to prepare their tax returns and will furnish
comparable information to the Service as and when required by law to do so.
Because the rules for accruing discount and amortizing premium with respect to
the Grantor Trust Certificates are uncertain in various respects, there is no
assurance the Service will agree with the Trustee's information reports of such
items of income and expense. Moreover, such information reports, even if
otherwise accepted as accurate by the Service, will in any event be accurate
only as to the initial Certificateholders that bought their Certificates at the
representative initial offering price used in preparing such reports.
BACKUP WITHHOLDING
In general, the rules described in "-REMICS-Backup Withholding with Respect
to REMIC Certificates" will also apply to Grantor Trust Certificates.
FOREIGN INVESTORS
In general, the discussion with respect to REMIC Regular Certificates in
"REMICS-Foreign Investors in REMIC Certificates-REMIC Regular Certificates"
applies to Grantor Trust Certificates except that Grantor Trust Certificates
will, unless otherwise disclosed in the related Prospectus Supplement, be
eligible for exemption from U.S. withholding tax, subject to the conditions
described in such discussion, only to the extent the related Mortgage Loans were
originated after July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
Certificateholder's trade or business in the United States, such Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
non-resident alien individual.
PARTNERSHIP TRUST FUNDS
CLASSIFICATION OF PARTNERSHIP TRUST FUNDS
With respect to each series of Partnership Certificates or Debt Certificates,
Thacher, Proffitt & Wood or Cadwalader, Wickersham & Taft, counsel to the
Depositor, as specified in the applicable Prospectus Supplement, will deliver
its opinion that the Trust Fund will not be
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a taxable mortgage pool or an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. This opinion will be
based on the assumption that the terms of the related Pooling and Servicing
Agreement and related documents will be complied with, and on counsel's
conclusions that (1) the Trust Fund will not have certain characteristics
necessary for a business trust to be classified as an association taxable as a
corporation and (2) the nature of the income of the Trust Fund will exempt it
from the rule that certain publicly traded partnerships are taxable as
corporations.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income on the
related Mortgage Loans, possibly reduced by its interest expense on the Debt
Certificates. Any such corporate income tax could materially reduce cash
available to make payments on the Debt Certificates and distributions on the
Partnership Certificates and Certificateholders could be liable for any such tax
that is unpaid by the Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN PARTNERSHIP CERTIFICATES AND DEBT
CERTIFICATES.
For federal income tax purposes, (i) Partnership Certificates and Debt
Certificates held by a thrift institution taxed as a "mutual savings bank" or
"domestic building and loan association" will not represent interests in
"qualifying real property loans" within the meaning of Code Section 593(d)(1);
(ii) Partnership Certificates and Debt Certificates held by a thrift institution
taxed as a domestic building and loan association will not constitute "loans ...
secured by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v); (iii) interest on Debt Certificates held by a real estate
investment trust will not be treated as "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Code Section 856(c)(3)(B), and Debt Certificates held by a real estate
investment trust will not constitute "real estate assets" or "Government
securities" within the meaning of Code Section 856(c)(5)(A), but Partnership
Certificates held by a real estate investment trust will qualify under those
sections based on the real estate investments trust's proportionate interest in
the assets of the Partnership Trust Fund based on capital accounts; and (iv)
Partnership Certificates and Debt Certificates held by a regulated investment
company will not constitute "Government securities" within the meaning of Code
Section 851(b)(4)(A)(i).
TAXATION OF DEBT CERTIFICATEHOLDERS
TREATMENT OF THE DEBT CERTIFICATES AS INDEBTEDNESS.
The Depositor will agree, and the Certificateholders will agree by their
purchase of Debt Certificates, to treat the Debt Certificates as debt for
federal income tax purposes. No regulations, published rulings, or judicial
decisions exist that discuss the characterization for federal income tax
purposes of securities with terms substantially the same as the Debt
Certificates. However, with respect to each series of Debt Certificates,
Thacher, Proffitt & Wood or Cadwalader, Wickersham & Taft, counsel to the
Depositor, as specified in the applicable Prospectus Supplement, will deliver
its opinion that the Debt Certificates will be classified as indebtedness for
federal income tax purposes. The discussion below assumes this characterization
of the Debt Certificates is correct.
If, contrary to the opinion of counsel, the IRS successfully asserted that
the Debt Certificates were not debt for federal income tax purposes, the Debt
Certificates might be treated as equity interests in the Partnership Trust. If
so, the Partnership Trust Fund might be taxable as a corporation with the
adverse consequences described above (and the taxable corporation would not be
able to deduct interest on the Debt Certificates).
