Prospectus Supplement
(To Prospectus Dated September 20, 1996)
Trust Certificates, Series 1996-4A
Salomon Brothers Mortgage Securities VII, Inc.
Depositor
The Trust Certificates, Series 1996-4A, will consist of two classes of
certificates (together, the "Trust Certificates"), designated as the Class 4A-A1
Certificates and the Class 4A-A2 Certificates. All of the Trust Certificates are
offered hereby.
The Trust Certificates represent in the aggregate the entire beneficial
ownership interest in a separate asset of a trust fund (the "Trust Fund"), such
separate asset consisting of The Prudential Home Mortgage Securities Company,
Inc. ("PHMSC"), Mortgage Pass-Through Certificates, Series 1994-8, Class A-5
(the "Underlying Certificates"), representing a partial, senior interest in a
separate trust fund consisting primarily of a pool (the "Mortgage Pool") of
conventional, fixed-rate, fully-amortizing, one- to four-family residential
mortgage loans having original terms to maturity of 30 years (the "Mortgage
Loans") and having an aggregate Scheduled Principal Balance (as defined herein)
as of August 30, 1996 (the "Reference Date"), of approximately $402,135,406,
which Mortgage Loans were previously pooled by PHMSC. Certain characteristics of
the Mortgage Loans are described under "The Mortgage Pool" herein. As of
September 30, 1996 (the "Delivery Date"), the Certificate Principal Balance of
the Underlying Certificates will be approximately $49,000,000. The Underlying
Certificates are rated "AAA" by Fitch Investors Service, Inc. ("Fitch") and
"Aaa" by Moody's Investors Service, Inc. ("Moody's"). It is a condition to the
issuance of the Trust Certificates that they be rated "AAA" by Standard & Poor's
Ratings Services ("S&P").
The Trust 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 Trust Certificates as so registered
(the "Book-Entry Certificates") will be represented by book entries on the
records of participating members of DTC. Definitive certificates will be
available for the Book-Entry Certificates only under the limited circumstances
described herein. See "Description of the Trust Certificates-Registration of the
Book-Entry Certificates" herein.
(cover continued on next page)
The yield to maturity on the Trust Certificates will be sensitive to the rate
and timing of principal payments on the Underlying Certificates, which in turn
will be affected by the rate and timing of principal payments (including
prepayments and repurchases) and defaults on the Mortgage Loans, which may
fluctuate significantly from time to time. A slower (faster) than anticipated
rate of principal prepayments on the Mortgage Loans will have a negative effect
on the yield to maturity of the Trust Certificates if such Trust Certificates
are purchased at a discount (premium). See "Summary of the Prospectus
Supplement--Special--Prepayment Considerations" and "--Special Yield
Considerations" and "Yield on the Trust Certificates" herein.
THE TRUST CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR OR THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES AND THE
UNDERLYING CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF PHMSC,
THE UNDERLYING TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. NONE OF THE TRUST
CERTIFICATES, THE UNDERLYING CERTIFICATES OR THE 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.
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Initial Certificate Pass-Through
Class Principal Balance(1) Rate
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4A-A1..................... $ 12,250,000 6.860%
4A-A2..................... $ 36,750,000 6.860%
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(1) Approximate.
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The Trust 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 Trust Certificates,
before deducting expenses payable by the Depositor, will be approximately 94.60%
of the initial Certificate Principal Balance of the Trust Certificates, plus
accrued interest from September 1, 1996.
The Trust 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 Trust Certificates will be made through the
facilities of the Depository Trust Company on or about September 30, 1996.
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Salomon Brothers Inc
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The date of this Prospectus Supplement is September 30, 1996.
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(cover continued)
Except as provided herein, distributions on the Trust Certificates will be made
on each Distribution Date, which will be the second business day following each
Underlying Distribution Date, commencing in October 1996. The Underlying
Distribution Date will be the 25th day of each calendar month or, if such 25th
day is not a business day, then the next succeeding business day. As described
more fully herein, interest will accrue on the Trust Certificates based on the
Pass-Through Rate thereon and the then outstanding Certificate Principal
Balances thereof. Distributions of accrued interest on each class of Trust
Certificates will be made on each Distribution Date. Distributions allocable to
principal of the Trust Certificates will be made in accordance with the
priorities described herein on each Distribution Date with respect to which
distributions of principal are made on the Underlying Certificates on the
related Underlying Distribution Date.
There is currently no secondary market for the Trust Certificates and there can
be no assurance that a secondary market for the Trust Certificates will develop.
Salomon Brothers Inc (the "Underwriter") intends to establish a market in the
Trust Certificates but is not obligated to do so. There is no assurance that any
such market, if established, will continue. See "Secondary Market" herein.
No election will be made to treat the Trust Fund as a "real estate mortgage
investment conduit" ("REMIC"). As described herein, the Trust Fund will be
classified as a grantor trust for federal income tax purposes.
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THE TRUST CERTIFICATES WILL CONSTITUTE A SEPARATE SERIES OF CERTIFICATES BEING
OFFERED BY THE DEPOSITOR PURSUANT TO ITS PROSPECTUS DATED SEPTEMBER 20, 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.
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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........................ Trust Certificates, Series 1996-4A (the
"Trust Certificates"). The Trust
Certificates represent in the aggregate
the entire beneficial ownership interest
in a separate asset of a trust fund (the
"Trust Fund"), such separate asset
consisting of a single subclass of
senior mortgage pass-through
certificates (the "Underlying
Certificates") representing a partial,
senior interest in a separate trust fund
(the "Underlying Trust Fund") consisting
primarily of a pool (the "Mortgage
Pool") of conventional, fixed-rate,
fully-amortizing, one- to four-family
residential mortgage loans having
original terms to maturity of 30 years
(the "Mortgage Loans") having an
aggregate Scheduled Principal Balance as
of August 30, 1996 (the "Reference
Date") of approximately $402,135,406,
which Mortgage Loans were previously
pooled by The Prudential Home Mortgage
Securities Company, Inc. ("PHMSC"). The
Trust Certificates will consist of two
classes, designated as the Class 4A-A1
Certificates and the Class 4A-A2
Certificates. The Trust Certificates
will be issued pursuant to a Trust
Agreement, to be dated as of September
30, 1996 (the "Agreement"), between the
Depositor and the Trustee. All of the
Trust Certificates are offered hereby.
Trust Certificates..................... The Trust Certificates of each class
will have the approximate initial
Certificate Principal Balances and Pass-
Through Rates as set forth on the cover
hereof. The Certificate Principal
Balance of a Trust Certificate
outstanding at any time represents the
then maximum amount that the holder
thereof is entitled to receive as
distributions allocable to principal
from the cash flow on the Underlying
Certificates.
The Trust Certificates are subject
to various priorities for payment
of principal as described herein
under "Summary of Prospectus
Supplement--Distributions on the Trust
Certificates-Principal Distributions on
the Trust Certificates" and "Description
of the Trust Certificates-Principal
Distributions on the Trust
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" in the Prospectus.
Servicer............................... The Prudential Home Mortgage Company,
Inc. (in its capacity as servicer, the
"Servicer", otherwise, "PHMSC") serves
as servicer with respect to the PHMSC
Certificates
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(as defined herein), which include the
Underlying Certificates. See "Pooling
and Servicing Agreement" herein.
Trustee and Underlying Trustee......... First Trust National Association, a
national banking association. See "Trust
Agreement-The Trustee" and "Pooling and
Servicing Agreement-The Underlying
Trustee" herein.
The Trust Fund......................... The Trust Fund, in which the Trust
Certificates in the aggregate evidence
an interest, consists of the Underlying
Certificates together with other
previously issued mortgage pass-through
certificates. The Underlying
Certificates represent a partial, senior
interest in the Underlying Trust Fund
consisting primarily of the Mortgage
Pool previously formed by PHMSC. The
Trust Certificates will receive
distributions only from payments
received on the Underlying Certificates.
The Underlying Certificates............ PHMSC's Mortgage Pass-Through
Certificates, Series 1994-8 (the "PHMSC
Certificates"), consist of (i) twenty
subclasses of senior certificates
(collectively, the "PHMSC Senior
Certificates") and (ii) two classes of
subordinate certificates (collectively,
the "PHMSC Subordinate Certificates").
The Underlying Certificates are the
subclass of PHMSC Senior Certificates
designated as "Class A-5". As of
September 30, 1996 (the "Delivery
Date"), the Certificate Principal
Balance of the Underlying Certificates
will be approximately $49,000,000.
The PHMSC Senior Certificates are
entitled to a certain priority, to the
extent described herein, relative to the
PHMSC Subordinate Certificates, in right
of distributions on the Mortgage Loans.
The PHMSC Subordinate Certificates will
have an aggregate Certificate Principal
Balance as of the Delivery Date of
approximately $26,349,604. As of the
Delivery Date, the PHMSC Subordinate
Percentage will be equal to
approximately 6.61%. As of the date of
the initial issuance of the PHMSC
Certificates, the PHMSC Subordinate
Percentage was equal to approximately
6.00%. The PHMSC Subordinate Percentage
refers to the percentage of all of the
PHMSC Certificates represented by the
PHMSC Subordinate Certificates. See
"--Subordination" below.
The Underlying Certificates have been
issued in book-entry form and owners
thereof, including the Trustee on behalf
of the holders of the Trust
Certificates, will not be entitled to
receive definitive certificates except
in certain limited circumstances set
forth herein. The Underlying
Certificates will be registered in the
name of CEDE & Co., as nominee of The
Depository Trust Company ("DTC").
An election was made to treat the
Underlying Trust Fund as two REMICs for
federal income tax purposes. The
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Underlying Certificates are "regular
interests" in one of such REMICs.
The pass-through rate on the Underlying
Certificates is fixed at 6.875% per
annum.
The Master Servicer may, at its option,
repurchase from the Underlying Trust
Fund all of the Mortgage Loans, and
thereby effect the early retirement of
the PHMSC Certificates, on any
Underlying Distribution Date after the
aggregate Scheduled Principal Balance of
the Mortgage Loans is less than 10% of
the aggregate Scheduled Principal
Balance thereof as of February 1, 1994
(the "Underlying Cut-off Date"). As of
the Reference Date, the aggregate
Scheduled Principal Balance of the
Mortgage Loans was equal to
approximately 89.19% of the aggregate
Scheduled Principal Balance thereof as
of the Underlying Cut-off Date. See
"Pooling and Servicing
Agreement-Optional Termination" herein.
Distributions on the
Underlying Certificates.............. Distributions in General. Distributions
on the Underlying Certificates will be
made on each Underlying Distribution
Date to holders of record at the close
of business on the last business day of
the preceding month who are entitled to
such distributions. The holder of record
of the Underlying Certificates will be
CEDE & Co., as nominee of DTC.
The amount available for distribution to
the holders of PHMSC Certificates on any
Underlying Distribution Date (the "PHMSC
Available Funds") will be allocated
among the classes of PHMSC Certificates
in the manner set forth under
"Description of the Underlying
Certificates--Distributions" herein.
On each Underlying Distribution Date,
holders of the PHMSC Senior Certificates
will be entitled to receive all amounts
due them before any distributions are
made to holders of the PHMSC Subordinate
Certificates on such Underlying
Distribution Date. The PHMSC Available
Funds for each Underlying Distribution
Date will be allocated first, to pay
interest due the holders of the PHMSC
Senior Certificates and then to pay
principal due the holders of the PHMSC
Senior Certificates, and second, to pay
interest and principal due the holders
of the PHMSC Subordinate Certificates.
Interest Distributions. Interest will
accrue on the Underlying Certificates at
6.875% per annum during each one month
period ending on the last day of the
month preceding the month in which each
Underlying Distribution Date occurs
(each, an "Interest Accrual Period").
On each Underlying Distribution Date,
interest will be distributable on the
Underlying Certificates from the PHMSC
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Available Funds for such Underlying
Distribution Date in an amount equal to
the interest accrued on the Underlying
Certificates during the immediately
preceding Interest Accrual Period, plus
any interest thereon remaining
undistributed from previous Underlying
Distribution Dates, net of any
Non-Supported Interest Shortfalls (as
defined herein) and other losses and
shortfalls allocable to the Underlying
Certificates for such Underlying
Distribution Date as described herein.
When mortgagors prepay principal or when
principal is recovered through
foreclosures or other liquidations of
defaulted Mortgage Loans, a full month's
interest for the month of payment or
recovery may not be paid or recovered,
resulting in interest shortfalls. A
shortfall that results from principal
prepayments in full will be offset from
aggregate servicing fees that would
otherwise be payable to the Servicer on
any Underlying Distribution Date, but
only to the extent of servicing fees
payable with respect to that Underlying
Distribution Date. Aggregate shortfalls
in collections of interest resulting
from principal prepayments in full, to
the extent they exceed the aggregate
servicing fees (the "Non-Supported
Interest Shortfall"), will be allocated
pro rata among all classes of the PHMSC
Certificates, based on their
then-outstanding Certificate Principal
Balances and will be allocated pro rata
among the subclasses of PHMSC Senior
Certificates, based on interest accrued.
Any shortfalls of interest that result
from the timing of partial principal
prepayments or liquidations of defaulted
Mortgage Loans will not be offset by the
servicing fees and will not be allocated
pro rata among all classes and
subclasses of the PHMSC Certificates,
but instead will be borne first by the
PHMSC Subordinate Certificates and then
by the PHMSC Senior Certificates. See
"Description of the PHMSC
Certificates--Subordination of the PHMSC
Subordinate Certificates" herein. The
amount of interest required to be
distributed to holders of the PHMSC
Certificates will also be reduced by a
portion of certain special hazard
losses, fraud losses and bankruptcy
losses attributable to interest. See
"--Subordination" below and "Description
of the Underlying Certificates-Interest"
and "--Subordination of the PHMSC
Subordinate Certificates" and
"Description of the Underlying
Certificates--Interest" herein.
To the extent that the amount available
for distribution on any Underlying
Distribution Date is insufficient to
permit the distribution of the
applicable amount of accrued interest on
the PHMSC Senior Certificates (net of
any Non-Supported Interest Shortfalls
and other shortfalls and losses
allocable to the PHMSC Senior
Certificates as described above), the
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amount of interest available to be
distributed will be allocated among the
outstanding subclasses of PHMSC Senior
Certificates pro rata in accordance with
their respective entitlements to
interest, and the amount of any
deficiency will be added to the amount
of interest that the PHMSC Senior
Certificates are entitled to receive on
subsequent Underlying Distribution
Dates. No interest will accrue on such
deficiencies.
Interest on the Underlying Certificates
will be calculated on the basis of a
360-day year consisting of twelve 30-day
months. See "Description of the
Underlying Certificates--Interest"
herein.
Principal Distributions. The aggregate
amount of principal to which the holders
of the PHMSC Senior Certificates are
entitled each month will be comprised of
a percentage of the scheduled payments
of principal on the Mortgage Loans and a
percentage of certain unscheduled
payments of principal on the Mortgage
Loans. The percentage of scheduled
payments will be equal, on each
Underlying Distribution Date, to the
fraction that represents the ratio of
the then-outstanding principal balance
of the PHMSC Senior Certificates to the
aggregate outstanding principal balance
of the Mortgage Loans (based on their
amortization schedules then in effect).
The percentage of certain unscheduled
payments will be equal to the percentage
described in the preceding sentence plus
an additional amount equal to a
percentage of the principal otherwise
distributable to the holders of the
PHMSC Subordinate Certificates. During
the five years that began on the
Underlying Distribution Date that
occurred in March 1994, the percentage
of certain unscheduled principal
payments otherwise distributable to the
holders of the PHMSC Subordinate
Certificates that is instead
distributable to the holders of the
PHMSC Senior Certificates will be equal
to 100%, and such percentage will likely
be declining during the subsequent four
years, as described under "Description
of the Underlying Certificates --
Distributions -- Principal" herein,
until in year ten from the first
Underlying Distribution Date and each
year thereafter such percentage is equal
to zero. On each Underlying Distribution
Date, the PHMSC Subordinate Certificates
will collectively be entitled to receive
the percentages of the scheduled and
certain unscheduled payments of
principal on the Mortgage Loans equal,
in each case, to 100% less the
applicable percentage for the PHMSC
Senior Certificates described above.
The amount that is available for
distribution to the holders of the PHMSC
Senior Certificates on any Underlying
Distribution Date as a distribution of
principal is the PHMSC
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Available Funds remaining after
deducting the amount of interest
distributable on the PHMSC Senior
Certificates on such Underlying
Distribution Date. Principal will be
distributed to the holders of the
Underlying Certificates in accordance
with the payment priorities described
under "Description of the Underlying
Certificates--Distributions-Principal"
herein.
Solely for purposes of distributions,
the Underlying Certificates will consist
of two components (each a "Component",
and respectively, the "Class A-5 PAC I
Component" and the "Class A-5 PAC II
Component"). Each such Component will
have a principal balance (a "Component
Principal Balance") as specified herein.
Such Components are sometimes referred
to herein as the "PAC Components". The
Class 4A-A1 Certificates will receive
all principal payments in respect of the
Class A-5 PAC I Component and the Class
4A-A2 Certificates will receive all
principal payments in respect of the
Class A-5 PAC II Component. See
"Description of the Underlying
Certificates-Distributions" herein.
Advances............................... The Servicer will be obligated to
advance delinquent installments of
principal and interest (net of the
related Servicing Fees) on the Mortgage
Loans included in the Mortgage Pool
under certain circumstances. See
"Description of the Underlying
Certificates-Advances" herein.
Subordination.......................... The rights of the holders of PHMSC
Subordinate Certificates to receive
distributions with respect to the
Mortgage Loans will be subordinated to
such rights of the holders of the PHMSC
Senior Certificates, including the
Underlying Certificates. The
subordination of the PHMSC Subordinate
Certificates relative to the PHMSC
Senior Certificates is intended to
enhance the likelihood of receipt by the
holders of the PHMSC Senior Certificates
of the maximum amount to which they are
entitled on any Underlying Distribution
Date, and to afford such holders
protection against losses associated
with the liquidation of defaulted
Mortgage Loans and certain losses
resulting from the bankruptcy of a
mortgagor. See "Description of the
Underlying Certificates--Subordination
of the PHMSC Subordinate Certificates"
herein.
The protection afforded the holders of
the PHMSC Senior Certificates by means
of this subordination will be effected
in two ways: (i) by the preferential
right of the holders of the PHMSC Senior
Certificates to receive, prior to any
distribution being made on any
Underlying Distribution Date in respect
of the PHMSC Subordinate Certificates,
the amounts of interest and principal
due the holders of the PHMSC Senior
Certificates on such date and, if
necessary,
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by the right of such holders to receive
future distributions on the Mortgage
Loans that would otherwise have been
allocated to the holders of the PHMSC
Subordinate Certificates and (ii) by the
allocation to the PHMSC Subordinate
Certificates, until their respective
Certificate principal balances are
reduced to zero, of certain losses
resulting from the liquidation of
defaulted Mortgage Loans or the
bankruptcy of mortgagors prior to the
allocation of such losses to the PHMSC
Senior Certificates.
In addition, in order to increase the
period during which the principal
balances of the PHMSC Subordinate
Certificates remain available as credit
enhancement to the PHMSC Senior
Certificates, a disproportionate amount
of prepayments and certain unscheduled
recoveries with respect to the Mortgage
Loans will be allocated to the PHMSC
Senior Certificates. This allocation has
the effect of accelerating the
amortization of the PHMSC Senior
Certificates while, in the absence of
losses in respect of the liquidation of
defaulted Mortgage Loans or losses
resulting from the bankruptcy of
mortgagors, increasing the respective
percentage interest in the principal
balance of the Mortgage Loans evidenced
by the PHMSC Subordinate Certificates.
The PHMSC Subordinate Certificates will
have an aggregate Certificate Principal
Balance as of the Delivery Date of
approximately $26,349,604. As of the
Delivery Date, the PHMSC Subordinate
Percentage will be equal to
approximately 6.61%. As of the date of
the initial issuance of the PHMSC
Certificates, the PHMSC Subordinate
Percentage was equal to approximately
6.00%.
As described above, the subordination
feature described above is intended to
enhance the likelihood of timely receipt
of principal and interest and to protect
holders of PHMSC Senior Certificates
against losses; however, in certain
circumstances the amount of available
subordination (including the limited
subordination provided for certain types
of losses) may be exhausted and
shortfalls in distributions on the PHMSC
Senior Certificates could result.
Holders of PHMSC Senior Certificates
will bear in the manner described herein
their proportionate share of any losses
realized on the Mortgage Loans in excess
of the available subordination amount.
See "Description of the Underlying
Certificates--Distributions" herein.
The Mortgage Pool...................... The Underlying Certificates represent a
partial, senior interest in a separate
trust fund (the "Underlying Trust Fund")
consisting primarily of a pool (the
"Mortgage Pool") consisting of
conventional, fixed-rate,
fully-amortizing, mortgage loans (the
"Mortgage Loans") secured by first liens
on one- to four-family residential
properties (the
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"Mortgaged Properties"). As of the
Reference Date, the Mortgage Pool
consisted of 1599 Mortgage Loans having
an aggregate Scheduled Principal Balance
of approximately $402,135,406. As of the
Underlying Cut-off Date, the Mortgage
Pool had an aggregate Scheduled
Principal Balance of approximately
$450,857,728. The Mortgage Loans have
original terms to maturity of 30 years
and a weighted average calculated
remaining term to maturity, based on
Scheduled Principal Balances as of the
Reference Date, of approximately 26
years and 10 months as of the Reference
Date. The Mortgage Loans have interest
rates thereon (each a "Mortgage Rate")
ranging from 7.500% per annum to 7.750%
per annum as of the Reference Date, with
a weighted average Mortgage Rate, based
on Scheduled Principal Balances as of
the Reference Date, of approximately
7.583% per annum as of the Reference
Date. As of the Delivery Date,
approximately $79,089 in Realized Losses
(as defined herein) have been allocated
to the PHMSC Subordinate Certificates.
On the Underlying Distribution Date in
September 1996, the Underlying Trustee
reported six Mortgage Loans with an
aggregate Scheduled Principal Balance
equal to approximately $1,471,189 were
30 days or more but less than 90 days
delinquent in their monthly payments,
and no Mortgage Loans were in
foreclosure or bankruptcy. For a further
description of the Mortgage Loans, see
"The Mortgage Pool" herein.
Pass-Through Rate on the Trust
Certificates......................... The Pass-Through Rate applicable to the
calculation of the Interest Distribution
Amount (as defined herein) for each
class of Trust Certificates for any
Distribution Date is equal to 6.860% per
annum.
Registration of the Book-Entry
Certificates......................... The Trust Certificates will initially be
represented by one or more global
certificates registered in the name of
CEDE & Co., as nominee of DTC (the Trust
Certificates as so registered, the
"Book-Entry Certificates"). No person
acquiring an interest in the Book-Entry
Certificates (a "Certificate Owner")
will be entitled to receive a
Certificate in fully registered,
certificated form (a "Definitive
Certificate"), except under the limited
circumstances described herein. See
"Description of the Trust
Certificates-Definitive Certificates"
herein. Instead, DTC will effect
payments and transfers by means of its
electronic record keeping 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 Book-Entry
Certificates will reflect the rights of
Certificate Owners, as
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such rights may be exercised through DTC
and its Participants, except as
otherwise specified herein. See
"Description of the Trust
Certificates-Registration of the
Book-Entry Certificates" herein.
Distribution Date...................... The second business day following each
Underlying Distribution Date, commencing
in October 1996. The Underlying
Distribution Date will be the 25th day
of each calendar month or, if such 25th
day is not a business day, then the next
succeeding business day. The Trustee
will be the beneficial owner of the
Underlying Certificates through the
facilities of DTC for the benefit of the
holders of the Trust Certificates.
Distributions on the Trust Certificates
will be made through the facilities of
DTC on each Distribution Date.
Distributions on the Trust
Certificates-General................. Holders of the Trust Certificates will
be entitled to receive the following
distributions on each Distribution Date:
(i) to the holders of each such class,
distributions in respect of interest in
an aggregate amount equal to the
Interest Distribution Amount for each
such class for such Distribution Date
and (ii) to the holders of each such
class then entitled to distributions in
respect of principal, distributions in
respect of principal in an aggregate
amount equal to the Principal
Distribution Amount for such
Distribution Date, in each case as
defined herein and as allocated among
the classes of Trust Certificates as
provided herein. Distributions on each
Distribution Date will be made to the
extent of the Available Distribution
Amount for such date. The Available
Distribution Amount with respect to the
Trust Certificates for any Distribution
Date is equal to the aggregate amount of
distributions on the Underlying
Certificates on the related Underlying
Distribution Date, net of the Trustee
Fee for such Distribution Date and the
portion allocable to the Trust
Certificates of the amount of any
Extraordinary Trust Fund Expenses
payable by the Trust Fund as of such
Distribution Date.