Debt Certificates generally will be subject to the same rules of taxation as
REMIC Regular Certificates issued by a REMIC, as described above, except that
(i) income reportable on Debt
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Certificates is not required to be reported under the accrual method unless the
holder otherwise uses the accrual method and (ii) the special rule treating a
portion of the gain on sale or exchange of a REMIC Regular Certificate as
ordinary income is inapplicable to Debt Certificates. See "-- REMICs -- Taxation
of Owners of REMIC Regular Certificates" and "-Sales of REMIC Certificates."
TAXATION OF OWNERS OF PARTNERSHIP CERTIFICATES
TREATMENT OF THE PARTNERSHIP TRUST FUND AS A PARTNERSHIP.
If so specified in the applicable Prospectus Supplement, the Depositor will
agree, and the Certificateholders will agree by their purchase of Certificates,
to treat the Partnership Trust Fund as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
Partnership Trust Fund, the partners of the partnership being the
Certificateholders (including the Depositor), and the Debt Certificates (if any)
being debt of the partnership. However, the proper characterization of the
arrangement involving the Partnership Trust Fund, the Partnership Certificates,
the Debt Certificates, and the Depositor is not clear, because there is no
authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example, because
one or more of the classes of Partnership Certificates have certain features
characteristic of debt, the Partnership Certificates might be considered debt of
the Depositor or the Partnership Trust Fund. Any such characterization would not
result in materially adverse tax consequences to Certificateholders as compared
to the consequences from treatment of the Partnership Certificates as equity in
a partnership, described below. The following discussion assumes that the
Partnership Certificates represent equity interests in a partnership.
PARTNERSHIP TAXATION.
As a partnership, the Partnership Trust Fund will not be subject to federal
income tax. Rather, each Certificateholder will be required to separately take
into account such holder's allocated share of income, gains, losses, deductions
and credits of the Partnership Trust Fund. It is anticipated that the
Partnership Trust Fund's income will consist primarily of interest earned on the
Mortgage Loans (including appropriate adjustments for market discount, original
issue discount and bond premium) as described above under "-- Grantor Trust
Funds -Taxation of Owners of Grantor Trust Fractional Interest Certificates --
If Stripped Bond Ruled Do Not Apply --", "-- Market Discount" and "--Premium")
and any gain upon collection or disposition of Mortgage Loans. The Partnership
Trust Fund's deductions will consist primarily of interest accruing with respect
to the Debt Certificates, servicing and other fees, and losses or deductions
upon collection or disposition of Debt Certificates.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Pooling and Servicing Agreement and related documents). The Pooling and
Servicing Agreement will provide, in general, that the Certificateholders will
be allocated taxable income of the Partnership Trust Fund for each Due Period
equal to the sum of (i) the interest that accrues on the Partnership
Certificates in accordance with their terms for such Due Period, including
interest accruing at the applicable pass-through rate for such Due Period and
interest on amounts previously due on the Partnership Certificates but not yet
distributed; (ii) any Partnership Trust Fund income attributable to discount on
the Mortgage Loans that corresponds to any excess of the principal amount of the
Partnership Certificates over their initial issue price; and (iii) any other
amounts of income payable to the Certificateholders for such Due Period. Such
allocation will be reduced by any amortization by the Partnership Trust Fund of
premium on Mortgage Loans that corresponds to any excess of the issue price of
Partnership Certificates over their
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principal amount. All remaining taxable income of the Partnership Trust Fund
will be allocated to the Depositor. Based on the economic arrangement of the
parties, this approach for allocating Partnership Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire pass-through rate
plus the other items described above even though the Trust Fund might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Partnership
Certificates on the accrual basis and Certificateholders may become liable for
taxes on Partnership Trust Fund income even if they have not received cash from
the Partnership Trust Fund to pay such taxes.
All of the taxable income allocated to a Certificateholder that is a pension,
profit sharing or employee benefit plan or other tax-exempt entity (including an
individual retirement account) will constitute "unrelated business taxable
income" generally taxable to such a holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of the
Master Servicer but not interest expense) allocable to an individual, estate or
trust Certificateholder would be miscellaneous itemized deductions subject to
the limitations described above under "-- Grantor Trust Funds -- Taxation of
Owners of Grantor Trust Fractional Interest Certificates." Accordingly, such
deductions might be disallowed to the individual in whole or in part and might
result in such holder being taxed on an amount of income that exceeds the amount
of cash actually distributed to such holder over the life of the Partnership
Trust Fund.
Discount income or premium amortization with respect to each Mortgage Loan
would be calculated in a manner similar to the description above under "--
Grantor Trust Funds -Taxation of Owners of Grantor Trust Fractional Interest
Certificates -- If Stripped Bond Rules Do Not Apply." Notwithstanding such
description, it is intended that the Partnership Trust Fund will make all tax
calculations relating to income and allocations to Certificateholders on an
aggregate basis with respect to all Mortgage Loans held by the Partnership Trust
Fund rather than on a Mortgage Loan-by-Mortgage Loan basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Partnership Trust Fund might be required to incur additional expense, but it is
believed that there would not be a material adverse effect on
Certificateholders.
DISCOUNT AND PREMIUM.
Unless indicated otherwise in the applicable Prospectus Supplement, it is not
anticipated that the Mortgage Loans will have been issued with original issue
discount and, therefore, the Partnership Trust Fund should not have original
issue discount income. However, the purchase price paid by the Partnership Trust
Fund for the Mortgage Loans may be greater or less than the remaining principal
balance of the Mortgage Loans at the time of purchase. If so, the Mortgage Loans
will have been acquired at a premium or discount, as the case may be. See "--
Grantor Trust Funds -- Taxation of Owners of Grantor Trust Fractional Interest
Certificates -- Market Discount" and "Premium." (As indicated above, the
Partnership Trust Fund will make this calculation on an aggregate basis, but
might be required to recompute it on a Mortgage Loan-by-Mortgage Loan basis).
If the Partnership Trust Fund acquires the Mortgage Loans at a market
discount or premium, the Partnership Trust Fund will elect to include any such
discount in income currently as it accrues over the life of the Mortgage Loans
or to offset any such premium against interest income on the Mortgage Loans. As
indicated above, a portion of such market discount income or premium deduction
may be allocated to Certificateholders.
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SECTION 708 TERMINATION.
Under Section 708 of the Code, the Partnership Trust Fund will be deemed to
terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, the Partnership Trust Fund will
be considered to distribute its assets to the partners, who would then be
treated as recontributing those assets to the Partnership Trust Fund, as a new
partnership. The Partnership Trust Fund will not comply with certain technical
requirements that might apply when such a constructive termination occurs. As a
result, the Partnership Trust Fund may be subject to certain tax penalties and
may incur additional expenses if it is required to comply with those
requirements. Furthermore, the Partnership Trust Fund might not be able to
comply due to lack of data. Under proposed Treasury regulations, the foregoing
treatment would be replaced by a new regime under which a 50% or greater
transfer, as described above, would cause a deemed contribution of the assets of
a Partnership Trust Fund (the "old partnership") to a new Partnership Trust Fund
(the "new partnership") in exchange for interests in the new partnership. Such
interests would be deemed distributed to the partners of the old partnership in
liquidation thereof, which would not constitute a sale or exchange. It is not
known when or whether such proposed Treasury regulations will be adopted in
final (or temporary) form.
DISPOSITION OF CERTIFICATES.
Generally, capital gain or loss will be recognized on a sale of Partnership
Certificates in an amount equal to the difference between the amount realized
and the seller's tax basis in the Partnership Certificates sold. A
Certificateholder's tax basis in an Partnership Certificate will generally equal
the holder's cost increased by the holder's share of Partnership Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Partnership Certificate. In addition, both the tax basis in the
Partnership Certificates and the amount realized on a sale of an Partnership
Certificate would include the holder's share of the Debt Certificates and other
liabilities of the Partnership Trust Fund. A holder acquiring Partnership
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Partnership Certificates, and, upon sale or other
disposition of some of the Partnership Certificates, allocate a portion of such
aggregate tax basis to the Partnership Certificates sold (rather than
maintaining a separate tax basis in each Partnership Certificate for purposes of
computing gain or loss on a sale of that Partnership Certificate).
Any gain on the sale of an Partnership Certificate attributable to the
holder's share of unrecognized accrued market discount on the Mortgage Loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a Certificateholder is required to recognize an aggregate amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Partnership Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Partnership Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES.
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will be
apportioned among the Certificateholders in proportion to the principal amount
of Partnership Certificates owned by them as of the close of the last day of
such Due Period. As a result, a holder purchasing
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Partnership Certificates may be allocated tax items (which will affect its tax
liability and tax basis) attributable to periods before the actual transaction.
The use of such a Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the Certificateholders.
The Depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
SECTION 731 DISTRIBUTIONS.
In the case of any distribution to a Certificateholder, no gain will be
recognized to that Certificateholder to the extent that the amount of any money
distributed with respect to such Certificate exceeds the adjusted basis of such
Certificateholder's interest in the Certificate. To the extent that the amount
of money distributed exceeds such Certificateholder's adjusted basis, gain will
be currently recognized. In the case of any distribution to a Certificateholder,
no loss will be recognized except upon a distribution in liquidation of a
Certificateholder's interest. Any gain or loss recognized by a Certificateholder
will be capital gain or loss.
SECTION 754 ELECTION.
In the event that a Certificateholder sells its Partnership Certificates at a
profit (loss), the purchasing Certificateholder will have a higher (lower) basis
in the Partnership Certificates than the selling Certificateholder had. The tax
basis of the Partnership Trust Fund's assets would not be adjusted to reflect
that higher (or lower) basis unless the Partnership Trust Fund were to file an
election under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Partnership
Trust Fund will not make such election. As a result, Certificateholder might be
allocated a greater or lesser amount of Partnership Trust Fund income than would
be appropriate based on their own purchase price for Partnership Certificates.