Interest Distributions on the
Trust Certificates................... Distributions on each Distribution Date
in respect of interest on the Trust
Certificates will be based upon interest
accrued on such Trust Certificates
during the Interest Accrual Period for
the Underlying Certificates and such
Distribution Date. All distributions of
interest will be based on a 360-day year
consisting of twelve 30-day months.
Distributions in respect of interest on
each Distribution Date will be made (i)
to the holders of each class of the
Trust Certificates in an amount equal to
the Interest Distribution Amount for
such class. The "Interest Distribution
Amount" for the Trust Certificates of
any class on any Distribution
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S-11
<PAGE>
- --------------------------------------------------------------------------------
Date is equal to interest accrued during
the related Interest Accrual Period on
the Certificate Principal Balance of
such Trust Certificates immediately
prior to such Distribution Date at the
rate of 6.860% per annum, plus, in the
case of each such class, any such amount
remaining unpaid from previous
Distribution Dates, and reduced, in the
case of each such class (to not less
than zero), by a pro rata share (based
on interest accrued) of interest
shortfalls allocated to the Underlying
Certificates. See "Description of the
Trust Certificates-Interest
Distributions on the Trust Certificates"
and "-Allocation of Losses" herein.
Principal Distributions on the
Trust Certificates................... Distributions in respect of principal on
each Distribution Date will be made to
the holders of the class or classes of
Trust Certificates then entitled to
distributions in respect of principal,
in an aggregate amount equal to the
Principal Distribution Amount for such
Distribution Date.
With respect to each Distribution Date,
the Principal Distribution Amount is
equal to the aggregate amount
distributed in respect of principal on
the Underlying Certificates on the
related Underlying Distribution Date.
Except as otherwise described herein, on
each Distribution Date, the amounts
distributed on the related Underlying
Distribution Date as principal payments
allocated to the Underlying
Certificates' Class A-5 PAC I Component
and Class A-5 PAC II Component,
respectively, will be distributed as
principal payments on the Class 4A-A1
Certificates and the Class 4A-A2
Certificates, respectively.
Notwithstanding the manner of allocation
of the Principal Distribution Amount
referred to above, following the Cross-
Over Date (as defined herein), all
priorities relating to distributions of
principal among the Trust Certificates
will be disregarded and distributions
allocable to principal will be paid on
each succeeding Distribution Date to
holders of the Trust Certificates, on a
pro rata basis, based on the Certificate
Principal Balances thereof. See
"Description of the Trust
Certificates-Principal Distributions on
the Trust Certificates" herein.
Registration and Denominations
of the Trust Certificates............ The Book-Entry 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 $1.00 in
excess thereof, except that one
Book-Entry Certificate of each class may
evidence an amount equal to an otherwise
authorized denomination plus the
remainder of the aggregate initial
Certificate Principal Balance for such
class.
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S-12
<PAGE>
- --------------------------------------------------------------------------------
Record Date for the Trust
Certificates......................... The Record Date for each Distribution
Date with respect to the Trust
Certificates 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 Trust
Certificates--General" herein.
Optional Termination of the Trust
Certificates......................... The Trust Certificates are not subject
to any optional termination. However,
the Master Servicer is entitled, subject
to certain conditions relating to the
then-remaining size of the Mortgage
Pool, to purchase all outstanding
Mortgage Loans and thereby effect early
retirement of the PHMSC Certificates and
thereby the Trust Certificates. See
"Pooling and Servicing
Agreement-Optional Termination" herein.
Special Prepayment Considerations
with respect to the
Trust Certificates................... The rate and timing of distributions
allocable to principal on the Trust
Certificates will depend, in general, on
the rate and timing of principal
payments on the Underlying Certificates
(and the Components thereof) and the
allocation thereof to pay principal on
various classes of Trust Certificates as
provided herein, which will in turn be
affected by the rate and timing of
principal payments (including
prepayments and collections upon
defaults, liquidations and repurchases)
on the Mortgage Loans and the allocation
thereof to pay principal on the
Underlying Certificates. As is the case
with mortgage pass-through certificates
generally, the Underlying Certificates,
and as a result the Trust Certificates,
are subject to substantial inherent
cash-flow uncertainties because the
Mortgage Loans may be prepaid at any
time, and the actual rate of prepayment
of principal on the Mortgage Loans
cannot be predicted.
Generally, when prevailing interest
rates are increasing, prepayment rates
on mortgage loans tend to decrease,
resulting in a reduced rate of return of
principal to investors in mortgage
pass-through 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 resulting in a
greater rate of return of principal to
investors at a time when reinvestment at
comparable yields may not be possible.
See "Yield on the Trust
Certificates--General Prepayment
Considerations" herein.
The multiple class structure of the
Trust Certificates results in the
allocation of payments of principal
among the classes of the Trust
Certificates as follows:
Class 4A-A1 Certificates and Class
4A-A2 Certificates: Distributions of
principal on the Class 4A-A1
Certificates
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S-13
<PAGE>
- --------------------------------------------------------------------------------
and Class 4A-A2 Certificates,
respectively, will derive from
distributions of principal on the
Underlying Certificates' Class A-5 PAC
I Component and Class A-5 PAC II
Component, respectively. Such
Components were structured so that
principal distributions generally
would be payable thereon in the
amounts determined by using the table
attached hereto as Appendix A assuming
that prepayments on the Mortgage Loans
would occur each month at a level
falling within a specified range (the
"Structuring Range") of percentages of
SPA (as defined herein), and based on
certain other assumptions. At the
initial issuance of the Underlying
Certificates, the Structuring Range
for the Class A-5 PAC I Component was
a constant level of SPA between 125%
and 550%, and the Structuring Range
for the Class A-5 PAC II Component was
a constant level of SPA between 225%
and 400%. However, with respect to the
Class A-5 PAC I Component, as of the
Delivery Date, the range of constant
Mortgage Loan prepayment rates at
which such Component would adhere to
its schedule (with respect to such
Component, the "Targeted Range") has
shifted to 156% SPA through 634% SPA.
With respect to the Class A-5 PAC II
Component as of the Delivery Date, the
balances listed on Appendix A for the
Component Principal Balance thereof
are not currently supported and it is
extremely unlikely that principal will
be distributed in respect of the Class
A-5 PAC II Component in October 1996
as provided on Appendix A. If the
Mortgage Loans prepay in the same
manner and at the same rates as they
have since the issuance of the PHMSC
Certificates, the Class 4A-A2
Certificates will receive principal on
a date later than stated on Appendix A
and at a slower rate once they begin
receiving principal.
As discussed herein, actual principal
distributions in respect of the Class
A-5 PAC I Component and the Class A-5
PAC II Component in the future may be
greater or less than the scheduled
amounts and the weighted average life
of the of the Class A-5 PAC I
Component or the Class A-5 PAC II
Component (and therefore of the Class
4A-A1 Certificates or Class 4A-A2
Certificates) may be extended or
shortened.
During the period from the Underlying
Cut-off Date through the Reference Date,
the Mortgage Loans have prepaid at an
average constant rate of approximately
101% SPA. Certain months may have had
SPA rates significantly higher or lower
than the average.
The timing of commencement of principal
distributions and the weighted average
lives of the Trust Certificates will be
affected by the rates of prepayment
experienced both
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S-14
<PAGE>
- --------------------------------------------------------------------------------
before and after the commencement of
principal distributions on such classes.
The amount and allocation of principal
prepayments among certain classes of the
Trust Certificates will also be affected
by certain other factors, as follows:
Subordination Features Affecting the
Underlying Certificates. As described
herein, during certain periods all or
a disproportionately large percentage
of principal prepayments on the
Mortgage Loans included in the
Mortgage Pool will be allocated among
the PHMSC Senior Certificates. To the
extent that a disproportionately large
percentage of principal prepayments on
the Mortgage Loans is distributed on
the Underlying Certificates, the
subordination afforded the Underlying
Certificates by PHMSC Subordinate
Certificates, in the absence of
offsetting realized losses allocated
thereto, will be increased.
Weighted Average Life Volatility of
the Underlying Certificates. As
described above, the weighted average
life of the Underlying Certificates
(and the Components thereof) will be
affected by the rate of principal
payments on the Mortgage Loans, the
timing of changes in such rate of
payments and the priority sequence of
distributions of principal on the
Underlying Certificates' Components.
See "Description of the Trust
Certificates-Principal Distributions on
the Trust Certificates" and "Yield on
the Certificates" herein, and "Maturity
and Prepayment Considerations" in the
Prospectus. For further information
regarding the effect of principal
prepayments on the weighted average
lives of the Trust Certificates, see the
table entitled "Percent of Initial
Certificate Principal Balance
Outstanding at the Following Percentages
of SPA" herein.
Special Yield Considerations
with respect to the
Trust Certificates................... The yield to maturity on each class of
the Trust Certificates will depend, in
general, on (i) the Pass-Through Rates
thereon, (ii) the applicable purchase
price, and (iii) the rate and timing of
principal payments on the Underlying
Certificates (and the Components
thereof) and the allocation thereof to
reduce the Certificate Principal Balance
of each such class of Trust
Certificates, as well as other factors.
The rate and timing of principal
payments on the Underlying Certificates
(and the Components thereof) will in
turn be affected by the rate and timing
of principal payments (including
prepayments and collections upon
defaults, liquidations and repurchases)
on the Mortgage Loans and the allocation
thereof to pay principal on the
Underlying Certificates (and the
Components thereof).
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S-15
<PAGE>
- --------------------------------------------------------------------------------
The yield to investors in any class of
Trust Certificates will be adversely
affected by any allocation thereto of
interest shortfalls on the Underlying
Certificates.
The yield to investors in any class of
Trust Certificates will be extremely
sensitive to certain losses on the
Mortgage Loans after the Cross-Over
Date, because after such date certain
losses resulting from the liquidation of
defaulted Mortgage Loans or the
bankruptcy of mortgagors will be
allocated to the PHMSC Senior
Certificates including the Underlying
Certificates, and the Underlying
Certificates' allocated portion of such
losses will be allocated in turn to the
Trust Certificates.
In general, if the Trust 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 Trust 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 Trust Certificates were
determined based on a number of
assumptions, including a prepayment
assumption of 150% SPA (as defined
herein) and weighted average lives
corresponding thereto as described
herein. No representation is made that
the Mortgage Loans will prepay at that
rate or at any other rate. The yield
assumptions for the Trust Certificates
will vary as determined at the time of
sale. See "Yield on the Trust
Certificates" herein.
The multiple class structure of the
Trust Certificates causes the yield of
certain classes to be particularly
sensitive to changes in the rates of
prepayment of the Mortgage Loans and to
other factors, as described above under
"--Special Prepayment Considerations
with respect to the Trust Certificates".
Certain Federal Income Tax
Consequences......................... No election will be made to treat the
Trust Fund as a REMIC for federal income
tax purposes.
Upon issuance of the Trust Certificates,
Thacher Proffitt & Wood, counsel to the
Depositor ("Tax Counsel"), will deliver
its opinion generally to the effect
that, assuming compliance with all
provisions of the Trust Agreement, the
Trust Fund in which the Trust
Certificate is held will be classified
as a grantor trust under subpart E, part
I of subchapter J of the Code and not as
an association taxable as a corporation
or as a partnership. Accordingly, a
holder of a Trust Certificate generally
will be treated as the owner of an
- --------------------------------------------------------------------------------
S-16
<PAGE>
- --------------------------------------------------------------------------------
undivided interest in the related
Component of the Underlying Certificate.
Assuming the qualification and
maintenance of the status as a REMIC to
the Underlying Trust Fund, the Trust
Certificates will represent interests in
(i) "loans secured by an interest in
real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code;
(ii) "obligations (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
(iii) "real estate assets" within the
meaning of Section 856(c)(5)(A) of the
Code generally in the same proportion
that the assets of the Underlying Trust
Fund would be so treated. In addition,
interest on the Trust 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.
For federal income tax purposes, a
holder of a Trust Certificate will be
treated as the owner of an undivided
interest in the related Component of the
Underlying Certificate which will be
treated as a "stripped bond."
Original purchasers of the Underlying
Certificate were advised that the
prepayment assumption used in
determining the rate of accrual of
original issue discount on the
Underlying Certificate is 400% SPA.
For further information regarding the
federal income tax consequences of
investing in the Trust Certificates, see
"Certain Federal Income Tax
Consequences" herein and in the
Prospectus.
Ratings................................ It is a condition to the issuance of the
Trust Certificates that they be rated
"AAA" by Standard & Poor's Ratings
Services ("S&P"). The Depositor has not
requested that any rating agency rate
any class of the Trust Certificates
other than as stated above. If another
rating agency were to rate any class of
the Trust Certificates, such 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. See "Yield
on the Trust Certificates" and "Ratings"
herein and "Yield Considerations" in the
Prospectus.
Legal Investment....................... The Trust Certificates will constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA")
for so long as they
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S-17
<PAGE>
- --------------------------------------------------------------------------------
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 Trust
Certificates. Any such institution
should consult with their own legal
advisors in determining whether and to
what extent the Trust 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 certain pass-through
certificates underwritten by Salomon
Brothers Inc and the servicing and
operation of certain asset pools
provided that certain conditions are
satisfied. See "ERISA Considerations"
herein and in the Prospectus.
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S-18
<PAGE>
DESCRIPTION OF THE TRUST CERTIFICATES
General
The Trust Certificates, Series 1996-4A, will consist of two classes of
certificates (together, the "Trust Certificates"), designated as the Class 4A-A1
Certificates and the Class 4A-A2 Certificates. All of the Trust Certificates are
offered hereby.
The Trust Certificates in the aggregate will evidence the entire beneficial
ownership interest in a separate asset of the Trust Fund, such separate asset
consisting of the Underlying Certificates together with all distributions
thereon payable after the Delivery Date and such assets as from time to time are
acquired in respect of the Underlying Certificates. As of the Delivery Date, the
Certificate Principal Balance of the Underlying Certificates will be
approximately $49,000,000.
The Trust Certificates of each class will have the Pass-Through Rates and
approximate initial Certificate Principal Balances as set forth on the cover
hereof.
The Trust 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 thereof, except that one Trust Certificate of each
class may evidence an amount equal to an otherwise authorized denomination plus
the remainder of the aggregate initial Certificate Principal Balance for such
class.
The Trust Certificates will initially be represented by one or more global
certificates registered in the name of the nominee of DTC (the Trust
Certificates as so registered, the "Book-Entry Certificates"), 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 Book-Entry 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 Book-Entry Certificates shall refer to
distributions, notices, reports and statements to DTC or CEDE, as the registered
holder of the BookEntry Certificates, for distribution to Certificate Owners in
accordance with DTC procedures. See "-Registration of the Book-Entry
Certificates" and "--Definitive Certificates" herein.
All distributions to holders of the Trust Certificates, other than the
final distribution on any class of Trust Certificates, will be made on each
Distribution Date by or on behalf of the Trustee to the persons in whose names
such Trust Certificates are registered at the close of business on the related
Record Date, which will be the last business day of the month preceding the
month in which such 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
Trust 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 any class of Trust Certificates will be made in like manner, but
only upon presentment and surrender of such Trust 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 Book-Entry 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 the
S-19
<PAGE>
Underwriter), 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 Book-Entry 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 Book-Entry 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 Owners. Unless and until Definitive Certificates are issued, it is
anticipated that the only Certificateholder of the Book-Entry 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
Book-Entry Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and Indirect Participants with which Certificate Owners have
accounts with respect to the Book-Entry 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 Book-Entry Certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to such
Book-Entry Certificates, may be limited due to the absence of physical
certificates for the Book-Entry 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 Book-Entry 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 BookEntry Certificates evidenced such specified Voting Rights.
DTC may take conflicting actions with respect to Voting Rights, to the extent
that Participants whose holdings of Book-Entry Certificates evidenced such
Voting Rights, authorize divergent action.
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 Book-Entry 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 Book-Entry 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.
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<PAGE>
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 Book-Entry Certificates and
receipt of instructions for re-registration, the Trustee will reissue the
Book-Entry 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.
Available Distribution Amount
The Available Distribution Amount with respect to the Trust Certificates
for any Distribution Date is equal to the aggregate amount of distributions on
the Underlying Certificates on the related Underlying Distribution Date, net of
the Trustee Fee for such Distribution Date and the portion allocable to the
Trust Certificates of the amount of any Extraordinary Trust Fund Expenses
payable by the Trust Fund as of such Distribution Date.
Interest Distributions on the Trust Certificates
Distributions in respect of interest will be made on each Distribution Date
to the holders of the Trust Certificates in an aggregate amount equal to the
Interest Distribution Amount for each class of Trust Certificates for such
Distribution Date.
The Interest Distribution Amount for the Trust Certificates of any class on
any Distribution Date is equal to interest accrued during the related Interest
Accrual Period on the Certificate Principal Balance of such Trust Certificates
immediately prior to such Distribution Date at 6.860% per annum, plus, in the
case of each such class, any such amount remaining unpaid from previous
Distribution Dates, and reduced, in the case of each such class (to not less
than zero), by the pro rata share for such class of interest shortfalls
allocated to the Underlying Certificates. For purposes of the foregoing, the
aggregate amount of interest shortfalls for any Distribution Date will be equal
to the aggregate amount of interest shortfalls, if any, allocated to the
Underlying Certificates for the related Underlying Distribution Date in respect
of Non-Supported Interest Shortfalls or other losses or shortfalls as described
under "Description of the Underlying Certificates" herein.
The Interest Accrual Period for any Distribution Date is the one-month
period preceding the month in which such Distribution Date occurs. All
distributions of interest will be based on a 360-day year consisting of twelve
30-day months.
Except as otherwise described herein, on any Distribution Date,
distributions of the Interest Distribution Amount for a class of Trust
Certificates will be made in respect of such class of Trust Certificates, to the
extent provided herein, on a pari passu basis, based on the Certificate
Principal Balance of the Trust Certificates of each such class.
The Certificate Principal Balance of a Trust 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 Underlying Certificates. The Certificate Principal Balance of any class
of Trust Certificates 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 Trust
Certificate and (b) any reductions in the Certificate Principal Balance thereof
deemed to have occurred in connection with allocations thereto of (i) Realized
Losses on the Mortgage Loans allocated to the Underlying Certificates and (ii)
Extraordinary Trust Fund Expenses, as described below.
Principal Distributions on the Trust Certificates
Holders of each class of Trust Certificates will be entitled to receive on
each Distribution Date distributions allocable to principal in reduction of the
Certificate Principal Balances thereof equal to the aggregate amount distributed
in respect of principal on the Underlying Certificates on the related
S-21
<PAGE>
Underlying Distribution Date, to the extent of the Available Distribution Amount
remaining after distribution of the Interest Distribution Amount (the "Principal
Distribution Amount").
Distributions of the Principal Distribution Amount on the Trust
Certificates on each Distribution Date shall be made concurrently in the
following manner: the Class 4B-A1 Certificates will receive all principal
payments in respect of the Class A-5 PAC I Component, and the Class 4A-A2
Certificates will receive all principal payments in respect of the Class A-5 PAC
II Component.
For purposes of all principal distributions described above, the
Certificate Principal Balance of a Trust Certificate for any Distribution Date
shall be determined after the allocation thereto of losses allocated to the
Underlying Certificates and Extraordinary Trust Fund Expenses on such
Distribution Date as described under "--Allocation of Losses" below.
Notwithstanding the foregoing priorities, following the Cross-Over Date,
all priorities relating to distributions as described above in respect of
distributions of principal among the Trust Certificates will be disregarded, and
distributions allocable to principal will be paid on each succeeding
Distribution Date to holders of the Trust Certificates on a pro rata basis based
on the Certificate Principal Balances thereof. The "Cross-Over Date" is the date
on which the aggregate Certificate Principal Balance of the PHMSC Subordinate
Certificates has been reduced to zero.
Allocation of Losses
The Trust Certificates will not be covered by any credit support other than
the limited subordination provided to the Underlying Certificates by the
PHMSC Subordinate Certificates. See "Description of the Underlying
Certificates--Subordination of the PHMSC Subordinate Certificates" herein.
In the event that any Realized Losses that would have been covered by
subordination are allocated to the Underlying Certificates because the
Cross-Over Date has occurred, such losses will be borne by the holders of all
Trust Certificates on a pro rata basis. An allocation of a Realized Loss on a
pro rata basis among two or more classes of Trust Certificates means an
allocation to each such class of Trust Certificates on the basis of its then
outstanding Certificate Principal Balance prior to giving effect to
distributions to be made on such Distribution Date. In the case of the principal
portion of any Realized Loss allocated to the Underlying Certificates on any
Underlying Distribution Date, the allocation of such Realized Loss among the
Trust Certificates will be made by reducing the Certificate Principal Balance
thereof by the amount allocated thereto, as of the related Distribution Date. In
the case of the interest portion of any Realized Loss allocated to the
Underlying Certificates on any Underlying Distribution Date, the allocation of
such Realized Loss among the classes of Trust Certificates as described above
will be made by reducing the Interest Distribution Amount thereon by the amount
allocated thereto for the related Distribution Date. For a description of the
allocation of Realized Losses to the Underlying Certificates, see "Description
of the Underlying Certificates--Subordination of the PHMSC Subordinate
Certificates" herein.
Extraordinary Trust Fund Expenses are amounts that may become reimbursable
to the Depositor or the Trustee from the assets of the Trust Fund as provided in
the Agreement. Any Extraordinary Trust Fund Expenses will be allocated on a pro
rata basis based on current entitlement to payments between (i) the Trust
Certificates and (ii) other trust certificates not offered hereunder but issued
under the Agreement evidencing the portion of the ownership interest in the
Trust Fund which is not evidenced by the Trust Certificates. Any Extraordinary
Trust Fund Expenses so allocated to the Trust Certificates as of any
Distribution Date will reduce the Available Distribution Amount for such
Distribution Date and will result in a reduction in the amount distributable to
the holders of one or more classes of Trust Certificates.
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<PAGE>
DESCRIPTION OF THE UNDERLYING CERTIFICATES
General
The Prudential Home Mortgage Securities Company, Inc. ("PHMSC"), Mortgage
Pass-Through Certificates, Series 1994-8 (collectively, the "PHMSC
Certificates"), Class A-5 (such subclass, the "Underlying Certificates"),
represents a partial, senior beneficial interest in a separate REMIC trust fund
(the "Underlying Trust Fund"), consisting primarily of the Mortgage Pool. The
Underlying Certificates are rated "AAA" by Fitch and "Aaa" by Moody's. The PHMSC
Certificates, including the Underlying Certificates, were issued pursuant to a
Pooling and Servicing Agreement (the "Pooling and Servicing Agreement"), dated
as of February 1, 1994, among PHMSC, as seller, The Prudential Home Mortgage
Company, Inc., as servicer (in such capacity, the "Servicer", otherwise,
"PHMSC"), and First Trust National Association, as trustee (in such capacity,
the "Underlying Trustee").
The PHMSC Certificates consist of (i) twenty subclasses of senior
certificates - the Class A-1, Class A-2, and so forth in consecutive numerical
sub-designation through Class A-18, Class A-R and Class L-R Certificates
(collectively, the "PHMSC Senior Certificates", and the Class A-R and Class L-R
Certificates, together, the "PHMSC Residual Certificates") and (ii) two classes
of subordinate certificates-the Class M and Class B Certificates (together, the
"PHMSC Subordinate Certificates"). The PHMSC Senior Certificates are entitled to
a certain priority, as described herein, relative to the PHMSC Subordinate
Certificates, in right of distributions on the Mortgage Loans. The Certificate
Principal Balance of each subclass of PHMSC Senior Certificates and the
aggregate Certificate Principal Balance of the PHMSC Subordinate Certificates,
as of the date of the initial issuance thereof and as of the Delivery Date, are
as follows:
Certificate Principal Certificate Principal
Balance as of Balance as of
PHMSC Certificate Class Initial Issuance the Delivery Date
----------------------- ---------------- -----------------
Class A-1(1) $ 46,080,000 $28,316,115
Class A-2(1) $ 44,393,000 $44,393,000
Class A-3(1) $ 4,200,000 $ 4,200,000
Class A-4(2) $ 21,911,000 $21,911,000
Underlying Certificates(5) $ 49,000,000 $49,000,000
Class A-5 PAC I Component $ 12,250,000 $12,250,000
Class A-5 PAC II Component $ 36,750,000 $36,750,000
Class A-6(2) $ 12,066,000 $12,066,000
Class A-7(3) $116,650,000 $89,327,270
Class A-8(6) $ 0 $ 0
Class A-9(4) $ 4,956,000 $ 4,678,866
Class A-10(4) $ 53,655,000 $50,654,674
Class A-11(4) $ 12,495,000 $11,796,294
Class A-12(3) $ 1,390,000 $ 1,390,000
Class A-13(3) $ 223,000 $ 223,000
Class A-14(4) $ 20,294,000 $19,159,183
Class A-15(4) $ 4,726,000 $ 4,461,727
Class A-16(2) $ 22,472,000 $21,833,657
Class A-17(2) $ 9,293,000 $ 8,835,345
Class A-18(6) $ 0 $ 0
Class A-R $ 1,000 $ 944
Class A-LR $ 1,000 $ 944
PHMSC Subordinate Certificates $ 27,051,728 $26,349,604
- ------------------
(1) The Class A-1, Class A-2 and Class A-3 Certificates are referred to herein
collectively as the "PAC I Certificates".