ADMINISTRATIVE MATTERS.
The Trustee is required to keep or have kept complete and accurate books of
the Partnership Trust Fund. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Partnership Trust Fund and will report each Certificateholder's
allocable share of items of Partnership Trust Fund income and expense to holders
and the IRS on Schedule K-1. The Trustee will provide the Schedule K-1
information to nominees that fail to provide the Partnership Trust Fund with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Partnership
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Partnership Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Certificates as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership
Certificates so held. Such information includes (i) the name, address and
taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly-owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Partnership Certificates that were held, bought or sold on behalf of such person
throughout the year. In addition, brokers and financial institutions that hold
Partnership Certificates
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through a nominee are required to furnish directly to the Trustee information as
to themselves and their ownership of Partnership Certificates. A clearing agency
registered under Section17A of the Exchange Act is not required to furnish any
such information statement to the Partnership Trust Fund. The information
referred to above for any calendar year must be furnished to the Partnership
Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Partnership Trust Fund with the
information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the Pooling
and Servicing Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may be
precluded from separately litigating a proposed adjustment to the items of the
Partnership Trust Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the income
and losses of the Partnership Trust Fund.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS.
It is not clear whether the Partnership Trust Fund would be considered to be
engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to non-U.S. persons, because there is no clear
authority dealing with that issue under facts substantially similar to those
described herein. Although it is not expected that the Partnership Trust Fund
would be engaged in a trade or business in the United States for such purposes,
the Partnership Trust Fund will withhold as if it were so engaged in order to
protect the Partnership Trust Fund from possible adverse consequences of a
failure to withhold. The Partnership Trust Fund expects to withhold on the
portion of its taxable income that is allocable to foreign Certificateholders
pursuant to Section 1446 of the Code, as if such income were effectively
connected to a U.S. trade or business, at a rate of 35% for foreign holders that
are taxable as corporations and 39.6% for all other foreign holders. Amounts
withheld will be deemed distributed to the foreign certificateholders.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Partnership Trust Fund to change
its withholding procedures. In determining a holder's withholding status, the
Partnership Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or corporate
income tax return (including, in the case of a corporation, the branch profits
tax) on its share of the Partnership Trust Fund's income. Each foreign holder
must obtain a taxpayer identification number from the IRS and submit that number
to the Partnership Trust Fund on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign holder generally would be entitled to
file with the IRS a claim for refund with respect to taxes withheld by the
Partnership Trust Fund, taking the position that no taxes were due because the
Partnership Trust Fund was not engaged in a U.S. trade or business. However,
interest payment made (or accrued) to a Certificateholder who is a foreign
person generally will be considered guaranteed payments to the extent such
payments are determined without regard to the income of the Partnership Trust
Fund. If these interest payments are properly characterized as guaranteed
payments, then the interest will not be considered "portfolio interest." As a
result, Certificateholders who are foreign persons will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be entitled to claim a refund
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for that portion of the taxes in excess of the taxes that should be withheld
with respect to the guaranteed payments.
BACKUP WITHHOLDING.
Distributions made on the Partnership Certificates and proceeds from the sale
of the Partnership Certificates will be subject to a "backup" withholding tax of
31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A CERTIFICATEHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF REMIC CERTIFICATES, GRANTOR TRUST CERTIFICATES, PARTNERSHIP
CERTIFICATES AND DEBT CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences", potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Certificates offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the certificates
offered hereunder.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on employee benefit plans and on
certain other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts in which such plans, accounts or arrangements are invested that are
subject to the fiduciary responsibility provisions of ERISA and Section 4975 of
the Code ("Plans") and on persons who are fiduciaries with respect to such Plans
in connection with the investment of Plan assets. Certain employee benefit
plans, such as governmental plans (as defined in ERISA Section 3(32)), and, if
no election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Certificates without regard
to the ERISA considerations described below, subject to the provisions of other
applicable federal and state law. Any such plan which is qualified and exempt
from taxation under Sections 401(a) and 501(a) of the Code, however, is subject
to the prohibited transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, ERISA and the Code prohibit a broad range of
transactions involving assets of a Plan and persons ("Parties in Interest") who
have certain specified relationships to the Plan unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975
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of the Code, unless a statutory or administrative exemption is available. These
prohibited transactions generally are set forth in Section 406 of ERISA and
Section 4975 of the Code.