(2) The Class A-4, Class A-6, Class A-16 and Class A-17 Certificates are
referred to herein collectively as the "PAC II Certificates".
(3) The Class A-7, Class A-12 and Class A-13 Certificates are referred to
herein collectively as the "PAC Group".
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<PAGE>
(4) The Class A-9, Class A-10, Class A-11, Class A-14 and Class A-15
Certificates are referred to herein collectively as the "Companion
Certificates".
(5) Solely for purposes of determining distributions in reduction of
Certificate Principal Balance, the Underlying Certificates will be deemed
to consist of the two payment components (each, a "Component") listed in
the table below the Underlying Certificates. Each Component will have a
principal balance (a "Component Principal Balance"). The Component
Principal Balance of each Component as of the initial issuance of the PHMSC
Certificates and as of the Delivery Date are indicated in the table beside
each Component. The Components are sometimes referred to herein as the "PAC
Components".
(6) The Class A-8 and Class A-18 Certificates are interest-only certificates,
have no Certificate Principal Balance and bear interest on a notional
amount.
--------------------------------
The PHMSC Senior Certificates, other than the PHMSC Residual Certificates,
are referred to herein as the "Class A Certificates". The PAC I Certificate, the
PAC II Certificates and the subclasses comprising the PAC Group are referred to
herein collectively as the "PAC Certificates". Solely for purposes of
determining distributions in reduction of Certificate Principal Balance, the PAC
Group will be deemed to consist of two components designated as the PAC I Group
Component and the PAC II Group Component, respectively. The PAC I Group
Component and the PAC II Group Component are referred to herein together as the
"PAC Group Components".
The description of the PHMSC Certificates herein is a summary of certain of
the terms and provisions relating to the PHMSC Certificates and does not purport
to be complete. Such description is subject to, and is qualified in its entirety
by reference to, the actual terms and provisions of the Pooling and Servicing
Agreement, a copy of which will be made available (without exhibits) to
prospective investors upon written request therefor made to the Depositor. The
information set forth herein relating to the Underlying Certificates is based on
information obtained by the Depositor relating to the Underlying Certificates
from the prospectus dated February 9, 1994, and prospectus supplement dated
February 9, 1994, used in connection with the initial offering thereof, and from
statements furnished to holders of the PHMSC Certificates for each Underlying
Distribution Date. None of the Depositor, the Trustee, the Underwriter or any of
their affiliates has made or will make any representation as to the accuracy or
completeness of such information. Unless otherwise specified, references to
Certificates of any class throughout the text under this heading "Description of
the Underlying Certificates" refer to PHMSC Certificates.
The "Certificate Principal Balance" of a subclass of Class A Certificates as
of any date of determination will be the Certificate Principal Balance of such
subclass on the date of initial issuance of the PHMSC Certificates less (i) all
amounts previously distributed to holders of Class A Certificates of such
subclass in reduction of the Certificate Principal Balance of such subclass and
(ii) such subclass's pro rata share of the principal portion of Excess Special
Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses (each as defined
herein) previously allocated to the holders of Class A Certificates in the
manner described herein under "--Subordination of the PHMSC Subordinate
Certificates". After the Cross-Over Date, the Certificate Principal Balance of a
subclass of Class A Certificates may be subject to further reduction in an
amount equal to such subclass's pro rata share of the difference, if any,
between (a) the Certificate Principal Balance thereof as of such date of
determination without regard to this provision and (b) the Adjusted Pool Amount
for the preceding Underlying Distribution Date. Any pro rata allocation among
the subclasses of Class A Certificates described in this paragraph will be made
among the subclasses of Class A Certificates on the basis of their
then-outstanding Certificate Principal Balances immediately prior to the
preceding Underlying Distribution Date.
With respect to any Underlying Distribution Date, the "Adjusted Pool Amount"
will equal the aggregate Scheduled Principal Balance of the Mortgage Loans as of
the Underlying Cut-off Date minus the sum of (i) all amounts in respect of
principal received in respect of the Mortgage Loans (including amounts received
as Periodic Advances, principal prepayments and Liquidation Proceeds in respect
of principal) and distributed to holders of the PHMSC Certificates on such
Underlying Distribution Date and all prior Underlying Distribution Dates and
(ii) the principal portion of all Realized Losses, other
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<PAGE>
than Debt Service Reductions (as defined herein), incurred on the Mortgage Loans
from the Underlying Cut-off Date through the end of the month preceding such
Underlying Distribution Date.
Book-Entry Form
The Underlying Certificates were issued in book-entry form and are
represented by one or more physical certificates registered in the name of CEDE,
as nominee of DTC, which will be the "PHMSC Certificateholder" of such
Underlying Certificates. No person acquiring an interest in the Underlying
Certificates (a "Beneficial Owner"), including the Trustee on behalf of holders
of the Trust Certificates, will be entitled to receive a definitive PHMSC
Certificate representing such person's interest in the Underlying Certificates,
except as set forth below. Unless and until definitive Certificates are issued
to Beneficial Owners in respect of the Underlying Certificates under the limited
circumstances described herein, all references to actions taken by PHMSC
Certificateholders shall, in the case of the Underlying Certificates, refer to
actions taken by DTC upon instructions from its Participants, and all references
herein to distributions, notices, reports and statements to PHMSC
Certificateholders shall, in the case of the Underlying Certificates, refer to
distributions, notices, reports and statements to DTC or CEDE, as the registered
holder of the Underlying Certificates for distribution to Beneficial Owners in
accordance with DTC procedures. The Trustee on behalf of the holders of the
Trust Certificates will be the Beneficial Owner of the Underlying Certificates.
The Trustee is a Participant.
Neither PHMSC nor the Underlying Trustee will have any responsibility for
any aspect of the records relating to or payments made on account of beneficial
ownership interests of the Underlying Certificates held by CEDE, as nominee for
DTC, or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests. In the event of the insolvency of DTC or a
Participant or Indirect Participant in whose name the Underlying Certificates
are registered, the ability of the Beneficial Owners of such Underlying
Certificates to obtain timely payment may be impaired. In addition, in such
event, if the limits of applicable insurance coverage by the Securities Investor
Protection Corporation are exceeded or if such coverage is otherwise
unavailable, ultimate payment of amounts distributable with respect to such
Underlying Certificates may be impaired.
Underlying Certificates will be converted to definitive Certificates and
re-issued to Beneficial Owners or their nominees, rather than to DTC or its
nominee, only if (i) the Servicer advises DTC in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository with
respect to the Underlying Certificates and the Servicer is unable to locate a
qualified successor, (ii) the Servicer, at its option, elects to terminate the
book-entry system through DTC or (iii) after the occurrence of a dismissal or
resignation of the Servicer under the Pooling and Servicing Agreement,
Beneficial Owners aggregating not less than 51% of the aggregate voting rights
allocated to each outstanding class of PHMSC Book-Entry Certificates (defined as
all the classes of PHMSC Senior Certificates, other than the Class A-8, Class
A-11, Class A-15 and Class A-18 Certificates and the PHMSC Residual
Certificates) advise the Underlying Trustee through DTC, in writing, that the
continuation of a book-entry system through DTC (or a successor thereto) is no
longer in the Beneficial Owners' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Underlying Trustee will be required to notify all Beneficial
Owners of the availability of definitive Certificates. Upon surrender by DTC of
the physical Certificates representing the Underlying Certificates and receipt
of instructions for re-registration, the Underlying Trustee will reissue the
Underlying Certificates as definitive Certificates to Beneficial Owners. The
procedures relating to payment on and transfer of those PHMSC Certificates
initially issued as definitive Certificates will thereafter apply to those
Underlying Certificates that have been reissued as definitive Certificates.
PHMSC Available Funds
The aggregate amount of funds available for distribution to PHMSC
Certificateholders on each Underlying Distribution Date will be the PHMSC
Available Funds. With respect to each Underlying Distribution Date, the "PHMSC
Available Funds" will equal the sum of all previously undistributed payments or
other receipts on account of principal, including principal prepayments and
Liquidation
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<PAGE>
Proceeds (as defined herein) in respect of principal, if any, and interest on or
in respect of the Mortgage Loans received by the Servicer after the Underlying
Cut-off Date (except for amounts due on or prior to the Underlying Cut-off
Date), or received by the Servicer on or prior to the Underlying Cut-off Date
but due after the Underlying Cut-off Date, in either case received on or prior
to the business day preceding the Determination Date (as defined herein) in the
month in which such Underlying Distribution Date occurs, plus (i) all Periodic
Advances (as defined herein) made by the Servicer, (ii) all withdrawals from the
Advance Reserve Fund, if established, as described under "-Advances" herein and
(iii) all other amounts required to be placed in the certificate account by the
Servicer pursuant to the Pooling and Servicing Agreement, but excluding the
following:
(a) amounts received as late payments of principal or interest respecting
which the Servicer previously has made one or more unreimbursed Periodic
Advances or an unreimbursed advance has been made from the Advance Reserve Fund,
if established;
(b) to the extent permitted by the Pooling and Servicing Agreement, that
portion of Liquidation Proceeds with respect to a Mortgage Loan which represents
any unreimbursed Periodic Advances or unreimbursed advances from the Advance
Reserve Fund, if established;
(c) those portions of each payment of interest on a particular Mortgage Loan
which represent the applicable Servicing Fee, as adjusted in respect of
Prepayment Interest Shortfalls as described under "Distributions--Interest"
below;
(d) all amounts representing scheduled payments of principal and interest
due after the Due Date occurring in the month in which such Underlying
Distribution Date occurs;
(e) all principal prepayments in full and all proceeds of any Mortgage
Loans, or property acquired in respect thereof, liquidated, foreclosed,
purchased or repurchased pursuant to the Pooling and Servicing Agreement, other
than Partial Liquidation Proceeds (as defined herein), received on or after the
Due Date occurring in the month in which such Underlying Distribution Date
occurs, and all partial principal prepayments and Partial Liquidation Proceeds
received by the Servicer on or after the Determination Date occurring in the
month in which such Underlying Distribution Date occurs, and all related
payments of interest on such amounts;
(f) to the extent permitted by the Pooling and Servicing Agreement, that
portion of Liquidation Proceeds or insurance proceeds with respect to a Mortgage
Loan which represents any unpaid Servicing Fee to which the Servicer is
entitled;
(g) all amounts representing certain expenses reimbursable to the Servicer
and other amounts permitted to be retained by the Servicer or withdrawn by the
Servicer from the certificate account pursuant to the Pooling and Servicing
Agreement;
(h) all amounts in the nature of late fees, assumption fees, prepayment fees
and similar fees which the Servicer is entitled to retain as additional
servicing compensation;
(i) reinvestment earnings on payments received in respect of the Mortgage
Loans;
(j) Net Foreclosure Profits (as defined herein); and
(k) any recovery of an amount in respect of principal which had previously
been allocated as a Realized Loss to any of the PHMSC Certificates.
Distributions
Distributions of interest and principal to holders of PHMSC Certificates
will be made monthly on the 25th day of each month or, if such day is not a
business day, on the succeeding business day (each, an "Underlying Distribution
Date"), in an aggregate amount equal to the PHMSC Available Funds for such
Underlying Distribution Date. Distributions of interest and principal to holders
of the PHMSC Subordinate Certificates will be made monthly, to the extent of
their entitlement thereto as provided in the Pooling and Servicing Agreement, on
each Underlying Distribution Date after all amounts in
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<PAGE>
respect of interest and principal due on the PHMSC Senior Certificates for such
Underlying Distribution Date have been paid.
Allocation of PHMSC Available Funds. On each Underlying Distribution date,
the PHMSC Available Funds will be distributed in the following order of
priority:
first, to the subclasses of Class A Certificates, pro rata based on their
respective Class A Subclass Interest Accrual Amounts (as defined herein), in an
aggregate amount up to the sum of the Class A Subclass Interest Accrual Amounts
with respect to such Underlying Distribution Date;
second, to the subclasses of Class A Certificates, pro rata based on their
respective unpaid Class A Subclass Interest Shortfall Amounts (as defined
herein), in an aggregate amount up to the sum of the previously unpaid Class A
Subclass Interest Shortfall Amounts;
third, to the subclasses of Class A Certificates, in an aggregate amount
up to the PHMSC Class A Optimal Principal Amount (as defined herein), such
distribution to be allocated among such subclasses in accordance with the
priorities set forth below under "-Principal"; and
fourth, to the PHMSC Subordinate Certificates as provided in the Pooling
and Servicing Agreement.
Interest. Interest will accrue on the Underlying Certificates at 6.875% per
annum during each one-month period ending on the last day of the month preceding
the month in which each Underlying Distribution Date occurs (each, an "Interest
Accrual Period"). As described in the Pooling and Servicing Agreement, certain
subclasses of Class A Certificates have an Interest Accrual Period which
commences on the 25th day of each month and ends on the 24th day of the
following month. Interest that accrues on the Underlying Certificates will be
calculated on the assumption that distributions in reduction of the principal
balance thereof on an Underlying Distribution Date are made on the first day of
the month of such Underlying Distribution Date. Interest on the Underlying
Certificates will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
The amount of interest that will accrue on each subclass of Class A
Certificates during each related Interest Accrual Period is referred to herein
as the "Class A Subclass Interest Accrual Amount" for such subclass. The Class A
Subclass Interest Accrual Amount for each subclass of Class A Certificates,
other than the Class A-8 and Class A-18 Certificates, will equal the product of
(i) 1/12th of the pass-through rate for such subclass and (ii) the outstanding
Certificate Principal Balance of such subclass. The pass-through rate for the
Underlying Certificates is 6.875% per annum.
The Class A Subclass Interest Accrual Amount for the Class A-8 and Class
A-18 Certificates will be calculated on the respective notional amounts of such
subclasses.
Each Class A Subclass Interest Accrual Amount will be reduced by the portion
of (i) any NonSupported Interest Shortfall allocable to such subclass and (ii)
the interest portion of Excess Special Hazard Losses, Excess Fraud Losses and
Excess Bankruptcy Losses allocable to such subclass.
An interest shortfall resulting from principal prepayments in full of
Mortgage Loans (a "Prepayment Interest Shortfall") will be offset to the extent
of the aggregate Servicing Fees relating to mortgagor payments or other
recoveries distributed on the related Underlying Distribution Date. To the
extent that the aggregate Prepayment Interest Shortfalls with respect to an
Underlying Distribution Date exceed the aggregate Servicing Fees relating to
mortgagor payments or other recoveries distributed on such Underlying
Distribution Date, the resulting interest shortfall (the "Non-Supported Interest
Shortfall") will be allocated to (i) the Class A Certificates according to the
percentage obtained by dividing the then-outstanding Certificate Principal
Balance of the Class A Certificates by the sum of the then-outstanding aggregate
Certificate Principal Balance of the Class A Certificates and the
then-outstanding aggregate Certificate Principal Balance of the PHMSC
Subordinate Certificates and (ii) the PHMSC Subordinate Certificates according
to the percentage obtained by dividing the then-outstanding aggregate
Certificate Principal Balance of the PHMSC Subordinate Certificates by the sum
of the then-outstanding aggregate Certificate Principal Balance of the Class A
Certificates and the then-outstanding aggregate
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<PAGE>
Certificate Principal Balance of the PHMSC Subordinate Certificates. Such
allocation of the Non-Supported Interest Shortfall will reduce the amount of
interest due to be distributed to holders of the Class A Certificates then
entitled to distributions in respect of interest. Any such reduction in respect
of interest will be allocated among the subclasses of Class A Certificates pro
rata on the basis of their respective Class A Subclass Interest Accrual Amounts
for such Underlying Distribution Date.
Interest shortfalls resulting from the timing of the receipt of partial
principal prepayments and Partial Liquidation Proceeds will not be offset by
Servicing Fees and will, on each Underlying Distribution Date occurring prior to
the Cross-Over Date, be allocated first to the PHMSC Subordinate Certificates
before being borne by the Class A Certificates. See "--Subordination of the
PHMSC Subordinate Certificates" below. On each Underlying Distribution Date
occurring on or after the Cross-Over Date, any interest shortfalls resulting
from the timing of the receipt of partial principal prepayments and Partial
Liquidation Proceeds will be considered a Non-Supported Interest Shortfall and
will be allocated to the Class A Certificates as described above.
The interest portion of any Excess Special Hazard Losses, Excess Fraud
Losses or Excess Bankruptcy Losses (each as defined herein) will be allocated
among the Class A Certificates and the PHMSC Subordinate Certificates pro rata
based on interest accrued thereon and among the subclasses of Class A
Certificates pro rata on the basis of their respective Class A Subclass Interest
Accrual Amounts for such Underlying Distribution Date.
Allocations of the interest portion of Realized Losses (other than Excess
Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy Losses) first to
the PHMSC Subordinate Certificates will result from the priority of
distributions first to the holders of Class A Certificates of the PHMSC
Available Funds as described above under "--Allocation of PHMSC Available
Funds".
On each Underlying Distribution Date on which the PHMSC Available Funds
equals or exceeds the sum of the Class A Subclass Interest Accrual Amounts,
distributions in respect of interest to each subclass of Class A Certificates
will equal such subclass' Class A Subclass Interest Accrual Amount, and any
excess will then be allocated first to pay previously unpaid Class A Subclass
Interest Shortfall Amounts. Such amounts will be allocated among the subclasses
of Class A Certificates pro rata in accordance with the respective unpaid Class
A Subclass Interest Shortfall Amounts immediately prior to such Underlying
Distribution Date.
If, on any Underlying Distribution Date, the PHMSC Available Funds is less
than the sum of the Class A Subclass Interest Accrual Amounts, the amount of
interest currently distributed on the Class A Certificates will equal the PHMSC
Available Funds and will be allocated among the subclasses of Class A
Certificates pro rata in accordance with each such subclass' Class A Subclass
Interest Accrual Amount. Amounts so allocated will be distributed in respect of
interest to each subclass of Class A Certificates. Any difference between the
portion of the PHMSC Available Funds distributed in respect of current interest
to each subclass of Class A Certificates and the Class A Subclass Interest
Accrual Amount for such subclass with respect to the related Underlying
Distribution Date (as to each subclass, the "Class A Subclass Interest Shortfall
Amount") will be added to the amount to be distributed on subsequent Underlying
Distribution Dates to the extent that the PHMSC Available Funds is sufficient
therefor. No interest will accrue on the unpaid Class A Subclass Interest
Shortfall Amounts.
Principal. The Certificate Principal Balance of a Class A Certificate of any
subclass (other than a Class A-8 or Class A-18 Certificate) at any time is equal
to the product of the Certificate Principal Balance of such subclass and such
Class A Certificate's percentage interest in such subclass, and represents the
maximum specified dollar amount (exclusive of any interest that may accrue on
such Class A Certificate) to which the PHMSC Certificateholder thereof is
entitled from the cash flow on the Mortgage Loans at such time, and will decline
to the extent of distributions in reduction of the Certificate Principal Balance
of, and allocations of losses to, such Class A Certificate.
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<PAGE>
The "Class A Distribution Amount" for any Underlying Distribution Date will
be equal to the sum of the amounts distributed in accordance with priorities
first through third of the allocation set forth above under "--Allocation of
PHMSC Available Funds".
The "PHMSC Class A Optimal Principal Amount" with respect to each Underlying
Distribution Date will be an amount equal to the sum of (i) the PHMSC Class A
Percentage of (A) all scheduled payments of principal due on each outstanding
Mortgage Loan (including each defaulted Mortgage Loan, other than a Liquidated
Loan (as defined herein), with respect to which the related Mortgaged Property
has been acquired by the Underlying Trust Fund) on the first day of the month in
which the Underlying Distribution Date occurs, less (B) if the Bankruptcy Loss
Amount (as defined herein) is zero, the principal portion of Debt Service
Reductions, (ii) the PHMSC Class A Prepayment Percentage of the Scheduled
Principal Balance of each Mortgage Loan which, during the month preceding the
month of such Underlying Distribution Date was repurchased by the PHMSC, (iii)
the Class A Prepayment Percentage of (A) the aggregate net Liquidation Proceeds
(other than net Partial Liquidation Proceeds) on all Mortgage Loans that became
Liquidated Loans during such preceding month (excluding the portion thereof, if
any, constituting Net Foreclosure Profits), less the amounts allocable to
principal of any unreimbursed Periodic Advances previously made by the Servicer
and any unreimbursed advances from the Advance Reserve Fund (if established)
with respect to such Liquidated Loans and the portion of such net Liquidation
Proceeds allocable to interest and (B) the aggregate net Partial Liquidation
Proceeds on all Mortgage Loans received by the Servicer on or after the
Determination Date occurring in the month preceding the month in which such
Underlying Distribution Date occurs and prior to the Determination Date
occurring in the month in which such Underlying Distribution Date occurs, less
the amounts allocable to principal of any unreimbursed Periodic Advances
previously made by the Servicer and any unreimbursed advances from the Advance
Reserve Fund (if established) with respect thereto and the portion of the net
Partial Liquidation Proceeds allocable to interest, (iv) the PHMSC Class A
Prepayment Percentage of an amount equal to the principal portion of Realized
Losses (other than Bankruptcy Losses due to Debt Service Reductions) incurred in
such preceding month other than Excess Special Hazard Losses, Excess Fraud
Losses and Excess Bankruptcy Losses, (v) the PHMSC Class A Prepayment Percentage
of the Scheduled Principal Balance of each Mortgage Loan which was the subject
of a principal prepayment in full during the month preceding the month of such
Underlying Distribution Date, (vi) the PHMSC Class A Prepayment Percentage of
all partial principal prepayments received by the Servicer on or after the
Determination Date occurring in the month preceding the month in which such
Underlying Distribution Date occurs and prior to the Determination Date
occurring in the month in which such Underlying Distribution Date occurs and
(vii) the PHMSC Class A Percentage of the difference between the unpaid
principal balance of any Mortgage Loan substituted for a defective Mortgage Loan
during the month preceding the month in which such Underlying Distribution Date
occurs and the unpaid principal balance of such defective Mortgage Loan, less
the amounts allocable to principal of any unreimbursed Periodic Advances and any
unreimbursed advances from the Advance Reserve Fund (if established) with
respect to such defective Mortgage Loan.
In addition, in the event that there is any recovery of an amount in respect
of principal which had previously been allocated as a Realized Loss to the Class
A Certificates, each subclass of the Class A Certificates then outstanding will
be entitled to its pro rata share of such recovery in an amount up to the amount
by which the Certificate Principal Balance of such subclass was reduced as a
result of such Realized Loss.
The "Scheduled Principal Balance" of a Mortgage Loan as of any Underlying
Distribution Date is the unpaid principal balance of such Mortgage Loan as
specified in the amortization schedule at the time relating thereto (before any
adjustment to such schedule by reason of bankruptcy (other than Deficient
Valuations), moratorium or similar waiver or grace period) as of the Due Date
occurring in the month preceding the month in which such Underlying Distribution
Date occurs, after giving effect to any principal prepayments or other
unscheduled recoveries of principal previously received, to any partial
principal prepayments and Partial Liquidation Proceeds applied as of such Due
Date, Deficient
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Valuations occurring prior to such Due Date and to the payment of principal due
on such Due Date, and irrespective of any delinquency in payment by the
mortgagor.
"Partial Liquidation Proceeds" are Liquidation Proceeds received by the
Servicer on a Mortgage Loan prior to such Mortgage Loan becoming a Liquidated
Loan. A "Liquidated Loan" is a defaulted Mortgage Loan as to which the Servicer
has determined that all recoverable liquidation and insurance proceeds have been
received. A "Liquidated Loan Loss" on a Liquidated Loan is generally equal to
the excess, if any, of (i) the unpaid principal balance of such Liquidated Loan,
plus interest thereon in accordance with the amortization schedule at the Net
Mortgage Rate through the last day of the month in which such Mortgage Loan was
liquidated, over (ii) net Liquidation Proceeds. For purposes of calculating the
amount of any Liquidated Loan Loss, all net Liquidation Proceeds (after
reimbursement to the Servicer for any previously unreimbursed advances) will be
applied first to accrued interest and then to the unpaid principal balance of
the Liquidated Loan. A "Special Hazard Loss" is a Liquidated Loan Loss occurring
as a result of a hazard not insured against under a standard hazard insurance
policy of the type described generally in the Prospectus under "Description of
Primary Insurance Policies-Primary Hazard Insurance Policies." A "Fraud Loss" is
a Liquidated Loan Loss incurred on a Liquidated Loan as to which there was fraud
in the origination of such Mortgage Loan. A "Bankruptcy Loss" is a loss
attributable to certain actions which may be taken by a bankruptcy court in
connection with a Mortgage Loan, including a reduction by a bankruptcy court of
the principal balance of or the interest rate on a Mortgage Loan or an extension
of its maturity. A "Debt Service Reduction" means a reduction in the amount of
monthly payments due to certain bankruptcy proceedings, but does not include any
permanent forgiveness of principal. A "Deficient Valuation" with respect to a
Mortgage Loan means a valuation by a court of the Mortgaged Property in an
amount less than the outstanding indebtedness under the Mortgage Loan or any
reduction in the amount of monthly payments that results in a permanent
forgiveness of principal, which valuation or reduction results from a bankruptcy
proceeding. Liquidated Loan Losses (including Special Hazard Losses and Fraud
Losses) and Bankruptcy Losses are referred to herein as "Realized Losses." "Net
Foreclosure Profits" means, with respect to any Underlying Distribution Date,
the excess, if any, of (i) the aggregate profits on Liquidated Loans in the
related period with respect to which net Liquidation Proceeds exceed the unpaid
principal balance thereof plus accrued interest thereon at the Mortgage interest
Rate over (ii) the aggregate realized losses on Liquidated Loans in the related
period with respect to which net Liquidation Proceeds are less than the unpaid
principal balance thereof plus accrued interest thereon at the Mortgage Rate.