A Plan's investment in Certificates may cause the Mortgage Loans, Agency
Securities, Private Mortgage-Backed Securities and other assets included in a
related Trust Fund to be deemed Plan assets. Section 2510.3-101 of the
regulations of the United States Department of Labor ("DOL") provides that when
a Plan acquires an equity interest in an entity, the Plan's assets include both
such equity interest and an undivided interest in each of the underlying assets
of the entity, unless certain exceptions not applicable here apply, or unless
the equity participation in the entity by "benefit plan investors" (i.e., Plans
and certain employee benefit plans not subject to ERISA) is not "significant",
both as defined therein. For this purpose, in general, equity participation by
benefit plan investors will be "significant" on any date if 25% or more of the
value of any class of equity interests in the entity is held by benefit plan
investors. Equity participation in a Trust Fund will be significant on any date
if immediately after the most recent acquisition of any Certificate, 25% or more
of any class of Certificates is held by benefit plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Mortgage Loans, Agency Securities, Private Mortgage-Backed
Securities and other assets included in a Trust Fund constitute Plan assets,
then any party exercising management or discretionary control regarding those
assets, such as the Master Servicer or any Sub-Servicer, may be deemed to be a
Plan "fiduciary" and thus subject to the fiduciary responsibility provisions and
prohibited transaction provisions of ERISA and the Code with respect to the
investing Plan. In addition, if the Mortgage Loans, Agency Securities, Private
Mortgage-Backed Securities and other assets included in a Trust Fund constitute
Plan assets, the purchase of Certificates by a Plan, as well as the operation of
the Trust Fund, may constitute or involve a prohibited transaction under ERISA
and the Code.
The DOL issued an individual exemption, Prohibited Transaction Exemption
89-89 (the "Exemption"), on October 17, 1989 to Salomon Brothers Inc, which
generally exempts from the application of the prohibited transaction provisions
of Section 406 of ERISA, and the excise taxes imposed on such prohibited
transactions pursuant to Section 4975(a) and (b) of the Code and Section 502(i)
of ERISA, certain transactions, among others, relating to the servicing and
operation of mortgage pools and the purchase, sale and holding of mortgage
pass-through certificates underwritten by an Underwriter (as hereinafter
defined), provided that certain conditions set forth in the Exemption are
satisfied. For purposes of this Section "ERISA Considerations," the term
"Underwriter" shall include (a) Salomon Brothers Inc, (b) any person directly or
indirectly, through one or more intermediaries, controlling, controlled by or
under common control with Salomon Brothers Inc and (c) any member of the
underwriting syndicate or selling group of which a person described in (a) or
(b) is a manager or co-manager with respect to a class of Certificates.
The Exemption sets forth six general conditions which must be satisfied for a
transaction involving the purchase, sale and holding of Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by a Plan must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
Exemption only applies to Certificates evidencing rights and interests not
subordinated to the rights and interests evidenced by the other Certificates of
the same series. Third, the Certificates at the time of acquisition by the Plan
must be rated in one of the three highest generic rating categories by Standard
& Poor's Corporation, Moody's Investors Service, Inc., Duff & Phelps, Inc. or
Fitch Investors Service, Inc. Fourth, the Trustee cannot be an affiliate of any
member of the "Restricted Group" which consists of any Underwriter, the
Depositor, the Trustee, the Master Servicer, any Sub-Servicer and any mortgagor
with
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respect to Trust Fund Assets constituting more than 5% of the aggregate
unamortized principal balance of the Trust Fund Assets in the related Trust Fund
as of the date of initialissuance of the Certificates. Fifth, the sum of all
payments made to and retained by the Underwriter(s) must represent 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
Trust Fund Assets to the related Trust Fund must represent not more than the
fair market value of such obligations; and the sum of all payments made to and
retained by the Master Servicer and any Sub-Servicer must represent not more
than reasonable compensation for such person's services under the related
Pooling and Servicing Agreement and reimbursement of such person's reasonable
expenses in connection therewith. Sixth, the investing Plan must be 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, as amended.
A fiduciary of a Plan contemplating purchasing a Certificate must make its
own determination that the general conditions set forth above will be satisfied
with respect to such Certificate.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407 of
ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Sections 4975(c)(1)(A) through (D) of the Code) in connection
with the direct or indirect sale, exchange, transfer, holding or the direct or
indirect acquisition or disposition in the secondary market of Certificates by
Plans. However, no exemption is provided from the restrictions of Sections
406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding of a
Certificate on behalf of an "Excluded Plan" by any person who has discretionary
authority or renders investment advice with respect to the assets of such
Excluded Plan. For purposes of the Certificates, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with (1) the direct or indirect sale, exchange or
transfer of Certificates in the initial issuance of Certificates between the
Depositor or an Underwriter and a Plan when the person who has discretionary
authority or renders investment advice with respect to the investment of Plan
assets in the Certificates is (a) a mortgagor with respect to 5% or less of the
fair market value of the Trust Fund Assets or (b) an affiliate of such a person,
(2) the direct or indirect acquisition or disposition in the secondary market of
Certificates by a Plan and (3) the holding of Certificates by a Plan.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 of ERISA, and the taxes imposed by Sections 4975(a) and
(b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the Mortgage Pools.