The "Net Mortgage Rate" on each Mortgage Loan will be equal to the Mortgage Rate
on such Mortgage Loan as stated in the related mortgage note minus the Servicing
Fee rate of 0.20% per annum. See "Pooling and Servicing Agreement--Servicing
Compensation and Payment of Expenses" herein.
The "PHMSC Class A Percentage" for any Underlying Distribution Date
occurring prior to the CrossOver Date is the percentage (subject to rounding),
which in no event will exceed 100%, obtained by dividing the Certificate
Principal Balance as of such date (before taking into account distributions in
reduction of principal balance on such date) by the aggregate Scheduled
Principal Balances of all Mortgage Loans for such Underlying Distribution Date.
The PHMSC Class A Percentage was approximately 94.00% at the initial issuance of
the PHMSC Certificates. As of the Delivery Date, the Class A Percentage is
approximately 93.39%, such percentage subject to decrease, as a result of the
allocation of certain unscheduled payments in respect of principal according to
the Class A Prepayment Percentage for a specified period to the Class A
Certificates, and to increase as a result of the allocation of Realized Losses
to the PHMSC Subordinate Certificates. The PHMSC Class A Percentage for each
Underlying Distribution Date occurring on or after the Cross-Over Date will be
100%.
The "PHMSC Class A Prepayment Percentage" for any Underlying Distribution
Date occurring during the five years that began on the first Underlying
Distribution Date in March 1994 will, except as provided below, equal 100%.
Thereafter, the PHMSC Class A Prepayment Percentage will be subject to gradual
reduction as described in the following paragraph. This disproportionate
allocation
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of certain unscheduled payments in respect of principal will have the effect of
accelerating the amortization of the Class A Certificates while, in the absence
of Realized Losses, increasing the respective interest in the principal balance
of the Mortgage Loans evidenced by the PHMSC Subordinate Certificates.
Increasing the respective interest of the PHMSC Subordinate Certificates
relative to that of the Class A Certificates is intended to preserve the
availability of the subordination provided by the PHMSC Subordinate
Certificates. See "-Subordination of the PHMSC Subordinate Certificates" below.
The "PHMSC Class A Prepayment Percentage" for any Underlying Distribution
Date occurring on or after the fifth anniversary of the first Underlying
Distribution Date will be as follows: for any Underlying Distribution Date
subsequent to February 1999 to and including the Underlying Distribution Date in
February 2000, the PHMSC Class A Percentage for such Underlying Distribution
Date plus 70% of the PHMSC Subordinate Percentage for such Underlying
Distribution Date; for any Underlying Distribution Date subsequent to February
2000 to and including the Underlying Distribution Date in February 2001, the
PHMSC Class A Percentage for such Underlying Distribution Date plus 60% of the
PHMSC Subordinate Percentage for such Underlying Distribution Date; for any
Underlying Distribution Date subsequent to February 2001 to and including the
Underlying Distribution Date in February 2002, the PHMSC Class A Percentage for
such Underlying Distribution Date plus 40% of the PHMSC Subordinate Percentage
for such Underlying Distribution Date; for any Underlying Distribution Date
subsequent to February 2002 to and including the Underlying Distribution Date in
February 2003, the PHMSC Class A Percentage for such Underlying Distribution
Date plus 20% of the PHMSC Subordinate Percentage for such Underlying
Distribution Date; and for any Underlying Distribution Date thereafter, the
PHMSC Class A Percentage for such Underlying Distribution Date (unless on any of
the foregoing Underlying Distribution Dates the PHMSC Class A Percentage exceeds
the initial PHMSC Class A Percentage, in which case the Class A Prepayment
Percentage for such Underlying Distribution Date will once again equal 100%).
See "Yield on the Trust Certificates" herein. Notwithstanding the foregoing, no
reduction of the Class A Prepayment Percentage will occur on any Underlying
Distribution Date if (i) as of such Underlying Distribution Date as to which any
such reduction applies, more than an average of 2% of the dollar amount of all
monthly payments on the Mortgage Loans due in each of the preceding twelve
months were delinquent 60 days or more (including for this purpose any Mortgage
Loans in foreclosure and Mortgage Loans with respect to which the related
Mortgaged Property has been acquired by the Underlying Trust Fund), or (ii)
cumulative Realized Losses with respect to the Mortgage Loans exceed (a) 30% of
the principal balance of the Subordinated Certificates as of the Cut-Off Date
(the "Original Subordinated Principal Balance") if such Underlying Distribution
Date occurs between and including March 1999 and February 2000, (b) 35% of the
Original Subordinated Principal Balance if such Underlying Distribution Date
occurs between and including March 2000 and February 2001, (c) 40% of the
Original Subordinated Principal Balance if such Underlying Distribution Date
occurs between and including March 2001 and February 2002, (d) 45% of the
Original Subordinated Principal Balance if such Underlying Distribution Date
occurs between and including March 2002 and February 2003, and (e) 50% of the
Original Subordinated Principal Balance if such Underlying Distribution Date
occurs during or after March 2003. If on any Underlying Distribution Date the
allocation to the Class A Certificates of full and partial principal prepayments
and other amounts in the percentage required above would reduce the outstanding
aggregate Certificate Principal Balance of the Class A Certificates below zero,
the Class A Prepayment Percentage for such Underlying Distribution Date will be
limited to the percentage necessary to reduce the Class A Principal Balance to
zero. See "Description of the Certificates--Distributions to Percentage
Certificateholders--Shifting Interest Certificates" in the Prospectus.
Solely for the purpose of determining distributions in reduction of
Certificate Principal Balance, the PAC Group will be deemed to consist of two
components: the "PAC I Group Component" and the "PAC II Group Component" (each,
a "PAC Group Component") each with an identifiable principal balance (a "Group
Component Principal Balance"). The sum of the Certificate Principal Balances of
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the subclasses comprising the PAC Group (the "Group Principal Balance") will be
equal to, on any date, the sum of the Group Component Principal Balances of the
outstanding PAC Group Components as of such date. The PAC I Group Component had
an initial Group Component Principal Balance at initial issuance of
approximately $92,135,000 and has a Group Component Principal Balance as of the
Reference Date of approximately $65,489,173. The PAC I Group Component had an
initial Group Component Principal Balance at initial issuance of approximately
$26,128,000 and has a Group Component Principal Balance as of the Reference Date
of approximately $25,451,096.
Whenever principal payments are allocated to a PAC Group Component, the
aggregate amount of such allocated principal will be paid sequentially as
follows:
(i) to the Class A-7 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
(ii) to the Class A-12 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero; and
(iii) to the Class A-13 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero.
Distributions in reduction of the principal balance of the PHMSC Class A
Certificates (other than the Class A-8 and Class A-18 Certificates) will be made
on each Underlying Distribution Date pursuant to priority third of the
allocation set forth above under "--Allocation of PHMSC Available Funds", in an
aggregate amount (the "PHMSC Class A Principal Distribution Amount") up to the
PHMSC Class A Optimal Principal Amount.
On each Underlying Distribution Date occurring prior to the Cross Over Date,
the Class A Principal Distribution Amount will be allocated among and
distributed in reduction of the principal balances of the subclasses of Class A
Certificates as follows:
first, sequentially, to the following subclasses of PAC I Certificates,
the Class A-5 PAC I Component and the PAC I Group Component, up to their PAC
Principal Amounts and PAC Group Principal Amount with respect to such
Underlying Distribution Date, allocated in the following approximate
proportions:
(a) concurrently, 40% to the Class A-1 Certificates and 60% to the
PAC I Group Component;
(b) concurrently, 56.69604087% to the Class A-2 Certificates,
15.64495530% to the Class A-5 PAC I Component and 27.65900383% to the
PAC I Group Component; and
(c) concurrently, 75.56675063% to the Class A-3 Certificates and
24.43324937% to the PAC I Group Component;
second, sequentially, to the following subclasses of PAC II
Certificates, the Class A-5 PAC II Component and the PAC II Group Component,
up to their PAC Principal Amounts and PAC Group Principal Amount with
respect to such Underlying Distribution Date, allocated in the following
approximate proportions:
(a) concurrently, 36.00555556% to the Class A-16 Certificates,
25.81388888% to the Class A-17 Certificates and 38.18055556% to the PAC
II Group Component;
(b) concurrently, 27.32044888% to the Class A-4 Certificates,
45.82294264% to the Class A-5 PAC II Component, 11.85785536% to the
Class A-16 Certificates and 14.99875312% to the PAC II Group Component;
and
(c) concurrently, 97.14975845% to the Class A-6 Certificates and
2.85024155% to the PAC II Group Component;
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third, concurrently, to the Class A-9, Class A-10, Class A-11, Class
A-14, Class A-15, Class A-R and Class A-LR Certificates, pro rata, until the
Certificate Principal Balances thereof have been reduced to zero;
fourth, sequentially, to the following subclasses of PAC II
Certificates, the Class A-5 PAC II Component and the PAC II Group Component
without regard to their PAC Principal Amounts and PAC Group Principal Amount
with respect to such Underlying Distribution Date, allocated in the
following approximate proportions:
(a) concurrently, 36.00555556% to the Class A-16 Certificates,
25.81388888% to the Class A-17 Certificates and 38.18055556% to the PAC
II Group Component, until the Certificate Principal Balance of the Class
A-17 Certificates has been reduced to zero;
(b) concurrently, 27.32044888% to the Class A4 Certificates,
45.82294264% to the Class A-5 PAC II Component, 11.85785536% to the
Class A-16 Certificates and 14.99875312% to the PAC II Group Component,
until the Certificate Principal Balances of the Class A-4 and Class A-16
Certificates and the Component Principal Balance of the Class A-5 PAC II
Component have been reduced to zero; and
(c) concurrently, 97.14975845% to the Class A-6 Certificates and
2.85024155% to the PAC II Group Component, until the Certificate
Principal Balance and Group Component Principal Balance thereof have
been reduced to zero; and
fifth, sequentially, to the following subclasses of PAC I Certificates,
the Class A-5 PAC I Component and the PAC I Group Component, without-regard
to their PAC Principal Amounts and PAC Group Principal Amount with respect
to such Underlying Distribution Date, allocated in the following approximate
proportions:
(a) concurrently, 40% to the Class A-1 Certificates and 60% to the
PAC I Group Component, until the Certificate Principal Balance of the
Class A-1 Certificates has been reduced to zero;
(b) concurrently, 56.69604087% to the Class A-2 Certificates,
15.64495530% to the Class A-5 PAC I Component and 27.65900383% to the
PAC I Group Component, until the Certificate Principal Balance of the
Class A-2 Certificates and the Component Principal Balance of the Class
A-5 PAC I Component have been reduced to zero, and
(c) concurrently, 75.56675063% to the Class A-3 Certificates and
24.43324937% to the PAC I Group Component, until the Certificate
Principal Balance and Group Component Principal Balance thereof have
been reduced to zero.
As used above, the "PAC Principal Amount" for any Underlying Distribution
Date and for any subclass of PAC Certificates (other than the Class A-7, Class
A-12 and Class A-13 Certificates) or any PAC Component means the amount, if any,
that would reduce the Certificate Principal Balance of such subclass or the
Component Principal Balance of such PAC Component to the percentage of its
initial Certificate Principal Balance or initial Component Principal Balance
shown in the tables attached hereto as Appendix A with respect to such
Underlying Distribution Date.
As used above, the "PAC Group Principal Amount" for any Underlying
Distribution Date and for any PAC Group Component means the amount, if any, that
would reduce the Group Component Principal Balance of such PAC Group Component
to the percentage of its initial Group Component Principal Balance shown in the
following tables with respect to such Underlying Distribution Date. The Class
A-7, Class A-12 and Class A-13 Certificates do not have separate PAC Principal
Amounts. Instead, any PAC Group Principal Amount distributed to the PAC Group
Components will be allocated to the subclasses comprising the PAC Group in
accordance with the proportions and priorities set forth above.
On each Underlying Distribution Date occurring on or after the Cross-Over
Date, the Class A Principal Distribution Amount will be distributed among the
subclasses of Class A Certificates pro rata
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in accordance with their respective outstanding Certificate Principal Balances
without regard to either the priorities set forth above or the tables attached
hereto as Appendix A.
Amounts distributed on each Underlying Distribution Date to the holders of
Class A Certificates (other than the Class A-8 and Class A-18 Certificates) in
reduction of principal balance will be allocated among the holders of Class A
Certificates of each subclass, pro rata, in accordance with their respective
percentage interests in such subclass.
Subordination of the PHMSC Subordinate Certificates
The rights of the holders of the PHMSC Subordinate Certificates to receive
distributions with respect to the Mortgage Loans in the Underlying Trust Fund
will be subordinated to such rights of the holders of the Class A Certificates
to the extent described below. This subordination is intended to enhance the
likelihood of timely receipt by the holders of the Class A Certificates (to the
extent of the subordination of the PHMSC Subordinate Certificates) of the full
amount of their scheduled monthly payments of interest and principal and to
afford the holders of the Class A Certificates (to the extent of the
subordination of the PHMSC Subordinate Certificates) protection against Realized
Losses, as more fully described below. If Realized Losses exceed the credit
support provided through subordination to the Class A Certificates or if Excess
Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy Losses occur,
all or a portion of such losses will be borne by the Class A Certificates.
The protection afforded to the holders of Class A Certificates by means of
the subordination feature will be accomplished by the preferential right of such
holders to receive, prior to any distribution being made on a Underlying
Distribution Date in respect of the PHMSC Subordinate Certificates, the amounts
of principal and interest due the holders of Class A Certificates on each
Underlying Distribution Date out of the PHMSC Available Funds with respect to
such date and, if necessary, by the right of such PHMSC Certificateholders to
receive future distributions on the Mortgage Loans that would otherwise have
been payable to the holders of the PHMSC Subordinate Certificates. The
application of this subordination to cover Realized Losses experienced in
periods prior to the periods in which a subclass of Class A Certificates is
entitled to distributions in reduction of principal balance will decrease the
protection provided by the subordination to any such subclass.
The PHMSC Subordinate Certificates will be entitled, on each Underlying
Distribution Date, to the remaining portion, if any, of the applicable PHMSC
Available Funds, after payment interest and principal required to be distributed
to the Class A Certificates for such date. Amounts so distributed to holders of
the PHMSC Subordinate Certificates will not be available to cover delinquencies
or Realized Losses in respect of subsequent Underlying Distribution Dates.
Realized Losses (other than Excess Special Hazard Losses, Excess Fraud
Losses or Excess Bankruptcy Losses) will not be allocated to the holders of the
Class A Certificates until the Cross-Over Date. Prior to such time, such
Realized Losses will be allocated first to the PHMSC Subordinate Certificates
until the principal balances thereof have been reduced to zero.
The allocation of the principal portion of a Realized Loss (other than a
Debt Service Reduction, Excess Special Hazard Loss, Excess Fraud Loss or Excess
Bankruptcy Loss) will be effected through the adjustment of the aggregate
Certificate Principal Balance of the PHMSC Subordinate Certificates in such
amount as is necessary to cause the sum of the Certificate Principal Balances of
the Class A Certificates and PHMSC Subordinate Certificates to equal the
Adjusted Pool Amount.
Allocations to the PHMSC Subordinate Certificates of (i) the principal
portion of Debt Service Reductions, (ii) the interest portion of Realized Losses
(other than Excess Special Hazard Losses, Excess Fraud Losses and Excess
Bankruptcy Losses), (iii) any interest shortfalls resulting from delinquencies
for which the Servicer does not advance and (iv) any interest shortfalls
resulting from the timing of the receipt of partial principal prepayments and
Partial Liquidation Proceeds, will result from the priority of distributions
first to the holders of Class A Certificates of the PHMSC Available Funds as
described above under "--Distributions."
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As of the Delivery Date, approximately $79,089 in Realized Losses (as
defined herein) have been allocated to the PHMSC Subordinate Certificates.
The principal portion of any Realized Loss occurring on or after the
Cross-Over Date will be allocated among the outstanding subclasses of Class A
Certificates pro rata in accordance with their then-outstanding Certificate
Principal Balances and the interest portion of any Realized Loss occurring on or
after the Cross-Over Date will be allocated among the outstanding subclasses of
Class A Certificates pro rata in accordance with their Class A Subclass Interest
Accrual Amounts. Any such losses will be allocated among the outstanding Class A
Certificates within each subclass pro rata in accordance with their respective
percentage interests in such subclass.
Any Excess Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy
Losses will be allocated on a pro rata basis among the Class A Certificates and
the PHMSC Subordinate Certificates. Any such losses so allocated to the Class A
Certificates will be allocated among the outstanding subclasses of Class A
Certificates pro rata in accordance with their then-outstanding Certificate
Principal Balances with respect to the principal portion of such losses and
their Class A Subclass Interest Accrual Amounts with respect to the interest
portion of such losses, and among the outstanding Class A Certificates within
each subclass pro rata in accordance with their respective percentage interests
in such subclass).
The interest portion of Excess Special Hazard Losses, Excess Fraud Losses
and Excess Bankruptcy Losses allocated to the Class A Certificates will be
allocated by reducing the Class A Subclass Interest Accrual Amount.
As described above, the PHMSC Available Funds for any Underlying
Distribution Date will include current receipts (other than certain unscheduled
payments in respect of principal) from the Mortgage Loans otherwise payable to
holders of the PHMSC Subordinate Certificates. If the PHMSC Available Funds is
not sufficient to cover the amount of principal payable to the holders of the
Class A Certificates on a particular Underlying Distribution Date (other than
any portion thereof representing the difference between the PHMSC Class A
Percentage of the Scheduled Principal Balances of Liquidated Loans and the PHMSC
Class A Prepayment Percentage of such amounts), then the percentage of principal
payments on the Mortgage Loans to which the holders of the Class A Certificates
will be entitled (i.e., the PHMSC Class A Percentage) on and after the next
Underlying Distribution Date will be proportionately increased, thereby
reducing, as a relative matter, the respective interest of the PHMSC Subordinate
Certificates in future payments of principal on the Mortgage Loans in the
Underlying Trust Fund. Such a shortfall could occur, for example, if a
considerable number of Mortgage Loans were to become Liquidated Loans in a
particular month.
At the issuance of the PHMSC Certificates, the PHMSC Subordinate
Certificates provided protection to the PHMSC Senior Certificates against (i)
Special Hazard Losses in an initial equal to approximately $6,464,899 (the
initial "Special Hazard Loss Amount"), (ii) Bankruptcy Losses in an initial
amount equal to approximately $148,000 (the initial "Bankruptcy Loss Coverage
Amount") and (iii) Fraud Losses in an initial amount equal to approximately
$9,017,155 (the "Fraud Loss Coverage Amount"). Pursuant to terms of the Pooling
and Servicing Agreement described below providing for the reduction of such
coverage amounts, as of the Delivery Date the Special Hazard Loss Coverage
Amount has been reduced to approximately $5,142,703 and the Fraud Loss Coverage
Amount has been reduced to approximately $4,149,761. As of the Delivery Date,
the Bankruptcy Loss Coverage Amount remains equal to approximately $148,000.
Special Hazard Losses, other than Excess Special Hazard Losses, will be
allocated solely to the PHMSC Subordinate Certificates. Special Hazard Losses in
excess of the Special Hazard Loss Amount are "Excess Special Hazard Losses." As
of any Underlying Distribution Date, the Special Hazard Loss Amount will equal
the initial Special Hazard Loss Amount less the sum of (A) any Special Hazard
Losses allocated solely to the PHMSC Subordinate Certificates and (B) the
Adjustment Amount. The "Adjustment Amount" on each anniversary of the Underlying
Cut-off Date will be equal to the amount, if any, by which the Special Hazard
Amount, without giving effect to the deduction of
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the Adjustment Amount for such anniversary, exceeds the greater of (i) 1.00%
(or, if greater than 1.00%, the highest percentage of Mortgage Loans by
principal balance in any California zip code) times the aggregate principal
balance of all the Mortgage Loans on such anniversary (ii) twice the principal
balance of the single Mortgage Loan having the largest principal balance, and
(iii) the amount which is necessary to maintain the original ratings on the
Class A and Class M Certificates, as evidenced by a letter to that effect
delivered by Fitch to the Servicer and the Underlying Trustee. On and after the
Cross-Over Date, the Special Hazard Loss Amount will be zero.
Fraud Losses, other than Excess Fraud Losses, will be allocated solely to
the PHMSC Subordinate Certificates. Fraud Losses in excess of the Fraud Loss
Amount are "Excess Fraud Losses." As of any Underlying Distribution Date prior
to the first anniversary of the Underlying Cut-off Date, the Fraud Loss Amount
will equal the initial Fraud Loss Amount minus the aggregate amount of Fraud
Losses allocated solely to the Subordinate Certificates through the related
Determination Date. As of any Underlying Distribution Date from the first
through fifth anniversary of the Underlying Cut-off Date, the Fraud Loss Amount
will be an amount equal to (1) the lesser of (a) the Fraud Loss Amount as of the
most recent anniversary of the Underlying Cut-off Date and (b) 1.00% of the
aggregate principal balance of all of the Mortgage Loans as of the most recent
anniversary of the Underlying Cut-off Date minus (2) the aggregate amounts
allocated solely to the PHMSC Subordinate Certificates with respect to Fraud
Losses since the most recent anniversary of the Underlying Cut-off Date through
the related Determination Date. On and after the Cross-Over Date or after the
fifth anniversary of the Underlying Cut-off Date, the Fraud Loss Amount will be
zero.
Bankruptcy Losses, other than Excess Bankruptcy Losses, will be allocated
solely to the PHMSC Subordinate Certificates. Bankruptcy losses in excess of the
Bankruptcy Loss Amount are "Excess Bankruptcy Losses." As of any Underlying
Distribution Date prior to the first anniversary of the Underlying Cut-off Date,
the Bankruptcy Loss Amount will equal the initial Bankruptcy Loss Amount minus
the aggregate amount of Bankruptcy Losses allocated solely to the PHMSC
Subordinate Certificates through the related Determination Date. As of any
Underlying Distribution Date on or after the first anniversary of the Underlying
Cut-off Date, the Bankruptcy Loss Amount will equal the excess, if any, of (1)
the lesser of (a) the Bankruptcy Loss Amount as of the business day next
preceding the most recent anniversary of the Underlying Cut-off Date and (b) an
amount, if any, calculated pursuant to the terms of the Pooling and Servicing
Agreement, which amount as calculated will provide for a reduction in the
Bankruptcy Loss Amount, over (2) the aggregate amount of Bankruptcy Losses
allocated solely to the PHMSC Subordinate Certificates since such anniversary.
The Bankruptcy Loss Amount and the related coverage levels described above may
be reduced or modified upon written confirmation from Moody's and Fitch that
such reduction or modification will not adversely affect the then-current
ratings assigned to the PHMSC Certificates by Moody's and Fitch. Such a
reduction or modification may adversely affect the coverage provided by
subordination with respect to Bankruptcy Losses. On and after the Cross-Over
Date, the Bankruptcy Loss Amount will be zero. As of the Delivery Date, there
have been no Bankruptcy Losses or adjustments to the Bankruptcy Loss Amount.
Notwithstanding the foregoing, the provisions relating to subordination will
not be applicable in connection with a Bankruptcy Loss so long as the Servicer
has notified the Underlying Trustee in writing that the Servicer is diligently
pursuing any remedies that may exist in connection with the representations and
warranties made regarding the related Mortgage Loan and when (A) the related
Mortgage Loan is not in default with regard to the payments due thereunder or
(B) delinquent payments of principal and interest under the related Mortgage
Loan and any premiums on any applicable primary hazard insurance policy and any
related escrow payments in respect of such Mortgage Loan are being advanced on a
current basis by the Servicer, in either case without giving effect to any Debt
Service Reduction.
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Advances
If, on any Determination Date, payments of principal and interest due on any
Mortgage Loan in the Underlying Trust Fund on the related Due Date have not been
received as of the close of business on the business day preceding such
Determination Date, the Servicer will be obligated to advance on or before the
related Underlying Distribution Date for the benefit of holders of the PHMSC
Certificates an amount in cash equal to all delinquent payments of principal and
interest due on each Mortgage Loan in the Underlying Trust Fund (with interest
adjusted to the applicable Net Mortgage Rate) not previously advanced, but only
to the extent that the Servicer believes that such amounts will be recoverable
by it from liquidation proceeds or other recoveries in respect of the related
Mortgage Loan (each, a "Periodic Advance").
The Pooling and Servicing Agreement provides that any Periodic Advance may
be reimbursed to the Servicer at any time from funds available in the
Certificate Account to the extent that (i) such funds represent receipts on, or
liquidation, insurance, purchase or repurchase proceeds in respect of, the
Mortgage Loans to which the advance relates or (ii) the Servicer has determined
in good faith that it will be unable to recover such advance from funds of the
type referred to in clause (i) above.
In the event that, at some future date, Moody's should revise its assessment
of the ability of the Servicer to make Periodic Advances, and so notify the
Underlying Trustee in writing (the date on which such notification is received
by the Servicer being referred to herein as the "Advance Reserve Fund Trigger
Date"), a reserve fund (the "Advance Reserve Fund") will be established by the
Servicer in accordance with the provisions of the Pooling and Servicing
Agreement to provide limited support for the Servicer's obligation to make
Periodic Advances, as described above. In the event that, with respect to any
Underlying Distribution Date occurring after the date on which the Advance
Reserve Fund is funded, the Servicer fails to make any Periodic Advance required
to be made by it pursuant to the Pooling and Servicing Agreement, the Underlying
Trustee will cause to be withdrawn from the Advance Reserve Fund an advance in
an amount equal to the least of (i) the Periodic Advance required to be made by
the Servicer which the Servicer failed to make, (ii) the excess of (A) the
amount of interest and principal required to be distributed to the Class A
Certificates for such Underlying Distribution Date over (B) the PHMSC Available
Funds (determined without regard to any advance from the Advance Reserve Fund on
such Underlying Distribution Date) and (iii) an amount equal to the amount then
in the Advance Reserve Fund, less any reinvestment income or gain to be released
from the Advance Reserve Fund as described in the following paragraph (the
"Advance Reserve Fund Available Advance Amount"). The Pooling and Servicing
Agreement will provide that any such advance made from the Advance Reserve Fund
will be reimbursed to the Advance Reserve Fund if and to the extent that such
reimbursement would be permitted under the Pooling and Servicing Agreement if
such advance had been a Periodic Advance made by the Servicer. The Advance
Reserve Fund, if established, will not be a part of either REMIC of the
Underlying Trust Fund.
The Advance Reserve Fund, if required, will be established as a trust
account pursuant to a depository agreement (the "Depository Agreement") by and
among a depository institution (the "Advance Reserve Fund Depository"), the
Servicer and the Underlying Trustee and will be held by the Advance Reserve Fund
Depository. Following the Advance Reserve Fund Trigger Date, should such date
occur, the Advance Reserve Fund will be funded by the deposit by the Servicer
with the Advance Reserve Fund Depository of an amount in cash equal to (i) 0.50%
of the outstanding principal balance of the Mortgage Loans as of the close of
business on the Advance Reserve Fund Trigger Date or (ii) such lesser amount as
Moody's may specify (the "Advance Reserve Fund Required Amount"). After the
Advance Reserve Fund Required Amount has been deposited in the Advance Reserve
Fund, no person will have any further obligation to deposit amounts in the
Advance Reserve Fund or to maintain the amounts in the Advance Reserve Fund at
that level even if at some future date amounts in the Advance Reserve Fund fall
below the Advance Reserve Fund Required Amount as a result of unreimbursed
advances made from the Advance Reserve Fund or withdrawals permitted by Moody's.
The amounts in the Advance Reserve Fund may be invested in investments that will
not cause the then-current ratings of the Class A Certificates to be lowered by
Moody's, and reinvestment income
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or gain will be released to the Servicer (or its designee) on each Underlying
Distribution Date free and clear of any interest of the Underlying Trustee, the
Advance Reserve Fund Depository or any other person. After the Certificate
Principal Balance of the Class A Certificates has been reduced to zero, any
amounts in the Advance Reserve Fund will be released to the Servicer (or its
designee).
An alterative method of limited support for the Servicer's obligation to
make Periodic Advances may be provided, if such change does not cause the then
current ratings of the Class A Certificates to be lowered by Moody's.
THE MORTGAGE POOL
General
Certain information set forth in the following sections is based, in whole
or in part, on information obtained by the Depositor relating to the Mortgage
Loans. None of the Depositor, the Trustee, the Underwriter or any of their
affiliates has made or will make any representation as to the accuracy or
completeness of such information.
The Underlying Trust Fund consists primarily of a pool (the "Mortgage Pool")
of conventional, fixed-rate, fully-amortizing mortgage loans (the "Mortgage
Loans"). The Mortgage Loans are secured by mortgages, deeds of trust or other
security instruments (each, a "Mortgage") creating a first lien on one- to
four-family residential properties (the "Mortgaged Properties"). The Mortgage
Loans have original terms to stated maturity of approximately 30 years.
As of the August 30, 1996 (the "Reference Date"), the Mortgage Loans have an
aggregate Scheduled Principal Balance, after deducting payments of principal due
on or before such date, of approximately $402,135,406.
The latest stated maturity date of Mortgage Loan is February 1, 2024;
however, the actual date on which any Mortgage Loan is paid in full may be
earlier than the stated maturity date due to unscheduled payments of principal.
None of the Mortgage Loans is subject to any buydown agreement.
Each of the Mortgage Loans subject to a due-on-sale clause. See "Certain
Legal Aspects of Mortgage Loans--Enforceability of Certain Provisions" in the
Prospectus.
No Mortgage Loan will have had a Loan-to-Value Ratio at origination of more
than 90%.
As of the Reference Date, each Mortgage Loan had a Scheduled Principal
Balance of not less than $11,244 or more than $975,277.
Set forth below is a description of certain additional characteristics of
the Mortgage Loans as of the Reference Date (except as otherwise indicated). The
sum in any column may not equal the total indicated due to rounding.
Mortgage Rates at Origination
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Mortgage Rate (%) of Loans the Reference Date the Reference Date
- ----------------- -------- ------------------ ------------------
7.500 - 7.999......... 1,599 $402,135,405.55 100.00%
----- -------------- ------
Total............. 1,599 $402,135,405.55 100.00%
===== ============== ======
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<PAGE>
Mortgage Rates as of the Reference Date
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Mortgage Rate (%) of Loans the Reference Date the Reference Date
- ----------------- -------- ------------------ ------------------
7.500 - 7.999......... 1,599 $402,135,405.55 100.00%
----- -------------- ------
Total............. 1,599 $402,135,405.55 100.00%
===== ============== ======
As of the Reference Date, the weighted average Mortgage Rate of the Mortgage
Loans, based on Scheduled Principal Balances as of the Reference Date, was
approximately 7.583% per annum.
Calculated Remaining Terms to Maturity
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Maturity Range (Years) of Loans the Reference Date the Reference Date
- ---------------------- -------- ------------------ ------------------
0.01-20.00........... 31 $ 4,912,216.37 1.22%
20.01-22.00........... 22 5,285,988.39 1.31
22.01-24.00........... 38 8,195,771.89 2.04
24.01-26.00........... 127 29,273,116.69 7.28
26.01-28.00........... 1381 354,468,312.21 88.15
----- -------------- ------
Total............. 1599 $402,135,405.55 100.00%
==== ============== ======
As of the Reference Date, the weighted average calculated remaining term to
maturity of the Mortgage Loans, based on Scheduled Principal Balances as of the
Reference Date, was approximately 322 months.
Original Loan-to-Value Ratios of the Mortgage Loans
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Loan-to-Value Ratio (%) of Loans the Reference Date the Reference Date
- ----------------------- -------- ------------------ ------------------
Less than or equal
to 25.000............... 4 $ 536,040.81 0.13%
25.001- 30.000.......... 9 816,068.78 0.20
30.001- 35.000.......... 12 2,678,265.01 0.67
35.001- 40.000.......... 17 3,367,920.59 0.84
40.001- 45.000.......... 29 6,772,877.28 1.68
45.001- 50.000.......... 33 7,067,560.46 1.76
50.001- 55.000.......... 47 11,966,971.08 2.98
55.001- 60.000.......... 74 19,028,808.13 4.73
60.001- 65.000.......... 107 27,661,151.35 6.88
65.001- 70.000.......... 191 47,536,374.83 11.82
70.001- 75.000.......... 313 78,173,065.17 19.44
75.001- 80.000.......... 565 144,546,369.29 35.94
80.001- 85.000.......... 20 5,248,629.66 1.31
85.001- 90.000.......... 178 46,735,303.11 11.62
----- -------------- ------
Total................ 1,599 $402,135,405.55 100.00%
===== ============== ======
As of the Reference Date, the minimum and maximum loan-to-value ratios at
origination of the Mortgage Loans were 17.30% and 90.00%, respectively, and the
weighted average loan-to-value ratio at origination of the Mortgage Loans, based
on Scheduled Principal Balances as of the Reference Date, was approximately
73.03%.
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<PAGE>
Mortgage Loan Documentation Programs
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Loan Program of Loans the Reference Date the Reference Date
- ------------ -------- ------------------ ------------------
Full Documentation
Program................ 934 $274,272,873.96 68.20%
Asset Verification....... 21 2,822,374.49 0.70
Asset and Mortgage
Verification........... 569 109,044,340.95 27.12
No Income, Asset,
or Mortgage............ 11 1,033,159.89 0.26
Mortgage Verification.... 35 6,034,945.13 1.50
Income and Mortgage
Verification........... 29 8,927,711.13 2.22
----- -------------- ------
Total................ 1,599 $402,135,405.55 100.00%
===== ============== ======
Mortgage Loan Principal Balances as of the Reference Date
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Range ($) of Loans the Reference Date the Reference Date
- --------- -------- ------------------ ------------------
0.01 - 50,000.00 ... 13 $ 463,451.22 0.12%
50,000.01 - 100,000.00 ... 141 11,120,891.34 2.77
100,000.01 - 150,000.00 ... 160 19,778,958.01 4.92
150,000.01 - 200,000.00 ... 114 19,922,887.83 4.95
200,000.01 - 250,000.00 ... 435 98,577,946.45 24.51
250,000.01 - 300,000.00 ... 304 83,022,842.65 20.65
300,000.01 - 350,000.00 ... 172 55,544,690.81 13.81
350,000.01 - 400,000.00 ... 122 45,490,260.54 11.31
400,000.01 - 450,000.00 ... 51 21,699,302.22 5.40
450,000.01 - 500,000.00 ... 47 22,219,734.96 5.53
500,000.01 - 550,000.00 ... 14 7,402,287.53 1.84
550,000.01 - 600,000.00 ... 13 7,500,287.77 1.87
600,000.01 - 650,000.00 ... 8 5,017,285.02 1.25
750,000.01 - 800,000.00 ... 1 794,859.05 0.20
800,000.01 - 850,000.00 ... 1 839,966.27 0.21
850,000.01 - 900,000.00 ... 2 1,764,477.15 0.44
950,000.01 - 1,000,000.00 ... 1 975,276.73 0.24
----- -------------- ------
Total.................... 1,599 $402,135,405.55 100.00%
===== ============== ======
As of the Reference Date, the average Scheduled Principal Balance of the
Mortgage Loans was approximately $251,492.
Mortgaged Property Types
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Property Type of Loans the Reference Date the Reference Date
- ------------- -------- ------------------ ------------------
Single Family Detached....... 1,521 $386,953,910.18 96.22%
Two- to Four-Family.......... 4 1,375,821.06 0.34
Low Rise Condominium......... 74 13,805,674.31 3.43
----- -------------- ------
Total.................... 1,599 $402,135,405.55 100.00%
===== ============== ======
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<PAGE>
Mortgaged Property Occupancy Status
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Occupancy Status of Loans the Reference Date the Reference Date
- ---------------- -------- ------------------ ------------------
Owner Occupied............... 1,539 $386,506,371.33 96.11%
Secondary.................... 60 15,629,034.22 3.89
----- -------------- ------
Total.................... 1,599 $402,135,405.55 100.00%
===== ============== ======
The occupancy status of a Mortgaged Property is as represented by the
Mortgagor in its loan application.
Geographic Distribution of the Mortgaged Properties
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Location of Loans the Reference Date the Reference Date
- ---------------- -------- ------------------ ------------------
Arizona...................... 16 $ 3,486,102.53 0.87%
California................... 1,049 290,174,190.63 72.16
Colorado..................... 9 2,265,371.83 0.56
Connecticut.................. 36 8,811,188.85 2.19
Delaware..................... 2 258,312.49 0.06
District of Columbia......... 5 1,718,390.22 0.43
Florida...................... 50 7,196,671.74 1.79
Georgia...................... 20 3,718,696.24 0.92
Hawaii....................... 13 5,462,715.20 1.36
Idaho........................ 4 872,606.47 0.22
Illinois..................... 22 3,828,995.45 0.95
Indiana...................... 2 296,545.65 0.07
Kansas....................... 2 420,696.63 0.10
Louisiana.................... 1 327,499.04 0.08
Maine........................ 1 256,578.71 0.06
Maryland..................... 27 6,186,154.34 1.54
Massachusetts................ 29 5,936,089.28 1.48
Michigan..................... 7 1,256,525.80 0.31
Minnesota.................... 5 773,997.44 0.19
Missouri..................... 1 306,746.91 0.08
Nevada....................... 22 5,116,491.47 1.27
New Hampshire................ 4 834,064.49 0.21
New Jersey................... 71 14,044,828.10 3.49
New Mexico................... 2 279,593.64 0.07
New York..................... 106 21,232,639.49 5.28
North Carolina............... 4 444,572.32 0.11
Ohio......................... 5 1,327,098.76 0.33
Oklahoma..................... 1 117,674.77 0.03
Oregon....................... 5 1,003,406.77 0.25
Pennsylvania................. 12 1,381,256.14 0.34
Rhode Island................. 2 249,236.08 0.06
South Carolina............... 5 635,378.85 0.16
Texas........................ 29 5,361,381.73 1.33
Utah......................... 4 737,677.39 0.18
Virginia..................... 7 1,494,270.41 0.37
Washington................... 17 3,981,941.57 0.99
Wyoming...................... 2 339,818.12 0.08
----- -------------- ------
Total.................... 1,599 $402,135,405.55 100.00%
===== ============== ======
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<PAGE>
Purpose of the Mortgage Loans
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Loan Purpose of Loans the Reference Date the Reference Date
- ------------ -------- ------------------ ------------------
Purchase..................... 412 $ 89,566,708.63 22.27%
Equity-out Refinance......... 280 70,511,633.99 17.53
Refinance.................... 907 242,057,062.93 60.19
----- -------------- ------
Total.................... 1,599 $402,135,405.55 100.00%
===== ============== ======
Underwriting Standards
The Mortgage Loans generally have been originated in accordance with the
underwriting standards of PHMSC in effect at the time of origination as
disclosed by PHMSC at the time of the initial issuance of the PHMSC
Certificates. Such underwriting standards are summarized below.
In determining whether to lend to a particular mortgage borrower or to
purchase a mortgage loan, PHMSC would have made an assessment of the applicant's
ability to repay the loan, as well as an assessment of the value of the property
to which the financing relates. The underwriting standards that would have
guided the determination represent a balancing of several factors that may
affect the ultimate recovery of the loan amount, including, among others, the
amount of the loan, the ratio of the loan amount to the property value (i.e.,
the lower of the appraised value of the mortgaged property and the purchase
price), the borrower's means of support and the borrower's credit history.
PHMSC's guidelines for underwriting may have varied according to the nature of
the borrower or the type of loan, since differing characteristics might have
been perceived as presenting different levels of risk.
PHMSC's underwriting of a mortgage loan might have been based on data
obtained by parties other than PHMSC that were involved at various stages in the
mortgage origination or acquisition process. This typically occurred under
circumstances in which loans were subject to more than one approval process, as
when third-party lenders, certain mortgage brokers or similar entities that have
been approved by PHMSC to process loans on its behalf, or independent
contractors hired by PHMSC to perform underwriting services on its behalf
("contract underwriters") made initial determinations as to the consistency of
loans with PHMSC underwriting guidelines. In such instances, certain information
could have been, but need not necessarily have been, resolicited by PHMSC in
connection with its approval process. For example, in connection with a mortgage
loan presented to PHMSC by another originator for purchase, PHMSC would have
typically ordered a second credit report, but would only order a review
appraisal under certain limited circumstances, in advance of reaching a purchase
decision. However, in connection with mortgage loans that were processed on
PHMSC's behalf by certain mortgage brokers or similar entities, PHMSC
customarily would have ordered both a second credit report and a review
appraisal. When contract underwriters were used, PHMSC generally would not order
any supplemental documentation but would review the information collected by
these providers, who would have been trained by PHMSC personnel in PHMSC's
underwriting practices and would have been required to review all loans in
accordance with PHMSC's underwriting guidelines. In all cases, PHMSC would have
made the final determination to approve or deny the funding or purchase of a
particular mortgage loan.
The loan application would have elicited pertinent information about the
applicant, with particular emphasis on the applicant's financial health (assets,
liabilities, income and expenses), the property being financed and the type of
loan desired. A self-employed applicant might have been required to submit his
or her most recent signed federal income tax returns. With respect to every
applicant, credit reports would have been obtained from commercial reporting
services, summarizing the applicant's credit history with merchants and lenders.
Significant unfavorable credit information reported by the applicant or a credit
reporting agency would have been required to have been explained by the
applicant. The type of credit report that PHMSC would have obtained, and that it
would have authorized parties referring loans to it to obtain, is a
computer-generated report that electronically
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merges the information gathered from the data bases of two major consumer credit
repositories (these repositories produce what are commonly referred to as
"in-file" credit reports). In connection with its underwriting procedure, PHMSC
would, with the single exception of the use of contract underwriters, itself
have ordered a credit report of the type described, whether or not a report had
previously been ordered with respect to an applicant for whom another party has
processed or approved of the loan.
Verifications of employment, income, assets or mortgages might have been
used to supplement the loan application and the credit report in reaching a
determination as to the applicant's ability to meet his or her monthly
obligations on the proposed mortgage loan, as well as his or her other mortgage
payments (if any), living expenses and financial obligations. A mortgage
verification would have involved obtaining information regarding the borrower's
payment history with respect to any existing mortgage the applicant may have
had. This verification was accomplished by either having the present lender
complete a verification of mortgage form, evaluating the information on the
credit report concerning the applicant's payment history for the existing
mortgage, communicating, either verbally or in writing, with the applicant's
present lender or analyzing cancelled checks provided by the applicant.
Verifications of income, assets or mortgages may have been waived under certain
programs offered by PHMSC, but PHMSC's practice was to obtain verification of
employment for every loan applicant. Waivers limit the amount of documentation
required for an underwriting decision and have the effect of increasing the
relative importance of the credit report and the appraisal. Such waivers or
reduced-documentation options were, in general, available for owner-occupied
properties where the ratio of the loan amount to the property value does not
exceed 80%. The interest rate may be higher with respect to a loan which was
processed according to a reduced documentation program than a loan which was
processed under a full documentation program. Documentation requirements varied
based upon a number of factors, including the purpose of the loan, the amount of
the loan and the ratio of the loan amount to the property value. The least
restrictive reduced-documentation programs applied to the applicant for a
relocation loan and to the borrower whose loan amount did not exceed $600,000
and whose Loan-to-Value Ratio was not in excess of 75%. PHMSC accepted
alternative methods of verification, in those instances where verifications were
part of the underwriting decision; for example, salaried income might have been
substantiated either by means of a form independently prepared and signed by the
applicant's employer or by means of the applicant's most recent paystub and W-2.
In cases where two or more persons had jointly applied for a mortgage loan, the
gross incomes and expenses of all of the applicants, including nonoccupant
co-mortgagors, were combined and considered as a unit.
All borrowers applying for relocation loans with Loan-to-Value Ratios less
than or equal to 90%, as well as borrowers affiliated with professional
associations applying for loans with Loan-to-Value Ratios less than or equal to
80%, and all other borrowers applying for non-relocation mortgage loans with
respect to which the Loan-to-Value Ratios were less than or equal to 75%,
generally were required to have demonstrated that the ratio of their total
monthly housing debt to their monthly gross income did not exceed 33%, and that
the ratio of their total monthly debt to their monthly gross income did not
exceed 38%; borrowers affiliated with professional associations applying for
non-relocation mortgage loans with Loan-to-Value Ratios in excess of 80%, and
all other borrowers applying for nonrelocation mortgage loans with Loan-to-Value
Ratios in excess of 75%, generally would have been required to satisfy 28% and
36% ratios, respectively. These calculations were based on the amortization
schedule and the interest rate of the related loan, with each ratio being
computed on the basis of the proposed monthly mortgage payment. In evaluating
applications for subsidy loans, the foregoing ratios would have been determined
by including in the applicant's total monthly housing expense and total monthly
debt the proposed monthly mortgage payment reduced by the amount expected to be
applied on a monthly basis under the related subsidy agreement or, in certain
cases, the mortgage payment that would result from an interest rate
approximately 2.50% lower than the Mortgage Rate. These ratios may have been
exceeded if, in PHMSC's judgment, certain compensating factors were identified
and proved to its satisfaction, including a large downpayment, a large equity
position on a refinance, an excellent credit history, substantial liquid net
worth, the potential of the
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borrower for continued employment advancement or income growth, or the ability
of the borrower to accumulate assets or to devote a greater portion of income to
basic needs such as housing expense. Secondary financing was permitted on
mortgage loans under certain circumstances. In those cases, the payment
obligations under both primary and secondary financing were included in the
computation of the debt-to-income ratios described above, and the combined
amount of primary and secondary loans would have been used to calculate the
Loan-to-Value Ratio. Any secondary financing permitted generally would have
matured prior to the maturity date of the related mortgage loan. In evaluating
an application with respect to a "non-owner-occupied" property, which PHMSC
defined as a property leased to a third party by its owner (as distinct from a
"second home," which PHMSC defined as an owner-occupied, non-rental property
that is not the owner's principal residence), PHMSC would have included
projected rental income net of certain mortgagor obligations and other assumed
expenses or loss from such property to be included in the applicant's monthly
gross income or total monthly debt in calculating the foregoing ratios. A
mortgage loan secured by a two- to four-family Mortgaged Property was considered
to be an owner-occupied property if the borrower occupied one of the units;
rental income on the other units was generally taken into account in evaluating
the borrower's ability to repay the mortgage loan.
Property value was established in connection with the origination of any
mortgage loan (whether the loan is originated for purchase or refinancing
purposes) by means of an appraisal, which was typically ordered by the party
originating the related mortgage loan. Consistent with this practice, the
appraisals with respect to the loans generated through corporate contacts or
through referrals from mortgage brokers or other similar entities (other than
those certain mortgage brokers or similar entities that process mortgage loans
on PHMSC's behalf) generally would have been ordered by PHMSC, while the
appraisals with respect to the loans sold to PHMSC by third-party lenders would
have been ordered by those other originators. PHMSC might, however, at its
discretion, have ordered a review appraisal with respect to any loan generated
by a third-party lender; in addition, PHMSC typically ordered review appraisals
with respect to loans that certain mortgage brokers or similar entities
processed on its behalf. A review appraisal, like the original appraisal,
involves the making of a site visit, the taking of photographs, and the
gathering of data on comparable properties. Unlike original appraisals, however,
review appraisals do not include an inspection of the interior of the house. A
review appraisal was generally used to validate the decision made based upon the
original appraisal. If the variance between the original and the review
appraisal was significant, an explanation would have been sought and the
underwriting decision might have been reevaluated. In certain instances, which
most frequently involve the postponement of the closing with respect to a
mortgage loan on a newly built home due to construction delays, the
recertification of an appraisal might have been required. A recertification
includes a physical inspection of the exterior of the property and a statement
by an appraiser that the present value of the property is no lower than that
reflected on the original appraisal.
There can be no assurance that the values determined by the appraisers as of
the dates of appraisal represent the prices at which the related Mortgaged
Properties can be sold, either as of the dates of appraisal or at foreclosure.
The appraisal of any Mortgaged Property reflects the individual appraiser's
judgment as to value, based on the market values of comparable homes sold within
the recent past in comparable nearby locations and on the estimated replacement
cost. The appraisal relates both to the land and to the structure; in fact, a
significant portion of the appraised value of a Mortgaged Property may be
attributable to the value of the land rather than to the residence. Because of
the unique locations and special features of certain Mortgaged Properties,
identifying comparable properties in nearby locations may be difficult. The
appraised values of such Mortgaged Properties will be based to a greater extent
on adjustments made by the appraisers to the appraised values of reasonably
similar properties rather than on objectively verifiable sales data.