The Depositor expects that the specific conditions of the Exemption required for
this purpose will be satisfied with respect to the Certificates so that the
Exemption would provide an exemption from the restrictions imposed by Sections
406(a) and (b) of ERISA (as well as the excise taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code) for transactions
in connection with the servicing, management and operation of the Mortgage
Pools, provided that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed by
Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if such restrictions are deemed to otherwise apply merely because a person is
deemed to be a "party in interest" (within the
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meaning of Section 3(14) of ERISA) or a "disqualified person" (within the
meaning of Section 4975(e)(2) of the Code) with respect to an investing Plan by
virtue of providing services tothe Plan (or by virtue of having certain
specified relationships to such a person) solely as a result of the Plan's
ownership of Certificates.
Before purchasing a Certificate, a fiduciary of a Plan should itself confirm
(a) that the Certificates constitute "certificates" for purposes of the
Exemption and (b) that the specific and general conditions set forth in the
Exemption and the other requirements set forth in the Exemption would be
satisfied. In addition to making its own determination as to the availability of
the exemptive relief provided in the Exemption, the Plan fiduciary should
consider its general fiduciary obligations under ERISA in determining whether to
purchase any Certificates on behalf of a Plan.
Any Plan fiduciary which proposes to cause a Plan to purchase Certificates
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to such investment and the availability of the Exemption or
any other prohibited transaction exemption in connection therewith, in
particular, in connection with a contemplated purchase of Certificates
representing a beneficial ownership interest in a pool of single-family
residential first mortgage loans, Prohibited Transaction Class Exemption 83-1
("PTCE 83-1") for certain transactions involving mortgage pool investment
trusts. The Prospectus Supplement with respect to a series of Certificates may
contain additional information regarding the application of the Exemption, PTCE
83-1, or any other exemption, with respect to the Certificates offered thereby.
In addition, any Plan fiduciary that proposes to cause a Plan to purchase Strip
Certificates should consider the federal income tax consequences of such
investment.
ANY PLAN FIDUCIARY CONSIDERING WHETHER TO PURCHASE A CERTIFICATE ON BEHALF OF
A PLAN SHOULD CONSULT WITH ITS COUNSEL REGARDING THE APPLICABILITY OF THE
FIDUCIARY RESPONSIBILITY AND PROHIBITED TRANSACTION PROVISIONS OF ERISA AND THE
CODE TO SUCH INVESTMENT.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Certificates will specify which
classes of Certificates of such series, if any, will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Any class of Certificates that is not rated in one of the
two highest rating categories by one or more nationally recognized statistical
rating agencies or that represents an interest in a Trust Fund that includes
junior Mortgage Loans will not constitute "mortgage related securities" for
purposes of SMMEA "Mortgage related securities" are legal investments to the
same extent that, under applicable law, obligations issued by or guaranteed as
to principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, insurance companies and pension funds created pursuant
to or existing under the laws of the United States or of any state, the
authorized investments of which are subject to state regulation). Under SMMEA,
if a state enacted legislation prior to October 3, 1991 specifically limiting
the legal investment authority of any such entities with respect to "mortgage
related securities", the Certificates would constitute legal investments for
entities subject to such legislation only to the extent provided in such
legislation. SMMEA provides, however, that in no event will the enactment of any
such legislation affect the validity of any contractual commitment to purchase,
hold or invest in "mortgage related securities", or require the sale or other
disposition of such securities, so long as such contractual commitment was made
or such securities acquired prior to the enactment of such legislation.
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SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
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 OR ARE SUBJECT TO INVESTMENT, CAPITAL OR OTHER
RESTRICTIONS, AND, IF APPLICABLE, WHETHER SMMEA HAS BEEN OVERRIDDEN IN ANY
JURISDICTION RELEVANT TO SUCH INVESTOR.
METHODS OF DISTRIBUTION
The Certificates offered hereby and by the Supplements to this Prospectus
will be offered in series. The distribution of the Certificates may be effected
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Certificates will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Salomon Brothers Inc ("Salomon")
acting as underwriter with other underwriters, if any, named therein. In such
event, the Prospectus Supplement may also specify that the underwriters will not
be obligated to pay for any Certificates agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the Depositor. In connection with
the sale of the Certificates, underwriters may receive compensation from the
Depositor or from purchasers of the Certificates in the form of discounts,
concessions or commissions. The Prospectus Supplement will describe any such
compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that the Certificates
will be distributed by Salomon acting as agent or in some cases as principal
with respect to Certificates which it has previously purchased or agreed to
purchase. If Salomon acts as agent in the sale of Certificates, Salomon will
receive a selling commission with respect to each series of Certificates,
depending on market conditions, expressed as a percentage of the aggregate
principal balance of the related Mortgage Loans as of the Cut-off Date. The
exact percentage for each series of Certificates will be disclosed in the
related Prospectus Supplement. To the extent that Salomon elects to purchase
Certificates as principal, Salomon may realize losses or profits based upon the
difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Depositor and purchasers of
Certificates of such series.