At the time of the origination of the Mortgage Loans, most residential
mortgage lenders had not originated mortgage loans with Loan-to-Value Ratios in
excess of 80% unless primary mortgage insurance was obtained. PHMSC, however,
did not require primary mortgage insurance on loans up
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to $400,000 that had Loan-to-Value Ratios exceeding 80% but less than or equal
to 90%. Only owner-occupied, primary residences (excluding cooperatives and
certain high-rise condominium dwellings) were eligible for this program. Each
qualifying loan would have been made at an interest rate that is higher than the
rate would be if the Loan-to-Value Ratio was 80% or less or if primary mortgage
insurance was obtained. Loans that did not qualify for such program might have
been approved if primary mortgage insurance were obtained from an approved
primary mortgage insurance company. In such cases, the excess over 75% would be
covered by primary mortgage insurance until the unpaid principal balance of the
Mortgage Loan is reduced to an amount that would result in a Loan-to-Value Ratio
less than or equal to 80%.
Where permitted by law, PHMSC generally required that a borrower include in
each monthly payment a portion of the real estate taxes, assessments, primary
mortgage insurance (if applicable), and hazard insurance premiums and other
similar items with respect to the related mortgage loan. PHMSC might, however,
on a case-by-case basis, in its discretion not have required such advance
payments for certain Mortgage Loans, based on an evaluation of the borrowers'
ability to pay such taxes and charges as they become due.
YIELD ON THE TRUST CERTIFICATES
Delay in Distributions on the Trust Certificates
The effective yield to holders of the Trust Certificates will be less than
the yields otherwise produced by their respective Pass-Through Rates and
purchase prices because (i) on the first Distribution Date one month's interest
is payable thereon even though 56 or more days will have elapsed from the date
on which interest begins to accrue thereon, (ii) on each succeeding Distribution
Date the interest payable thereon is the interest accrued during the month
preceding the month of such Distribution Date, which ends 26 or more days prior
to such Distribution Date and (iii) during each Interest Accrual Period,
interest accrues on a Certificate Principal Balance that is less than the
Certificate Principal Balance of such class actually outstanding for the first
26 or more days of such Interest Accrual Period.
Certain Shortfalls in Collections of Interest
Net Interest Shortfalls allocated to the Underlying Certificates will affect
the yield on the Trust Certificates. Full or partial prepayments of principal on
the Mortgage Loans are passed through to the PHMSC Certificateholders in the
month following the month of receipt or payment. Any prepayment of a Mortgage
Loan or liquidation of a Mortgage Loan (by foreclosure proceedings or by virtue
of the purchase of a Mortgage Loan in advance of its stated maturity as required
or permitted by the Pooling and Servicing Agreement) will generally have the
effect of passing through to the PHMSC Certificateholders principal amounts
which would otherwise be passed through (or reduced) in amortized increments
over the remaining term of such Mortgage Loan.
General Prepayment Considerations
The yield to maturity and the aggregate amount of distributions on the Trust
Certificates will be affected by the rate and timing of principal payments on
the Underlying Certificates (and the Components thereof), which in turn will be
affected by the rate and timing of principal payments on the Mortgage Loans and
the amount and timing of Mortgagor defaults resulting in Realized Losses.
Principal payments on the Underlying Certificates will result in
distributions in respect of principal to the holders of the class or classes of
Trust Certificates then entitled to receive such distributions that otherwise
would be distributed over the remaining term of the Underlying Certificates.
Since the rates of payment of principal on the Mortgage Loans, and therefore on
the Underlying Certificates, 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
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given as to such rate or the rate of principal prepayments on the PHMSC Senior
Certificates or the aggregate amount of distributions on the PHMSC Senior
Certificates. The extent to which the yield to maturity of any class of Trust
Certificates may vary from the anticipated yield will depend upon the degree to
which they are purchased at a discount or premium and the degree to which the
timing of payments thereon is sensitive to principal payments on the Underlying
Certificates. Further, in the case of any such Trust Certificate purchased at a
discount, an investor should consider the risk that a slower than anticipated
rate of principal payments on the Underlying Certificates could result in an
actual yield to such investor that is lower than the anticipated yield and, in
the case of any such Trust Certificate purchased at a premium, 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 is allocated to the
Underlying Certificates, the greater will be the effect on the yield to maturity
on the Trust Certificates. As a result, the effect on the yield on the Trust
Certificates of principal payments allocated to the Underlying Certificates at a
rate higher (or lower) than the rate anticipated by the investor during the
period immediately following the issuance of the Trust Certificates would not be
fully offset by a subsequent like reduction (or increase) in the rate of
principal payments allocated to the Underlying Certificates.
Because principal distributions are paid to certain classes of Trust
Certificates at a different rate than distributions of principal are paid to
other such classes, holders of classes whose principal is distributed later in
the life of the Trust Certificates bear a greater risk of losses (because such
classes will represent an increasing percentage interest in the ownership of the
Underlying Certificates during the period prior to such later distributions of
principal thereon and because the balance of the PHMSC Subordinate Certificates
may be declining during such period) than holders of classes whose principal is
distributed earlier in the life of the Trust Certificates.
The rate of distributions in reduction of the principal balance of the PHMSC
Senior Certificates and the aggregate amount of distributions on the PHMSC
Senior Certificates will be directly related to the rate of payments of
principal on the Mortgage Loans in the Underlying Trust Fund and the amount and
timing of Mortgagor defaults resulting in Realized Losses. The rate of principal
payments on the Mortgage Loans will in turn be affected by the amortization
schedules of the Mortgage Loans, the rate of principal prepayments (including
partial prepayments and those resulting from refinancing) thereon by Mortgagors,
liquidations of defaulted Mortgage Loans, repurchases of Mortgage Loans as a
result of defective documentation or breaches of representations and warranties
and optional purchase by the Master Servicer of all of the Mortgage Loans in
connection with the termination of the Underlying Trust Fund. See "Pooling and
Servicing Agreement-Optional Termination" herein. Mortgagors are permitted
to prepay the Mortgage Loans, in whole or in part, at any time without
penalty. As described under "Description of the Underlying
Certificates--Distributions--Principal" herein, all or a disproportionate
percentage of principal prepayments on the Mortgage Loans (including
liquidations and repurchases of Mortgage Loans) will be distributed to the
holders of the PHMSC Senior Certificates then entitled to distributions in
respect of principal during the nine years that began in January 1994.
Prepayments (which, as used herein, include all unscheduled payments of
principal, including payments as the result of liquidations, purchases and
repurchases) of the Mortgage Loans in the Underlying Trust Fund will result in
distributions to PHMSC Certificateholders then entitled to distributions in
respect of principal of amounts which would otherwise be distributed over the
remaining terms of such Mortgage Loans.
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 rates for similar mortgage loans fall below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment would generally be expected to increase.
Conversely, if interest rates on similar mortgage loans rise significantly above
the Mortgage Rates on the Mortgage Loans, the rate of prepayment would generally
be expected to decrease. The rate of prepayment on the Mortgage Loans may also
be influenced by programs offered by mortgage loan originators and mortgage loan
brokers to encourage refinancing through such
S-46
<PAGE>
originators and brokers, including but not limited to general or targeted
solicitations, reduced origination fees or closing costs, or other financial
incentives.
Other factors affecting prepayment of mortgage loans include changes in
mortgagors' housing needs, job transfers, unemployment or, in the case of
self-employed mortgagors or mortgagors relying on commission income, substantial
fluctuations in income, significant declines in real estate values and adverse
economic conditions either generally or in particular geographic areas,
mortgagors' 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 PHMSC Certificates.
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 borrower's default on a Mortgage Loan, there can be no assurance that recourse
beyond the specific Mortgaged Property pledged as security for repayment will be
available.
Because the pass-through rate on the Trust Certificates is 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
Trust Certificates were to rise, the market value of the Trust Certificates may
decline.
Special Yield Considerations with respect to the Class 4A-A1 Certificates and
Class 4A-A2 Certificates
Distributions of principal on the Class 4A-A1 Certificates and Class 4A-A2
Certificates, respectively, will derive from distributions of principal on the
Underlying Certificates' Class A-5 PAC I Component and Class A-5 PAC II
Component, respectively. Such Components were structured so that principal
distributions generally would be payable thereon in the amounts determined by
using the table attached hereto as Appendix A assuming that prepayments on the
Mortgage Loans would occur each month at a level falling within the related
Structuring Range, and based on certain other assumptions. At the initial
issuance of the Underlying Certificates, the Structuring Range for the Class A-5
PAC I Component was a constant level of SPA between 125% and 550%, and the
Structuring Range for the Class A-5 PAC II Component was a constant level of SPA
between 225% and 400%. However, with respect to the Class A-5 PAC I Component,
as of the Delivery Date, the range of constant Mortgage Loan prepayment rates at
which such Component would adhere to its schedule (with respect to such
Component, the "Targeted Range") has shifted to 156% SPA through 634% SPA. With
respect to the Class A-5 PAC II Component as of the Delivery Date, the balances
listed on Appendix A for the Component Principal Balance thereof are not
currently supported and it is extremely unlikely that principal will be
distributed in respect of the Class A-5 PAC II Component in October 1996 as
provided on Appendix A. If the Mortgage Loans prepay in the same manner and at
the same rates as they have since the issuance of the PHMSC Certificates, the
Class 4A-A2 Certificates will receive principal on a date later than stated on
Appendix A and at a slower rate once they begin receiving principal.
There can be no assurance that funds distributable in respect of principal
on the Class A-5 PAC I Component or the Class A-5 PAC II Component will be
sufficient to cover, or will not be in excess of, the amounts necessary to
reduce the outstanding Component Principal Balance of each such Component to its
planned balance for any Underlying Distribution Date and, therefore, the
weighted average life of the of the Class A-5 PAC I Component or the Class A-5
PAC II Component (and therefore of the Class 4A-A1 Certificates or Class 4A-A2
Certificates) may be extended or shortened, as further described below.
Unless otherwise specified, references to Certificates of any class
throughout the text under this sub heading "--Planned Payment Characteristics of
the PAC Certificates, the PAC Components, the PAC Group Components and the
Companion Certificates" refer to PHMSC Certificates. The planned balance
schedules set forth in Appendix A hereto for the Primary Planned Principal
Classes and the Secondary Planned Principal Classes were prepared by calculating
the amounts that would be
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<PAGE>
available for payments on the PAC Certificates, the PAC Components and the PAC
Group Components, using, among other things, certain modeling assumptions
described below (the "Underlying Modeling Assumptions") and a range of constant
prepayment rates (each, a "Structuring Range"), expressed as a percentage of
SPA. The Targeted Range for any class of the Primary Planned Principal Classes
or Secondary Planned Principal Classes can narrow or "shift" upward or downward
over time as a result of the rates of principal payments actually experienced on
the Mortgage Loans. The Targeted Range as of the Delivery Date for the Class A-5
PAC I Component is specified above. As of the Delivery Date, there is no
Targeted Range at which the Class A-5 PAC II Component is supported.
Underlying Modeling Assumptions used at the time of the initial issuance of
the PHMSC Certificates included the following assumptions, among others: (i)
that no defaults or delinquencies in the payment by Mortgagors of principal of
and interest on the Mortgage Loans would be experienced and that the no person
would repurchase any of the Mortgage Loans as permitted or required by the
Pooling and Servicing Agreement, (ii) that the Servicer would not exercise its
option to purchase all the Mortgage Loans in the Underlying Trust Fund as
described under the caption "The Pooling and Servicing Agreement--Optional
Termination" and (iii) that prepayments representing payment in full of
individual Mortgage Loans would be received on the last day of each month
(commencing in February, 1994) and would include 30 days' interest thereon. The
Mortgage Loans have had, now have and will continue to have characteristics that
differ from those assumed in the Underlying Modeling Assumptions.
The weighted average lives of the subclasses of PAC Certificates and the
Underlying Certificates to the extent of their PAC Components will vary under
different prepayment scenarios. To the extent that principal prepayments occur
at a constant rate that is slower than the related Targeted Range, the Class A
Principal Distribution Amount on each Underlying Distribution Date may be
insufficient to make distributions in reduction of the principal balances of
some or all of the subclasses of the PAC Certificates or PAC Components or to
make distributions in reduction of the Group Component Principal Balances of the
PAC Group Components in amounts that would reduce their Certificate Principal
Balances, Component Principal Balances or Group Component Principal Balances,
respectively, to their respective planned principal balances or planned Group
Component Principal Balances for such Underlying Distribution Date. The weighted
average lives of the subclasses of PAC Certificates and the Underlying
Certificates to the extent of their PAC Components may therefore be extended. To
the extent that such principal prepayments occur at a constant rate that is
higher than the related Targeted Range, the weighted average lives of the
subclasses of PAC Certificates and the Underlying Certificates to the extent of
their PAC Components may be shortened.
The extent to which the planned principal balances will be achieved and the
sensitivity of the PAC Certificates and the PAC Components to principal
prepayments on the Mortgage Loans will depend, in part, upon the period of time
during which the Companion Certificates remain outstanding, and in the case of
the PAC I Certificates, the Class A-5 PAC I Component and the PAC I Group
Component upon the period of time during which the PAC II Certificates, the
Class A-5 PAC II Component and the PAC II Group Component remain outstanding.
On each Underlying Distribution Date, the excess of the portion of the Class
A Principal Distribution Amount over the PAC Principal Amounts and the PAC Group
Principal Amounts ("Excess Principal Payments") for such Underlying Distribution
Date will be distributed first to the Companion Certificates and then to the PAC
II Certificates, the Class A-5 PAC II Component and the PAC II Group Component
before being distributed to the PAC I Certificates, the Class A-5 PAC I
Component and the PAC I Group Component, in accordance with the proportions and
priorities set forth above under "Description of the Underlying
Certificates--Distributions--Principal". This is intended to decrease the
likelihood that the PAC Certificates, the PAC Components and the PAC Group
Components will be reduced below their planned principal balances and planned
Group Component Principal Balances, respectively, on a given Underlying
Distribution Date. As such, and in accordance with the proportions and
priorities described above, the Companion Certificates support the PAC II
Certificates, the Class
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A-5 PAC II Component and the PAC II Group Component; and the Companion
Certificates, the PAC II Certificates, the Class A-5 PAC II Component and the
PAC II Group Component support the PAC I Certificates, the Class A-5 PAC I
Component and the PAC I Group Component. However, under certain relatively fast
prepayment scenarios, one or more subclasses of PAC Certificates or one or more
PAC Components or PAC Group Components could continue to be outstanding when the
subclasses of Class A Certificates, PAC Components or PAC Group Components that
support such subclass or subclasses of PAC Certificates or such PAC Components
or such PAC Group Components are no longer outstanding. Under such
circumstances, all Excess Principal Payments will be applied to the remaining
PAC Certificates, PAC Components and PAC Group Components in accordance with the
proportions and priorities described herein. Thus, when the Certificate
Principal Balances of the Companion Certificates have been reduced to zero, any
subclasses of PAC II Certificates then outstanding or the Class A-5 PAC II
Component or PAC II Group Component, if outstanding, will, in accordance with
the proportions and priorities set forth above, become more sensitive to the
rate of prepayment on the Mortgage Loans as such subclasses, PAC Component or
PAC Group Component will receive all Excess Principal Payments until the
principal balances of the PAC II Certificates or the Class A-5 PAC II Component
or the Group Component Principal Balance of the PAC II Group Component have been
reduced to zero. Finally, when the principal balances of the PAC II Certificates
and the Class A-5 PAC II Component and the Group Component Principal Balance of
the PAC II Group Component have been reduced to zero, any outstanding subclass
of PAC I Certificates and the Class A-5 PAC I Component and the PAC I Group
Component, if outstanding, will, in accordance with the proportions and
priorities set forth herein, become more sensitive to the rate of prepayment on
the Mortgage Loans as such subclasses, PAC Component and PAC Group Component
will receive all Excess Principal Payments until the principal balances of the
PAC I Certificates and the Class A-5 PAC I Component and the Group Component
Principal Balance of the PAC I Group Component have been reduced to zero.
Conversely, under certain relatively slow prepayment scenarios, the Class A
Principal Distribution Amount may not be sufficient to pay the PAC Principal
Amounts for the related subclasses of PAC Certificates and the PAC Components
and the PAC Group Principal Amount for the PAC Group Components on a given
Underlying Distribution Date. In such cases, the Class A Principal Distribution
Amount for each subsequent Underlying Distribution Date will be applied in
accordance with the proportions and priorities described herein such that the
Companion Certificates will not receive any distributions in reduction of their
principal balances until the outstanding principal balance of each such subclass
of PAC Certificates and each such PAC Component has reached its planned
principal balance and each PAC Group Component has reached its planned Group
Component Principal Balance for such Underlying Distribution Date. As a result,
the weighted average life of any subclass of PAC Certificates or of the Class
A-5 Certificates to the extent of their PAC Components may be extended if such
subclass or PAC Components do not receive their PAC Principal Amounts or if the
PAC Group Components do not receive their PAC Group Principal Amounts on an
Underlying Distribution Date.
Because any Excess Principal Payments for any Underlying Distribution Date
will be distributed to Certificateholders on such Underlying Distribution Date,
the ability to distribute the PAC Principal Amounts and the PAC Group Principal
Amounts on any Underlying Distribution Date will not be enhanced by the
averaging of high and low principal prepayment rates on the Mortgage Loans over
several Underlying Distribution Dates, as might be the case if any such Excess
Principal Payments were held for future applications and not distributed
monthly. There is no assurance that (i) distributions in reduction of the
Certificate Principal Balance of any subclass of PAC I Certificates and PAC II
Certificates (other than the Class A-1, Class A-16 and Class A-17 Certificates)
will not commence significantly earlier than the first Underlying Distribution
Date shown in the tables contained in Appendix A hereto relating to such
Subclass, (ii) distributions in reduction of the Certificate Principal Balance
of any subclass of PAC I Certificates and PAC II Certificates (other than the
Class A-1 Certificates) will not commence significantly later than the first
Underlying Distribution Date shown in
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<PAGE>
such tables relating to such subclass, (iii) distributions in reduction of the
Component Principal Balance of the PAC Components will not commence
significantly earlier or significantly later than the first Underlying
Distribution Date shown in such tables, (iv) distributions in reduction of the
Group Component Principal Balance of the PAC II Group Component will not
commence significantly later than the first Underlying Distribution Date shown
in such tables or (v) the Certificate Principal Balance of any subclass of PAC
Certificates or the Component Principal Balance of any PAC Component will not be
reduced to zero significantly earlier or significantly later than the last
Underlying Distribution Date shown in such tables.
During the period from the Underlying Cut-off Date through the Reference
Date, the Mortgage Loans have prepaid at an average constant rate of
approximately 101% SPA. Certain months may have had SPA rates significantly
higher or lower than the average.
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 Trust
Certificates will be influenced by, among other things, the rate at which
principal on the 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).
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement with respect to
the Trust Certificates, the standard prepayment assumption ("SPA"), assumes
prepayment rates of 0.2% per annum of the then outstanding principal balance of
such mortgage loans in the first month after origination and that this annual
prepayment rate increases by 0.2% per annum each month through the thirtieth
month after origination and remains constant at 6% per annum in each month
thereafter. SPA does not purport 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.
The following table indicates the percentage of the initial Certificate
Principal Balance of each class of Trust Certificates that would be outstanding
after each of the dates shown at various constant percentages of SPA and the
corresponding weighted average life of each such class of Trust Certificates.
The table is based on the following assumptions (the "Modeling Assumptions"):
(i) the Mortgage Pool consists of one Mortgage Loan with the following
characteristics:
(a) a Scheduled Principal Balance of $398,597,623;
(b) a Mortgage Rate of 7.583212% per annum;
(c) a loan seasoning of 32 months; and
(d) a remaining term to maturity of 321 months;
(ii) distributions on such Trust Certificates are received, in cash, on the
27th day of each month, commencing in October 1996;
(iii) the Mortgage Loans prepay at the constant percentages of SPA indicated;
(iv) no defaults or delinquencies occur or have occurred in the payment by
mortgagors of principal and interest on the Mortgage Loans and no interest
shortfalls are allocated to the Underlying Certificates;
(v) neither the Master Servicer nor any other person purchases from the
Underlying Trust Fund any Mortgage Loan pursuant to any obligation or option
under the Pooling and Servicing Agreement;
(vi) scheduled monthly payments on the Mortgage Loans are received on the first
day of each month commencing in October 1996, and are computed prior to giving
effect to any prepayments received in the prior month;
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<PAGE>
(vii) prepayments representing payment in full of individual Mortgage Loans are
received on the last day of each month (commencing in September 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 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) as of the date of issuance of the Trust Certificates, the principal
balance of the PHMSC Senior Certificates of each class and the aggregate
principal balance of the PHMSC Subordinate Certificates as of the Delivery Date
are as set forth under "Description of Underlying Certificates" herein; and
(x) as of the date of issuance of the Trust Certificates, the PHMSC
Certificates are as described under "Description of the Underlying Certificates"
herein.
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 Balances outstanding (and the weighted average lives) of the classes
of Trust Certificates set forth in the tables. In addition, to the extent that
the actual Mortgage Loans included in the Mortgage Pool have characteristics
that differ from those assumed in preparing the table set forth below, each such
class of the Trust Certificates may mature earlier or later than indicated by
the tables. Based on the foregoing assumptions, the table indicates the weighted
average life of each class of Trust Certificates included in the table, and sets
forth the percentages of the initial Certificate Principal Balance of each such
class of Trust Certificates that would be outstanding after each of the dates
shown, at various percentages of SPA. Neither the prepayment model used herein
with respect to the Trust Certificates 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 Underlying Trust Fund.
Variations in the prepayment experience and the balance of the Mortgage Loans
that prepay may increase or decrease the percentages of initial Certificate
Principal Balance (and weighted average lives) shown in the following table.
Such variations may occur even if the average prepayment experience of all such
Mortgage Loans equals any of the specified percentages of the prepayment
assumption.
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<PAGE>
PERCENT OF INITIAL CERTIFICATE BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF SPA
<TABLE>
<CAPTION>
Class 4A-A1 Certificates Class 4A-A2 Certificates
---------------------------------------- ----------------------------------------
Distribution Date 0% 100% 150% 300% 400% 0% 100% 150% 300% 400%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date ............................. 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
September 27, 1997 ....................... 100 100 100 100 100 100 100 100 100 78
September 27, 1998 ....................... 100 100 93 91 91 100 100 100 69 61
September 27, 1999 ....................... 100 89 56 56 56 100 100 100 49 49
September 27, 2000 ....................... 100 60 28 28 28 100 100 100 40 40
September 27, 2001 ....................... 100 33 13 13 13 100 100 100 29 29
September 27, 2002 ....................... 100 8 4 4 4 100 100 92 20 20
September 27, 2003 ....................... 100 0 0 0 0 100 100 71 12 12
September 27, 2004 ....................... 100 0 0 0 0 100 100 51 5 5
September 27, 2005 ....................... 100 0 0 0 0 100 90 31 0 0
September 27, 2006 ....................... 100 0 0 0 0 100 72 14 0 0
September 27, 2007 ....................... 96 0 0 0 0 100 55 0 0 0
September 27, 2008 ....................... 83 0 0 0 0 100 38 0 0 0
September 27, 2009 ....................... 69 0 0 0 0 100 22 0 0 0
September 27, 2010 ....................... 54 0 0 0 0 100 7 0 0 0
September 27, 2011 ....................... 38 0 0 0 0 100 0 0 0 0
September 27, 2012 ....................... 20 0 0 0 0 100 0 0 0 0
September 27, 2013 ....................... 1 0 0 0 0 100 0 0 0 0
September 27, 2014 ....................... 0 0 0 0 0 100 0 0 0 0
September 27, 2015 ....................... 0 0 0 0 0 100 0 0 0 0
September 27, 2016 ....................... 0 0 0 0 0 85 0 0 0 0
September 27, 2017 ....................... 0 0 0 0 0 60 0 0 0 0
September 27, 2018 ....................... 0 0 0 0 0 33 0 0 0 0
September 27, 2019 ....................... 0 0 0 0 0 3 0 0 0 0
September 27, 2020 ....................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
in Years(1) ............................ 14.2 4.5 3.5 3.5 3.5 21.4 11.4 8.1 3.8 3.5
</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
Balance of the Certificate.
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<PAGE>
There is no assurance that prepayments of the Mortgage Loans will conform to
any of the levels of the SPA indicated in the table above, or to any other
level, or that the actual weighted average life of any class of Trust
Certificates will conform to any of the weighted average lives set forth in the
table above. Furthermore, the information contained in the table with respect to
the weighted average life of any class of Trust Certificates is not necessarily
indicative of the weighted average life of such class that might be calculated
or projected under different or varying prepayment assumptions.
The characteristics of the Mortgage Loans 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 of SPA until maturity or that all of the
Mortgage Loans will prepay at the same rate. 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 is consistent with
the expectations of investors.
TRUST AGREEMENT
General
The Trust Certificates will be issued pursuant to a Trust Agreement to be
dated as of September 30, 1996, among the Depositor, as depositor, and the
Trustee, as trustee (the "Agreement"). A Current Report on Form 8-K relating to
the Trust 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 Trust Certificates. The Trust Fund
created under the Agreement will consist of the Underlying Certificates together
with other mortgage pass-through certificates previously issued by various
issuers. The Trust Certificates in the aggregate will evidence the entire
beneficial ownership interest in a separate asset of the Trust Fund, such
separate asset consisting of the Underlying Certificates together with all
distributions thereon payable after the Delivery Date and such assets as from
time to time are acquired in respect of the Underlying Certificates. The Trust
Certificates will receive distributions only from payments received on the
Underlying Certificates. 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 Trust Certificates. The Trust
Certificates will be transferable and exchangeable at the corporate trust
offices of the Trustee, located in St. Paul, Minnesota. 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.
The Trustee
First Trust National Association, a national banking association, will act
as Trustee for the Trust Certificates pursuant to the Agreement. The Trustee's
offices for notices under the Agreement are located at 180 East Fifth Street,
St. Paul, Minnesota, 55101 and its phone number is (612) 973-6700.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Agreement will be accrued interest at the Trustee Fee Rate
of 0.015% per annum on the aggregate principal balance of the Trust
Certificates, payable monthly, before giving effect to the distribution and
principal balance reductions on the related Distribution Date. 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 incurred in connection with any legal
action relating to the Agreement or the Trust Certificates or the performance of
the Trustee's duties under the Agreement, other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or negligence in
the performance of the Trustee's duties under the Agreement or by reason of
reckless disregard, of the Trustee's obligations and duties under the Agreement.
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<PAGE>
Assignment of the Underlying Certificates
On the Delivery Date, the Depositor will transfer or cause to be transferred
the ownership of the Underlying Certificates to the Trustee. The Trustee will be
entitled to receive distributions in respect of the Underlying Certificates
beginning with the distributions thereon in October 1996.
Actions in Respect of the Underlying Certificates
If at any time the Trustee, as the holder of the Underlying Certificates, is
requested in such capacity to take any action or to give any consent, approval
or waiver, including without limitation in connection with an amendment of the
Pooling and Servicing Agreement or if an event of default occurs under the
Pooling and Servicing Agreement with respect to the Master Servicer or the
Underlying Trustee thereunder, the Agreement provides that the Trustee, in its
capacity as holder of the Underlying Certificates, may take action in connection
with the enforcement of any rights and remedies available to it in such capacity
with respect thereto and may request the direction of all holders of Trust
Certificates and will be protected in acting in accordance with the written
directions of a majority of the holders of Trust Certificates of each affected
class.
Voting Rights
At all times, all Voting Rights will be allocated among all holders of the
Trust Certificates in proportion to the then-outstanding Certificate Principal
Balances of their respective Trust Certificates.
Termination
The Trust Certificates are not subject to any optional termination. However,
the Master Servicer is entitled, subject to certain conditions relating to the
then-remaining size of the Mortgage Pool, to purchase all outstanding Mortgage
Loans and thereby effect early retirement of the Underlying Certificates and
thereby the Trust Certificates. See "Pooling and Servicing Agreement-Optional
Termination" herein.
POOLING AND SERVICING AGREEMENT
The Underlying Certificates were issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement") dated as of February 1, 1994
among PHMSC, as depositor, The Prudential Home Mortgage Company, Inc., as
servicer (in such capacity, the "Master Servicer"), and First Trust National
Association, as trustee (in such capacity, the "Underlying Trustee"). Reference
is made to the prospectus dated February 9, 1994, used in connection with the
initial offering of the PHMSC Certificates, as supplemented by a supplement
thereto dated February 9, 1994, for important information in addition to that
set forth herein regarding the terms and conditions of the Pooling and Servicing
Agreement. The Depositor will provide a prospective or actual Certificateholder
without charge, on written request, a copy (without exhibits) of the Pooling and
Servicing Agreement. Requests should be addressed to the Secretary, Salomon
Brothers Mortgage Securities VII, Inc., Seven World Trade Center, New York, New
York 10048.
The Underlying Trustee
First Trust National Association (in such capacity, the "Underlying
Trustee") will be the trustee under the Pooling and Servicing Agreement.
The Servicer
The Prudential Home Mortgage Company, Inc. serves as servicer with respect
to the PHMSC Certificates (in such capacity, the "Servicer", otherwise "PHMSC").
The executive offices of the Servicer are located at 8000 Maryland Avenue, Suite
1400, Clayton, Missouri 63105, telephone number (314) 726-3900.
For information on the delinquency and foreclosure experience of the
Mortgage Pool as of the Reference Date, see "The Mortgage Pool" herein.
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<PAGE>
Servicing Compensation and Payment of Expenses
The servicing fee paid to the Servicer with respect to the servicing of each
Mortgage Loan included in the Underlying Trust Fund and administrative services
provided by it will be 0.20% per annum of the outstanding principal balance of
each such Mortgage Loan (the "Servicing Fee"). No fixed retained yield will be
retained with respect to any of the Mortgage Loans.
Optional Purchase of Defaulted Loans
The Depositor may, at its option, purchase from the Underlying Trust Fund
any defaulted Mortgage Loan. Any such purchase shall be at a price equal to 100%
of the unpaid principal balance of such Mortgage Loan plus accrued interest
thereon at the applicable Mortgage Rate from the date through which interest was
last paid by the related mortgagor or advanced to the first day of the month in
which such amount is to be distributed.
Voting
With respect to any provisions of the Pooling and Servicing Agreement
providing for the action, consent or approval of the holders of all PHMSC
Certificates evidencing specified voting interests in the Underlying Trust Fund,
the holders of the Class A Certificates will collectively be entitled to the
then applicable Class A Percentage, and the holders of the PHMSC Subordinate
Certificates will collectively be entitled to the balance of the aggregate
voting interest represented by all PHMSC Certificates. The aggregate voting
interests of the Class A Certificates other than the Class A-8 and Class A-18
Certificates on any date will be 97% of the Class A Percentage on such date. The
aggregate voting interest of the Class A-8 Certificates on any date will be 2%
of the Class A Percentage on such date. The aggregate voting interest of the
Class A-18 Certificates on any date will be 1% of the Class A Percentage on such
date. The aggregate Voting Interest of each subclass of Class A Certificates
other than the Class A-8 and Class A-18 Certificates on any date will be equal
to the product of (a) 97% of the Class A Percentage on such date and (b) the
fraction obtained by dividing the Certificate Principal Balance of such subclass
on such date by the aggregate Certificate Principal Balance of the Class A
Certificates other than the Class A-8 and Class A-18 Certificates on such date.
Each PHMSC Certificateholder of a class or subclass will have a voting interest
equal to the product of the voting interest to which such class or subclass is
collectively entitled and the percentage interest in such class or subclass
represented by such holder's Certificates. With respect to any provisions of the
Pooling and Servicing Agreement providing for action, consent or approval of
each class or subclass of PHMSC Certificates or specified classes or subclasses
of PHMSC Certificates, each PHMSC Certificateholder of a subclass will have a
voting interest in such subclass equal to such holder's percentage interest in
such subclass.
Optional Termination
The Servicer will have the right to purchase from the Underlying Trust Fund
all remaining Mortgage Loans, and thereby effect early retirement of the PHMSC
Certificates, on any Underlying Distribution Date when the aggregate Scheduled
Principal Balance of the Mortgage Loans is less than 10% of the aggregate
Scheduled Principal Balance as of the Underlying Cut-off Date. In the event the
Master Servicer exercises such option, the purchase price will, generally, be
equal to the greater of (i) the unpaid principal balance of each Mortgage Loan
plus the fair market value of other property in the Underlying Trust Fund and
(ii) the fair market value of the Underlying Trust Fund's assets plus, in each
case, accrued interest.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
No election will be made to treat the Trust Fund as a REMIC for federal
income tax purposes.
Upon issuance of the Trust Certificates, Thacher Proffitt & Wood, counsel to
the Depositor ("Tax Counsel"), will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the Trust Agreement, the Trust
Fund in which the Trust Certificate is held will be classified as a
S-55
<PAGE>
grantor trust under subpart E, part I of subchapter J of the Code and not as an
association taxable as a corporation or as a partnership. Accordingly, a holder
of a Trust Certificate generally will be treated as the owner of an undivided
interest in the related Component of the Underlying Certificate.
The following discussion assumes that the Underlying Trust Fund qualifies as
a REMIC and that the Underlying Certificate is a regular interest in such REMIC.
However, no representation is made by the Depositor, the Trustee, Tax Counsel or
any of their respective affiliates regarding the tax characterization of the
Underlying Certificate or that all or any portion of the Underlying Trust Fund
qualifies as a REMIC or any other entity, taxable or otherwise.
Assuming the qualification and maintenance of the status as a REMIC to the
Underlying Trust Fund, the Trust Certificates will represent interests in (i)
"loans secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code; (ii) "obligations (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 (iii) "real estate assets" within the meaning of Section 856(c)(5)(A)
of the Code generally in the same proportion that the assets of the Underlying
Trust Fund would be so treated. In addition, interest on the Trust 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.
For federal income tax purposes, a holder of a Trust Certificate will be
treated as the owner of an undivided interest in the related Component of the
Underlying Certificate which will be treated as a "stripped bond." Accordingly,
each Trust Certificate will generally be treated as evidencing the ownership of
a debt instrument issued with "original issue discount," 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. Under
the stripped bond rules, the holder of a Trust Certificate (whether a cash or
accrual method taxpayer) will be required to report interest income from its
Trust 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. See
"--Taxation of Owners of Grantor Trust Fractional Interest Certificates--If
Stripped Bond Rules Apply" in the Prospectus. Payments of interest at the
pass-through rate will be treated as "qualified stated interest" for purposes of
such rules.
Original purchasers of the Underlying Certificate were advised that the
prepayment assumption used in determining the rate of accrual of original issue
discount on the Underlying Certificate is 400% SPA. It is unclear whether the
use of a different prepayment assumption will be required for the Trust
Certificates. It is also uncertain, if a different prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Trust Certificate or, with
respect to any holder, at the time of purchase of a Trust Certificate by that
holder. In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders only on the prepayment assumption that was used in the
initial pricing of the Underlying Certificate and representative initial
offering prices of the Trust 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.
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 the Trust Certificates.
If the original issue discount or market discount on a Trust Certificate
determined under the stripped bond rules is less than 0.25% of the stated
redemption price of the related Component of the Underlying Certificate
multiplied by the weighted average maturity of the Underlying Certificate, then
such original issue discount or market discount will be considered to be de
minimis. Original issue
S-56
<PAGE>
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" in
the Prospectus.
The OID Regulations appear to permit in some circumstances the holder of a
debt instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, it is possible that a holder of a
Trust Certificate may be able to select a method for recognizing original issue
discount that differs from that used by the Trust Fund. Prospective purchasers
of the Trust Certificates are advised to consult their tax advisors concerning
the tax treatment of the Trust Certificates in this regard.
If a holder of a Trust Certificate is treated as acquiring the Underlying
Certificate at a premium, that is, at a price in excess of their principal
amount, such holder may elect under Section 171 of the Code to amortize using a
constant yield method the portion of such premium allocable to the Underlying
Certificate. 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 the Underlying Certificate if an amortization
election is not made should be allowed as a deduction when a principal payment
is made (or, for a holder using the accrual method of accounting, when such
payments of stated redemption price are due) representing interest on the
Underlying Certificate.
The Trustee will furnish to each holder of a Trust Certificate with each
payment a copy of the payment date statement on the Underlying Certificate that
sets forth the amount of such payment allocable to principal of the Underlying
Certificate and to interest thereon at the related Underlying Interest Rates.
Because exact computation of the accrual of discount on a constant yield method
would require information relating to the holder's purchase price that the
Underlying Trust Fund may not have, only information pertaining to the
appropriate proportionate method of accruing discount maybe provided. Moreover,
because tax information reports relating to the Underlying Certificate will
generally be furnished to the Trust Fund on an aggregate basis rather than a
Component basis by the Underlying Trust Funds, accurate information on a
Component by Component basis as to each Underlying Certificate may be
unavailable or difficult to obtain. In addition to the payment date statements,
within a reasonable time after the end of each calendar year, the Trustee will
furnish to each Certificateholder during such year such customary factual
information as the Trustee deems necessary or desirable to enable holders of
Trust Certificates to prepare their tax returns and will furnish comparable
information to the IRS as and when required by law to do so.
The sale of a Trust Certificate will be treated as a sale of the
Certificateholder's interest in the related Component of the Underlying
Certificate and will be subject to the rules described in the Prospectus
concerning sales of REMIC regular interests. See "--Sales of REMIC Certificates"
in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Trust Certificates, see "Certain Federal Income Tax
Consequences" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement,
dated September 30, 1996 (the "Underwriting Agreement"), the Depositor has
agreed to sell, and Salomon Brothers Inc (the "Underwriter") has agreed to
purchase the Trust Certificates. The Underwriter is obligated to purchase all
Trust Certificates if it purchases any.
Distribution of the Trust 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 Trust Certificates,
before deducting expenses payable by the Depositor, will be approximately 94.60%
of the aggregate initial Certificate Principal Balance of the Trust
Certificates, plus accrued interest from September 1, 1996. In connection with
the purchase and sale of the Trust
S-57
<PAGE>
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 Trust Certificates
will develop or, if it does develop, that it will continue. The primary source
of information available to investors concerning the Trust 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 Trust Certificates. There can be no
assurance that any additional information regarding the Trust Certificates will
be available through any other source. In addition, the Depositor is not aware
of any source through which price information about the Trust Certificates will
be generally available on an ongoing basis. The limited nature of such
information regarding the Trust Certificates may adversely affect the liquidity
of the Trust Certificates, even if a secondary market for the Trust Certificates
becomes available.
RATINGS
It is a condition to the issuance of the Trust Certificates that they be
rated "AAA" by Standard & Poor's Ratings Services ("S&P").
The ratings of S&P on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions of
principal and interest to which they are entitled. S&P rating opinions address
the structural, legal and issuer-related aspects associated with the Trust
Certificates, including the nature of the underlying Mortgage Loans and the
nature of the Underlying Certificates. S&P ratings on pass-through certificates
do not represent any assessment of the likelihood that principal prepayments
will be made by mortgagors or the degree to which such prepayments might differ
from that originally anticipated. The ratings do not address the possibility
that Certificateholders might suffer a lower than anticipated yield.
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
Trust 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 Trust Certificates.
The Depositor has not requested that any rating agency rate any class of the
Trust Certificates other than as stated above. However, there can be no
assurance as to whether any other rating agency will rate any class of the Trust
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on any class of the Trust Certificates by another rating
agency, if assigned at all, may be lower than the ratings assigned to such
classes of the Trust Certificates as stated above.
LEGAL INVESTMENT
The Trust 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
S-58
<PAGE>
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 Trust 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 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 which classes of
the Trust 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 Trust 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 Trust 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 certain asset pools and the purchase, sale and
holding of certain asset-backed 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 Trust
Certificates.
The Exemption sets forth six general conditions that 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 certain employee benefit plans subject to Section 406 of ERISA, or by
individual retirement accounts or other plans or arrangements 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 certificates
must not be subordinated to the rights and interests evidenced by the other
certificates of the same trust. Third, the certificates at the time of
acquisition by the Plan must be rated in one of the three highest generic rating
categories by Moody's, Fitch, S&P or Duff & Phelps Credit Rating Co. Fourth, the
trustee cannot be an affiliate of any member of the "Restricted Group" (as
defined herein).
S-59
<PAGE>
Fifth, the sum of all payments made to and retained by the Underwriter must
represent not more than reasonable compensation for underwriting the Trust
Certificates; the sum of all payments made to and retained by the Depositor
pursuant to the assignment of the Underlying Certificates 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 each of the Trustee, each underlying
trustee, each master servicer or servicer and any sub-servicer represents not
more than reasonable compensation for its services under the agreement pursuant
to which such assets are pooled and reimbursed of its 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. The Exemption does not
apply to Plans sponsored by the Depositor, the Underwriter, the Trustee, or any
obligor with respect to assets included in the trust fund constituting more than
5% of the aggregate unamortized principal balance of the assets in the trust
fund or any affiliate of such parties (the "Restricted Group").
Because the Trust Certificates are not subordinated to any other class of
Trust Certificates, the second general condition set forth above is satisfied
with respect to each class of Trust Certificates. It is a condition of the
issuance of the Trust Certificates that they be rated in the highest rating
category by S&P. A fiduciary of a Plan contemplating purchasing a Trust
Certificate in the secondary market must make its own determination that at the
time of such acquisition, the Trust 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 Trust
Certificates. A fiduciary of a Plan contemplating purchasing a Trust Certificate
must also make its own determination that the first, fifth and sixth general
conditions set forth above will be satisfied with respect to the Trust
Certificates.
Before purchasing a Trust Certificate, a fiduciary of a Plan should itself
confirm (a) that such Trust 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 exemption, in
particular, Prohibited Transaction Class Exemption 83-1. See "ERISA
Considerations" in the Prospectus. A purchaser of a Trust Certificate should be
aware, however, that even if the conditions specified in one or more exemptions
are satisfied, the scope of the relief provided by an exemption might not cover
all acts that might be construed as prohibited transactions.
Any Plan fiduciary considering whether to purchase a Trust 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.
S-60
<PAGE>
APPENDIX A
The table attached as Appendix A sets forth for each Underlying Distribution
Date the applicable planned Certificate Principal Balances, Component Principal
Balances and Group Component Principal Balances as percentages of the
Certificate Principal Balances, Component Principal Balances and Group Component
Principal Balances at the initial issuance of the PHMSC Certificates.
There is no assurance that sufficient funds will be available on any
Underlying Distribution Date to reduce the Certificate Principal Balances of the
PAC Certificates, the Component Principal Balances of the PAC Components or the
Group Component Principal Balances of the PAC Group Components to their
corresponding planned principal balances for such Underlying Distribution Date,
or that distributions on such PAC Certificates, PAC Components or PAC Group
Components will not be made in excess of such amounts for such Underlying
Distribution Date. Distributions in reduction of the Certificate Principal
Balance of any subclass of PAC Certificates, the Component Principal Balance of
any PAC Component or the Group Component Principal Balance of any PAC Group
Component may commence significantly earlier (other than as to any subclass or
Component for which the table below reflects a distribution on the first
Underlying Distribution Date) or later than the first Underlying Distribution
Date for such subclass or Component shown in the table below. Distributions on
any of the PAC Certificates, PAC Components and PAC Group Components may end
significantly earlier or later than the last Underlying Distribution Date for
such subclass, PAC Component or PAC Group Component shown in the table below.
Planned principal balances of the PAC Certificates, PAC Components or PAC
Group Components for each Underlying Distribution Date set forth in the table
below were calculated based on certain assumptions, including the assumption
that prepayments on the Mortgage Loans would occur each month at a constant
level between approximately 125% SPA and approximately 550% SPA, in the case of
the PAC I Certificates, the Class A-5 PAC Component and the PAC I Group
Component, and at a constant level between approximately 225% SPA and
approximately 400% SPA in the case of the PAC II Certificates, the Class A-5 PAC
II Component and the PAC II Group Component. The actual characteristics and
performance of the Mortgage Loans have differed, now differ and will continue to
differ from the assumptions used in determining the planned principal balances.
The planned principal balances set forth in the table below are final and
binding regardless of any error or alleged error in making such calculations.
A-1
<PAGE>
Planned Class A Subclass Principal Balances and Component Principal Balances
as Percentages of Initial Class A Subclass Principal Balances
and Initial Component Principal Balances
Class A-1 Certificates
<TABLE>
<CAPTION>
Percentage of Percentage of Percentage of
Initial Class A Initial Class A Initial Class A
Distribution Subclass Distribution Subclass Distribution Subclass
Date Principal Balance Date Principal Balance Date Principal Balance
------------ ----------------- ------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
March 1994 ............... 99.53951843% September 1995 ... 77.35900104% March 1997 ....... 34.89530724%
April 1994 ............... 98.99580561 October 1995 ..... 75.39213036 April 1997 ....... 32.49867916
May 1994 ................. 98.36900081 November 1995 .... 73.35361306 May 1997 ......... 30.11791196
June 1994 ................ 97.65929668 December 1995 .... 71.24455304 June 1997 ........ 27.75290469
July 1994 ................ 96.86693931 January 1996 ..... 69.06614420 July 1997 ........ 25.40355705
August 1994 .............. 95.99222817 February 1996 .... 66.81963523 August 1997 ...... 23.06976940
September 1994 ........... 95.03551602 March 1996 ....... 64.50646433 September 1997 ... 20.75144277
October 1994 ............. 93.99720880 April 1996 ....... 62.12824720 October 1997 ..... 18.44847883
November 1994 ............ 92.87776545 May 1996 ......... 59.68736644 November 1997 .... 16.16077991
December 1994 ............ 91.67769760 June 1996 ........ 57.18802719 December 1997 .... 13.88824899
January 1995 ............. 90.39756928 July 1996 ........ 54.65166157 January 1998 ..... 11.63078965
February 1995 ............ 89.03799658 August 1996 ...... 52.12443069 February 1998 .... 9.38830615
March 1995 ............... 87.59964720 September 1996 ... 49.61389282 March 1998 ....... 7.16070337
April 1995 ............... 86.08323994 October 1996 ..... 47.11994153 April 1998 ....... 4.94788679
May 1995 ................. 84.48954423 November 1996 .... 44.64247108 May 1998 ......... 2.74976256
June 1995 ................ 82.81937947 December 1996 .... 42.18137643 June 1998 ........ 0.56623742
July 1995 ................ 81.07361444 January 1997 ..... 39.73655324 July 1998
August 1995 .............. 79.25316653 February 1997 .... 37.30789783 and thereafter ... 0.00000000
</TABLE>
Class A-2 Certificates and Class A-5 PAC I Component
<TABLE>
<CAPTION>
Percentage of Percentage of Percentage of
Initial Class A Initial Class A Initial Class A
Subclass Subclass Subclass
Principal Balance Principal Balance Principal Balance
Distribution or Component Distribution or Component Distribution or Component
Date Principal Balance Date Principal Balance Date Principal Balance
------------ ----------------- ------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Up to and including March 2000 ....... 40.19724202% January 2002 ..... 9.04247392%
June 1988 ................ 100.00000000% April 2000 ....... 38.03248911 February 2002 .... 8.23998520
July 1998 ................ 97.64188503 May 2000 ......... 35.94897257 March 2002 ....... 7.59217236
August 1998 .............. 94.47189257 June 2000 ........ 33.94385292 April 2002 ....... 6.96977621
September 1998 ........... 91.32297304 July 2000 ........ 32.01438710 May 2002 ......... 6.37184591
October 1998 ............. 88.19499282 August 2000 ...... 30.15792519 June 2002 ........ 5.79746507
November 1998 ............ 85.08781921 September 2000 ... 28.37190732 July 2002 ........ 5.24575050
December 1998 ............ 82.00132034 October 2000 ..... 26.65386068 August 2002 ...... 4.71585102
January 1999 ............. 78.93536525 November 2000 .... 25.00139654 September 2002 ... 4.20694639
February 1999 ............ 75.88982382 December 2000 .... 23.41220748 October 2002 ..... 3.71824612
March 1999 ............... 72.92801935 January 2001 ..... 21.88406462 November 2002 .... 3.24898851
April 1999 ............... 69.98610254 February 2001 .... 20.41481503 December 2002 .... 2.79843957
May 1999 ................. 67.06394516 March 2001 ....... 19.16005636 January 2003 ..... 2.36589204
June 1999 ................ 64.16141977 April 2001 ....... 17.95450202 February 2003 .... 1.95066448
July 1999 ................ 61.27839980 May 2001 ......... 16.79635796 March 2003 ....... 1.63915202
August 1999 .............. 58.41475948 June 2001 ........ 15.68389300 April 2003 ....... 1.33824787
September 1999 ........... 55.57037388 July 2001 ........ 14.61543667 May 2003 ......... 1.04759360
October 1999 ............. 52.74627646 August 2001 ...... 13.58937714 June 2003 ........ 0.76684281
November 1999 ............ 50.02528734 September 2001 ... 12.60415921 July 2003 ........ 0.49566073
December 1999 ............ 47.40386750 October 2001 ..... 11.65828232 August 2003 ...... 0.23372384
January 2000 ............. 44.87859690 November 2001 .... 10.75029876 September 2003
February 2000 ............ 42.44617052 December 2001 .... 9.87881180 and thereafter ... 0.00000000
</TABLE>
A-2
<PAGE>
Planned Class A Subclass Principal Balances
as Percentages of Initial Class A Subclass Principal Balances
Class A-3 Certificates
<TABLE>
<CAPTION>
Percentage of Percentage of Percentage of
Initial Class A Initial Class A Initial Class A
Distribution Subclass Distribution Subclass Distribution Subclass
Date Principal Balance Date Principal Balance Date Principal Balance
------------ ----------------- ------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Up to and including August 2008 ...... 12.14962037% September 2013 ... 1.19634113%
August 2003 .............. 100.00000000% September 2008 ... 11.71502429 October 2013 ..... 1.14865437
September 2003 ........... 99.72838017 October 2008 ..... 11.29559824 November 2013 .... 1.10270637
October 2003 ............. 96.28568874 November 2008 .... 10.89081990 December 2013 .... 1.05843541
November 2003 ............ 92.96046725 December 2008 .... 10.50018496 January 2014 ..... 1.01578212
December 2003 ............ 89.74874073 January 2009 ..... 10.12320637 February 2014 .... 0.97468874
January 2004 ............. 86.64666769 February 2009 .... 9.75941364 March 2014 ....... 0.93510004
February 2004 ............ 83.65053580 March 2009 ....... 9.40835211 April 2014 ....... 0.89696240
March 2004 ............... 80.75675765 April 2009 ....... 9.06958294 May 2014 ......... 0.86022418
April 2004 ............... 77.96186668 May 2009 ......... 8.74268208 June 2014 ........ 0.82483537
May 2004 ................. 75.26251277 June 2009 ........ 8.42724001 July 2014 ........ 0.79074793
June 2004 ................ 72.65545862 July 2009 ........ 8.12286110 August 2014 ...... 0.75791544
July 2004 ................ 70.13757575 August 2009 ...... 7.82916337 September 2014 ... 0.72629291
August 2004 .............. 67.70584131 September 2009 ... 7.54577762 October 2014 ..... 0.69583717
September 2004 ........... 65.35733393 October 2009 ..... 7.27234761 November 2014 .... 0.66650666
October 2004 ............. 63.08923102 November 2009 .... 7.00852897 December 2014 .... 0.63826089
November 2004 ............ 60.89880461 December 2009 .... 6.75398921 January 2015 ..... 0.61106099
December 2004 ............ 58.78341886 January 2010 ..... 6.50840734 February 2015 .... 0.58486956
January 2005 ............. 56.74052681 February 2010 .... 6.27147301 March 2015 ....... 0.55965041
February 2005 ............ 54.76766715 March 2010 ....... 6.04288683 April 2015 ....... 0.53536866
March 2005 ............... 52.86246168 April 2010 ....... 5.82235966 May 2015 ......... 0.51199046
April 2005 ............... 51.02261245 May 2010 ......... 5.60961191 June 2015 ........ 0.48948345
May 2005 ................. 49.24589888 June 2010 ........ 5.40437388 July 2015 ........ 0.46781612
June 2005 ................ 47.53017524 July 2010 ........ 5.20638503 August 2015 ...... 0.44695826
July 2005 ................ 45.87336830 August 2010 ...... 5.01539367 September 2015 ... 0.42688071
August 2005 .............. 44.27347481 September 2010 ... 4.83115689 October 2015 ..... 0.40755542
September 2005 ........... 42.72855901 October 2010 ..... 4.65344009 November 2015 .... 0.38895502
October 2005 ............. 41.23675063 November 2010 .... 4.48201637 December 2015 .... 0.37105344
November 2005 ............ 39.79624253 December 2010 .... 4.31666697 January 2016 ..... 0.35382530
December 2005 ............ 38.40528841 January 2011 ..... 4.15718064 February 2016 .... 0.33724613
January 2006 ............. 37.06220097 February 2011 .... 4.00335337 March 2016 ....... 0.32129255
February 2006 ............ 35.76535013 March 2011 ....... 3.85498795 April 2016 ....... 0.30594171
March 2006 ............... 34.51316067 April 2011 ....... 3.71189421 May 2016 ......... 0.29117182
April 2006 ............... 33.30411101 May 2011 ......... 3.57388827 June 2016 ........ 0.27696168
May 2006 ................. 32.13673048 June 2011 ........ 3.44079273 July 2016 ........ 0.26329093
June 2006 ................ 31.00959842 July 2011 ........ 3.31243613 August 2016 ...... 0.25014016
July 2006 ................ 29.92134221 August 2011 ...... 3.18865311 September 2016 ... 0.23749010
August 2006 .............. 28.87063548 September 2011 ... 3.06928410 October 2016 ..... 0.22532260
September 2006 ........... 27.85619701 October 2011 ..... 2.95417452 November 2016 .... 0.21361983
October 2006 ............. 26.87678877 November 2011 .... 2.84317578 December 2016 .... 0.20236488
November 2006 ............ 25.93121465 December 2011 .... 2.73614394 January 2017 ..... 0.19154156
December 2006 ............ 25.01831900 January 2012 ..... 2.63294009 February 2017 .... 0.18113386
January 2007 ............. 24.13698543 February 2012 .... 2.53343019 March 2017 ....... 0.17112648
February 2007 ............ 23.28613530 March 2012 ....... 2.43748471 April 2017 ....... 0.16150486
March 2007 ............... 22.46472670 April 2012 ....... 2.34497895 May 2017 ......... 0.15225477
April 2007 ............... 21.67175243 May 2012 ......... 2.25579201 June 2017 ........ 0.14336236
May 2007 ................. 20.90624019 June 2012 ........ 2.16980749 July 2017 ........ 0.13481468
June 2007 ................ 20.16725009 July 2012 ........ 2.08691292 August 2017 ...... 0.12659896
July 2007 ................ 19.45387442 August 2012 ...... 2.00699964 September 2017 ... 0.11870277
August 2007 .............. 18.76523606 September 2012 ... 1.92996312 October 2017 ..... 0.11111443
September 2007 ........... 18.10048777 October 2012 ..... 1.85570187 November 2017 .... 0.10382260
October 2007 ............. 17.45881108 November 2012 .... 1.78411839 December 2017 .... 0.09681612
November 2007 ............ 16.83941526 December 2012 .... 1.71511821 January 2018 ..... 0.09008438
December 2007 ............ 16.24153634 January 2013 ..... 1.64861047 February 2018 .... 0.08361731
January 2008 ............. 15.66443649 February 2013 .... 1.58450720 March 2018 ....... 0.07740500
February 2008 ............ 15.10740284 March 2013 ....... 1.52272346 April 2018 ....... 0.07143793
March 2008 ............... 14.56974667 April 2013 ....... 1.46317740 May 2018 ......... 0.06570691
April 2008 ............... 14.05080281 May 2013 ......... 1.40579021 June 2018 ........ 0.06020313
May 2008 ................. 13.54992857 June 2013 ........ 1.35048543 July 2018 ........ 0.05491814
June 2008 ................ 13.06650306 July 2013 ........ 1.29718928 August 2018 ...... 0.04984365
July 2008 ................ 12.59992677 August 2013 ...... 1.24583069 September 2018 ... 0.04497193
</TABLE>
A-3
<PAGE>
Planned Class A Subclass Principal Balances and Component Principal Balances
as Percentages of Initial Class A Subclass Principal Balances
and Initial Component Principal Balances
<TABLE>
<CAPTION>
Percentage of Percentage of Percentage of
Initial Class A Initial Class A Initial Class A
Distribution Subclass Distribution Subclass Distribution Subclass
Date Principal Balance Date Principal Balance Date Principal Balance
------------ ----------------- ------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
October 2018 ............. 0.04029525% March 2019 ....... 0.01958960% July 2019 ........ 0.00585462%
November 2018 ............ 0.03580623 April 2019 ....... 0.01593811 August 2019 ...... 0.00276556
December 2018 ............ 0.03149784 May 2019 ......... 0.01243559 September 2019
January 2019 ............. 0.02736326 June 2019 ........ 0.00907629 and thereafter ... 0.00000000
February 2019 ............ 0.02339601
</TABLE>
Class A-4 Certificates and Class A-5 PAC II Component
<TABLE>
<CAPTION>
Percentage of Percentage of Percentage of
Initial Class A Initial Class A Initial Class A
Subclass Subclass Subclass
Principal Balance Principal Balance Principal Balance
Distribution or Component Distribution or Component Distribution or Component
Date Principal Balance Date Principal Balance Date Principal Balance
------------ ----------------- ------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Up to and including . October 1999 ..... 48.67703212% November 2002 .... 18.39230394%
September 1996 ........... 100.00000000% November 1999 .... 47.93145206 December 2002 .... 17.67557300
October 1996 ............. 97.95287551 December 1999 .... 47.17231317 January 2003 ..... 16.97027933
November 1996 ............ 95.87481843 January 2000 ..... 46.40098840 February 2003 .... 16.27637956
December 1996 ............ 93.84382125 February 2000 .... 45.61878389 March 2003 ....... 15.58489059
January 1997 ............. 91.85917613 March 2000 ....... 44.80081764 April 2003 ....... 14.90663951
February 1997 ............ 89.92018469 April 2000 ....... 43.97552646 May 2003 ......... 14.24142501
March 1997 ............... 88.02615778 May 2000 ......... 43.14400419 June 2003 ........ 13.58904673
April 1997 ............... 86.17641550 June 2000 ........ 42.30728853 July 2003 ........ 12.94930544
May 1997 ................. 84.37028697 July 2000 ........ 41.46636335 August 2003 ...... 12.32200308
June 1997 ................ 82.60711029 August 2000 ...... 40.62216097 September 2003 ... 11.70694291
July 1997 ................ 80.88623234 September 2000 ... 39.77556420 October 2003 ..... 11.10392951
August 1997 .............. 79.20700880 October 2000 ..... 38.92740850 November 2003 .... 10.51276896
September 1997 ........... 77.56880392 November 2000 .... 38.07848394 December 2003 .... 9.93326882
October 1997 ............. 75.97099046 December 2000 .... 37.22953706 January 2004 ..... 9.36523820
November 1997 ............ 74.41294959 January 2001 ..... 36.38127281 February 2004 .... 8.80848792
December 1997 ............ 72.89407071 February 2001 .... 35.53435618 March 2004 ....... 8.26283042
January 1998 ............. 71.41375153 March 2001 ....... 34.65111439 April 2004 ....... 7.72807991
February 1998 ............ 69.97139772 April 2001 ....... 33.77297707 May 2004 ......... 7.20405241
March 1998 ............... 68.56642298 May 2001 ......... 32.90040955 June 2004 ........ 6.69056575
April 1998 ............... 67.19824892 June 2001 ........ 32.03384615 July 2004 ........ 6.18743968
May 1998 ................. 65.86630485 July 2001 ........ 31.17369157 August 2004 ...... 5.69449580
June 1998 ................ 64.57002783 August 2001 ...... 30.32032222 September 2004 ... 5.21155771
July 1998 ................ 63.30886246 September 2001 ... 29.47408753 October 2004 ..... 4.73845092
August 1998 .............. 62.08226081 October 2001 ..... 28.63531122 November 2004 .... 4.27500300
September 1998 ........... 60.88968242 November 2001 .... 27.80429242 December 2004 .... 3.82104353
October 1998 ............. 59.73059405 December 2001 .... 26.98130682 January 2005 ..... 3.37640409
November 1998 ............ 58.60446970 January 2002 ..... 26.16660784 February 2005 .... 2.94091837
December 1998 ............ 57.51079046 February 2002 .... 25.36042759 March 2005 ....... 2.51442211
January 1999 ............. 56.44904446 March 2002 ....... 24.54027586 April 2005 ....... 2.09675313
February 1999 ............ 55.41872677 April 2002 ....... 23.73153463 May 2005 ......... 1.68775137
March 1999 ............... 54.47230854 May 2002 ......... 22.93425105 June 2005 ........ 1.28725885
April 1999 ............... 53.55591448 June 2002 ........ 22.14845976 July 2005 ........ 0.89511974
May 1999 ................. 52.66906101 July 2002 ........ 21.37418348 August 2005 ...... 0.51118025
June 1999 ................ 51.81127120 August 2002 ...... 20.61143373 September 2005 ... 0.13528879
July 1999 ................ 50.98207454 September 2002 ... 19.86021147 October 2005
August 1999 .............. 50.18100696 October 2002 ..... 19.12050768 and thereafter ... 0.00000000
September 1999 ........... 49.40761070
</TABLE>
A-4
<PAGE>
Planned Class A Subclass Principal Balances
as Percentages of Initial Class A Subclass Principal Balances
Class A-6 Certificates
<TABLE>
<CAPTION>
Percentage of Percentage of Percentage of
Initial Class A Initial Class A Initial Class A
Distribution Subclass Distribution Subclass Distribution Subclass
Date Principal Balance Date Principal Balance Date Principal Balance
------------ ----------------- ------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Up to and including May 2009 ......... 33.00738269% February 2013 .... 7.99345870%
September 2005 . ......... 100.00000000% June 2009 ........ 32.11492262 March 2013 ....... 7.69006570
October 2005 ............. 98.49735314 July 2009 ........ 31.24290153 April 2013 ....... 7.39411425
November 2005 ............ 96.17115378 August 2009 ...... 30.39088301 May 2013 ......... 7.10543301
December 2005 ............ 93.89406779 September 2009 ... 29.55843945 June 2013 ........ 6.82385443
January 2006 ............. 91.66517069 October 2009 ..... 28.74515113 July 2013 ........ 6.54921473
February 2006 ............ 89.48355161 November 2009 .... 27.95060676 August 2013 ...... 6.28135346
March 2006 ............... 87.34831304 December 2009 .... 27.17440306 September 2013 ... 6.02011361
April 2006 ............... 85.25857101 January 2010 ..... 26.41614452 October 2013 ..... 5.76534187
May 2006 ................. 83.21345515 February 2010 .... 25.67544356 November 2013 .... 5.51688800
June 2006 ................ 81.21210837 March 2010 ....... 24.95192021 December 2013 .... 5.27460523
July 2006 ................ 79.25368663 April 2010 ....... 24.24520185 January 2014 ..... 5.03834984
August 2006 .............. 77.33735942 May 2010 ......... 23.55492359 February 2014 .... 4.80798148
September 2006 ........... 75.46230910 June 2010 ........ 22.88072754 March 2014 ....... 4.58336264
October 2006 ............. 73.62773116 July 2010 ........ 22.22226296 April 2014 ....... 4.36435894
November 2006 ............ 71.83283398 August 2010 ...... 21.57918631 May 2014 ......... 4.15083897
December 2006 ............ 70.07683881 September 2010 ... 20.95116087 June 2014 ........ 3.94267423
January 2007 ............. 68.35897963 October 2010 ..... 20.33785652 July 2014 ........ 3.73973897
February 2007 ............ 66.67850282 November 2010 .... 19.73895024 August 2014 ...... 3.54191031
March 2007 ............... 65.03466731 December 2010 .... 19.15412512 September 2014 ... 3.34906828
April 2007 ............... 63.42674477 January 2011 ..... 18.58307093 October 2014 ..... 3.16109525
May 2007 ................. 61.85401868 February 2011 .... 18.02548357 November 2014 .... 2.97787617
June 2007 ................ 60.31578486 March 2011 ....... 17.48106538 December 2014 .... 2.79929879
July 2007 ................ 58.81135113 April 2011 ....... 16.94952456 January 2015 ..... 2.62525330
August 2007 .............. 57.34003712 May 2011 ......... 16.43057552 February 2015 .... 2.45563229
September 2007 ........... 55.90117432 June 2011 ........ 15.92393833 March 2015 ....... 2.29033076
October 2007 ............. 54.49410580 July 2011 ........ 15.42933905 April 2015 ....... 2.12924605
November 2007 ............ 53.11818607 August 2011 ...... 14.94650926 May 2015 ......... 1.97227794
December 2007 ............ 51.77278100 September 2011 ... 14.47518607 June 2015 ........ 1.81932834
January 2008 ............. 50.45726771 October 2011 ..... 14.01511224 July 2015 ........ 1.67030137
February 2008 ............ 49.17103438 November 2011 .... 13.56603559 August 2015 ...... 1.52510330
March 2008 ............... 47.91348011 December 2011 .... 13.12770942 September 2015 ... 1.38364251
April 2008 ............... 46.68401490 January 2012 ..... 12.69989219 October 2015 ..... 1.24582947
May 2008 ................. 45.48205934 February 2012 .... 12.28234726 November 2015 .... 1.11157673
June 2008 ................ 44.30704461 March 2012 ....... 11.87484324 December 2015 .... 0.98079871
July 2008 ................ 43.15841208 April 2012 ....... 11.47715322 January 2016 ..... 0.85341184
August 2008 .............. 42.03561353 May 2012 ......... 11.08905539 February 2016 .... 0.72933446
September 2008 ........... 40.93811087 June 2012 ........ 10.71033253 March 2016 ....... 0.60848672
October 2008 ............. 39.86537576 July 2012 ........ 10.34077198 April 2016 ....... 0.49079066
November 2008 ............ 38.81688994 August 2012 ...... 9.98016570 May 2016 ......... 0.37617005
December 2008 ............ 37.79214477 September 2012 ... 9.62830990 June 2016 ........ 0.26455032
January 2009 ............. 36.79064098 October 2012 ..... 9.28500531 July 2016 ........ 0.15585878
February 2009 ............ 35.81188881 November 2012 .... 8.95005676 August 2016 ...... 0.05002415
March 2009 ............... 34.85540781 December 2012 .... 8.62327343 September 2016
April 2009 ............... 33.92072657 January 2013 ..... 8.30446836 and thereafter ... 0.00000000
</TABLE>
A-5
<PAGE>
Planned Class A Subclass Principal Balances
as Percentages of Initial Class A Subclass Principal Balances
Class A-16 Certification
<TABLE>
<CAPTION>
Percentage of Percentage of Percentage of
Initial Class A Initial Class A Initial Class A
Distribution Subclass Distribution Subclass Distribution Subclass
Date Principal Balance Date Principal Balance Date Principal Balance
------------ ----------------- ------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
March 1994 ............... 99.71873907% February 1998 .... 29.61142721% January 2002 ..... 11.07353331%
April 1994 ............... 99.31606850 March 1998 ....... 29.01685131 February 2002 .... 10.73236323
May 1994 ................. 98.79211040 April 1998 ....... 28.43784920 March 2002 ....... 10.38528050
June 1994 ................ 98.14720277 May 1998 ......... 27.87417938 April 2002 ....... 10.04302662
July 1994 ................ 97.38190025 June 1998 ........ 27.32560363 May 2002 ......... 9.70562155
August 1994 .............. 96.49697496 July 1998 ........ 26.79188688 June 2002 ........ 9.37307994
September 1994 ........... 95.49341638 August 1998 ...... 26.27279727 July 2002 ........ 9.04541140
October 1994 ............. 94.37243089 September 1998 ... 25.76810608 August 2002 ...... 8.72262081
November 1994 ............ 93.13544097 October 1998 ..... 25.27758764 September 2002 . . 8.40470857
December 1994 ............ 91.78408362 November 1998 .... 24.80101935 October 2002 ..... 8.09167088
January 1995 ............. 90.32020856 December 1998 .... 24.33818162 November 2002 .... 7.78349993
February 1995 ............ 88.74587570 January 1999 ..... 23.88885782 December 2002 .... 7.48018420
March 1995 ............... 87.06335221 February 1999 .... 23.45283426 January 2003 ..... 7.18170863
April 1995 ............... 85.27510910 March 1999 ....... 23.05231640 February 2003 .... 6.88805490
May 1995 ................. 83.38381728 April 1999 ....... 22.66450457 March 2003 ....... 6.59542139
June 1995 ................ 81.39234316 May 1999 ......... 22.28919412 April 2003 ....... 6.30839008
July 1995 ................ 79.30374369 June 1999 ........ 21.92618321 May 2003 ......... 6.02687575
August 1995 .............. 77.12126106 July 1999 ........ 21.57527273 June 2003 ........ 5.75079363
September 1995 ........... 74.84831681 August 1999 ...... 21.23626629 July 2003 ........ 5.48005939
October 1995 ............. 72.48850555 September 1999 ... 20.90897017 August 2003 ...... 5.21458923
November 1995 ............ 70.04558828 October 1999 ..... 20.59979421 September 2003 ... 4.95429989
December 1995 ............ 67.52348520 November 1999 .... 20.28426972 October 2003 ..... 4.69910865
January 1996 ............. 64.92633347 December 1999 .... 19.96300722 November 2003 .... 4.44893347
February 1996 ............ 62.25842775 January 2000 ..... 19.63658774 December 2003 .... 4.20369288
March 1996 ............... 59.52440426 February 2000 .... 19.30556403 January 2004 ..... 3.96330613
April 1996 ............... 56.72920832 March 2000 ....... 18.95940618 February 2004 .... 3.72769313
May 1996 ................. 53.87891280 April 2000 ....... 18.61014848 March 2004 ....... 3.49677453
June 1996 ................ 50.98216190 May 2000 ......... 18.25825382 April 2004 ....... 3.27047170
July 1996 ................ 48.07178506 June 2000 ........ 17.90416135 May 2004 ......... 3.04870676
August 1996 .............. 45.21449152 July 2000 ........ 17.54828745 June 2004 ........ 2.83140265
September 1996 ........... 42.42047265 August 2000 ...... 17.19102665 July 2004 ........ 2.61848306
October 1996 ............. 41.45300134 September 2000 ... 16.83275256 August 2004 ...... 2.40987251
November 1996 ............ 40.57358149 October 2000 ..... 16.47381875 September 2004 . . 2.20549634
December 1996 ............ 39.71407708 November 2000 .... 16.11455955 October 2004 ..... 2.00528072
January 1997 ............. 38.87418855 December 2000 .... 15.75529091 November 2004 .... 1.80915266
February 1997 ............ 38.05362034 January 2001 ..... 15.39631116 December 2004 .... 1.61704005
March 1997 ............... 37.25208083 February 2001 .... 15.03790171 January 2005 ..... 1.42887161
April 1997 ............... 36.46928228 March 2001 ....... 14.66411970 February 2005 .... 1.24457697
May 1997 ................. 35.70494077 April 2001 ....... 14.29249786 March 2005 ....... 1.06408661
June 1997 ................ 34.95877620 May 2001 ......... 13.92323313 April 2005 ....... 0.88733189
July 1997 ................ 34.23051217 June 2001 ........ 13.55650929 May 2005 ......... 0.71424508
August 1997 .............. 33.51987601 July 2001 ........ 13.19249763 June 2005 ........ 0.54475933
September 1997 ........... 32.82659867 August 2001 ...... 12.83135744 July 2005 ........ 0.37880868
October 1997 ............. 32.15041471 September 2001 ... 12.47323658 August 2005 ...... 0.21632806
November 1997 ............ 31.49106224 October 2001 ..... 12.11827206 September 2005 . . 0.05725331
December 1997 ............ 30.84828286 November 2001 .... 11.76659046 October 2005
January 1998 ............. 30.22182169 December 2001 .... 11.41830847 and thereafter ... 0.00000000
</TABLE>
A-6
<PAGE>
Planned Class A Subclass Principal Balances
as Percentages of Initial Class A Subclass Principal Balances
Class A-17 Certificates
<TABLE>
<CAPTION>
Percentage of Percentage of Percentage of
Initial Class A Initial Class A Initial Class A
Distribution Subclass Distribution Subclass Distribution Subclass
Date Principal Balance Date Principal Balance Date Principal Balance
------------ ----------------- ------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
March 1994 ............... 99.51238269% February 1995 .... 80.48891519% January 1996 ..... 39.19337800%
April 1994 ............... 98.81427953 March 1995 ....... 77.57195269 February 1996 .... 34.56807503
May 1994 ................. 97.90590225 April 1995 ....... 74.47170589 March 1996 ....... 29.82814478
June 1994 ................ 96.78783681 May 1995 ......... 71.19280528 April 1996 ....... 24.98216089
July 1994 ................ 95.46104478 June 1995 ........ 67.74022031 May 1996 ......... 20.04065178
August 1994 .............. 93.92686478 July 1995 ........ 64.11925075 June 1996 ........ 15.01860378
September 1994 ........... 92.18701225 August 1995 ...... 60.33551756 July 1996 ........ 9.97293272
October 1994 ............. 90.24357869 September 1995 ... 56.39495258 August 1996 ...... 5.01929128
November 1994 ............ 88.09903019 October 1995 ..... 52.30378775 September 1996 ... 0.17534806
December 1994 ............ 85.75620483 November 1995 .... 48.06854342 October 1996
January 1995 ............. 83.21830942 December 1995 .... 43.69601600 and thereafter ... 0.00000000
</TABLE>
A-7
<PAGE>
Planned Group Component Principal Balances
as Percentages of Initial Group Component Principal Balances
PAC I Group Component
<TABLE>
<CAPTION>
Percentage of Percentage of Percentage of
Initial Group Initial Group Initial Group
Distribution Component Distribution Component Distribution Component
Date Principal Balance Date Principal Balance Date Principal Balance
------------ ----------------- ------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
March 1994 ............... 99.65454511% February 1999 .... 19.31237763% January 2004 ..... 1.27710615%
April 1994 ............... 99.24664985 March 1999 ....... 18.61618401 February 2004 .... 1.23294544
May 1994 ................. 98.77641869 April 1999 ....... 17.92466513 March 2004 ....... 1.19029334
June 1994 ................ 98.24399616 May 1999 ......... 17.23779085 April 2004 ....... 1.14909877
July 1994 ................ 97.64956689 June 1999 