The Depositor will indemnify Salomon and any underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments Salomon and any underwriters may be required to make
in respect thereof.
In the ordinary course of business, Salomon and the Depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the Depositor's mortgage loans pending the sale
of such mortgage loans or interests therein, including the Certificates.
125
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The Depositor anticipates that the Certificates will be sold primarily to
institutional investors. Purchasers of Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Certificates. Certificateholders should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
As to each series of Certificates, only those classes rated in one of the
four highest rating categories by any Rating Agency will be offered hereby. Any
unrated class may be initially retained by the Depositor, and may be sold by the
Depositor at any time to one or more institutional investors.
LEGAL MATTERS
Certain legal matters in connection with the Certificates will be passed upon
for the Depositor by Thacher Proffitt & Wood, New York, New York or Cadwalader,
Wickersham & Taft, New York, New York.
FINANCIAL INFORMATION
The Depositor has determined that its financial statements are not material
to the offering made hereby. Any prospective purchaser that desires to review
financial information concerning the Depositor will be provided by the Depositor
on request with a copy of the most recent financial statements of the Depositor.
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INDEX OF PRINCIPAL DEFINITIONS
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
Accrual Certificates .....................................................6
Accrued Certificate Interest ............................................43
Agency Securities ........................................................1
Agreement ...............................................................34
ARM Loans ............................................................7, 15
Available Distribution Amount ...........................................42
Bankruptcy Amount .......................................................54
BIF .....................................................................32
Buydown Account .........................................................41
Buydown Funds ...........................................................18
Buydown Mortgage Loans ..................................................17
Buydown Period ..........................................................18
Certificate .............................................................34
Certificate Account ..................................................9, 39
Certificate Guarantee Insurance .........................................61
Certificate Principal Balance ........................................5, 43
Certificates .............................................................5
Charter Act .............................................................24
Closing Date ............................................................83
Code .............................................................6, 35, 80
Commission ...............................................................4
Committee Report ........................................................83
Contracts ...............................................................15
Contributions Tax .......................................................95
Cooperative ..........................................................7, 15
Cooperative Loans ....................................................7, 15
Cooperative Notes .......................................................20
Cooperative Unit ........................................................15
Credit Support ......................................................10, 35
Cut-off Date ............................................................10
Defaulted Mortgage Amount ...............................................54
Deficient Valuation .....................................................44
Deleted Mortgage Loan ...................................................37
Depositor ...............................................................15
Determination Date ......................................................42
Distribution Date .......................................................10
DOL ....................................................................116
DTC .....................................................................34
Due Period ..............................................................42
ERISA ..............................................................13, 116
Excluded Plan ..........................................................118
Exemption ..............................................................117
FDIC ....................................................................32
FHA ......................................................................8
FHA Loans ...............................................................20
FHLMC ....................................................................1
FHLMC Act ...............................................................22
FHLMC Certificates .......................................................8
FNMA .....................................................................1
FNMA Certificates ........................................................8
FTC Rule ................................................................76
Garn-St Germain Act .....................................................76
GNMA .....................................................................1
GNMA Certificates ........................................................8
GNMA Issuer .............................................................20
Grantor Trust Certificates ..........................................11, 81
127
<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
Grantor Trust Fractional Interest Certificate............................99
Grantor Trust Fractional Interest Certificates...........................12
Grantor Trust Fund.......................................................81
Grantor Trust Strip Certificate..........................................99
Grantor Trust Strip Certificates.........................................12
Guaranty Agreement.......................................................21
Holder-in-Due-Course.....................................................76
Housing Act..............................................................20
HUD......................................................................64
Insurance Instruments....................................................47
Insurance Proceeds.......................................................40
Interest Rate.........................................................7, 15
IRS......................................................................84
Issue Premium............................................................90
Letter of Credit Bank....................................................956
Liquidated Loan..........................................................44
Liquidation Proceeds.....................................................40
Loan-to-Value Ratio......................................................16
Lockout Period...........................................................28
Manufacturer's Invoice Price.............................................17
Master Servicer...........................................................5
Mortgage Loan Seller.....................................................15
Mortgage Loans.........................................................1, 7
Mortgage Notes...........................................................19
Mortgage Pool.............................................................7
Mortgaged Properties....................................................7, 15
Mortgages................................................................19
Multifamily Loans........................................................15
Multifamily Properties...................................................15
Net Interest Rate........................................................36
Nonrecoverable Advance...................................................45
OID Regulations..........................................................81
Originator...............................................................15
Parties in Interest.....................................................116
Pass-Through Rate.........................................................5
Permitted Investments....................................................39
Plans...................................................................116
PMBS Agreement...........................................................25
PMBS Issuer..............................................................26
PMBS Servicer............................................................26
PMBS Trustee.............................................................26
Prepayment Assumption...............................................83, 102
Prepayment Period........................................................28
Private Mortgage-Backed Securities........................................1
Prohibited Transactions Tax..............................................95
Proposed Mark-to-Market Regulations......................................93
PTCE 83-1...............................................................118
Purchase Price...........................................................33
Rating Agency............................................................36
Record Date..............................................................42
Related Proceeds.........................................................45
Relief Act...............................................................80
REMIC....................................................................81
REMIC Certificates.......................................................81
REMIC Provisions.........................................................81
REMIC Regular Certificates...........................................11, 81
REMIC Regulations........................................................81
128
<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
REMIC Residual Certificates..........................................11, 81
Reserve Fund.............................................................61
Reserve Funds............................................................56
Restricted Group........................................................117
Retained Interest........................................................35
SAIF.....................................................................32
Sales of Grantor Trust Certificates.....................................101
Salomon.............................................................13, 120
Scheduled Principal Balance..............................................55
Senior Certificates................................................5, 6, 35
Senior Liens.............................................................16
Senior Percentage........................................................44
Senior/Subordinate Series................................................35
Single Family Loans......................................................15
Single Family Properties.................................................15
SMMEA...............................................................13, 119
Special Hazard Amount....................................................54
Special Hazard Realized Losses...........................................55
Special Hazard Subordination Amount......................................55
Stated Principal Balance.................................................34
Strip Certificates....................................................6, 35
Stripped Interest........................................................27
Sub-Servicer.............................................................47
Sub-Servicing Account....................................................40
Sub-Servicing Agreement..................................................48
Subordinate Certificates...........................................5, 6, 35
Substitute Mortgage Loan.................................................37
Tiered REMICs............................................................82
Title V..................................................................78
Title VIII...............................................................79
Trust Fund.............................................................1, 5
Trust Fund Asset..........................................................5
Trustee...................................................................5
Underwriter.............................................................117
United States person.....................................................98
Unrecovered Senior Portion...............................................55
VA Loans.................................................................20
Window Period Loans......................................................77
129
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO
NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH SOLICITATION.
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Summary of Prospectus Supplement.................................. S-3
Risk Factors...................................................... S-18
The Mortgage Pool................................................. S-19
Yield on the Certificates......................................... S-38
Description of the Certificates................................... S-45
Pooling and Servicing Agreement................................... S-60
The Insurer....................................................... S-64
Certain Federal Income Tax Consequences........................... S-66
Method of Distribution............................................ S-68
Secondary Market.................................................. S-68
Legal Opinions.................................................... S-68
Experts........................................................... S-68
Ratings........................................................... S-69
Legal Investment.................................................. S-68
ERISA Considerations.............................................. S-70
PROSPECTUS
Summary of Prospectus............................................. 5
The Trust Funds................................................... 14
Use of Proceeds................................................... 26
Yield Considerations.............................................. 26
Maturity and Prepayment Considerations............................ 27
The Depositor..................................................... 29
Mortgage Loan Program............................................. 29
Description of the Certificates................................... 33
Description of Credit Support..................................... 53
Description of Primary Insurance Policies......................... 61
Certain Legal Aspects of Mortgage Loans........................... 63
Certain Federal Income Tax Consequences........................... 79
State and Other Tax Consequences.................................. 108
Erisa Considerations.............................................. 108
Legal Investment.................................................. 111
Methods of Distribution........................................... 112
Legal Matters..................................................... 112
Financial Information............................................. 113
Index of Principal Definitions.................................... 114
UNTIL SEPTEMBER 23, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
SALOMONDBROTHERSVINCA PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN WHICH IT
RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
PROSPECTUS SUPPLEMENTPROSPECTUS SUPPLEMENT AND DATEDEJUNE 25,N1996ING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTION.
<PAGE>
$131,301,927 (APPROXIMATE)
ASSET-BACKED FIXED AND FLOATING
RATE CERTIFICATES, SERIES 1996-3
SALOMON BROTHERS MORTAGE
SECURITIES VII, INC.
DEPOSITOR
BERKELEY FEDERAL BANK AND TRUST FSB
MORTGAGE LOAN SELLER AND MASTER SERVICER
- --------------------------------------
SALOMON BROTHERS INC
- --------------------------------------
PROSPECTUS SUPPLEMENT
DATED JUNE 25, 1996
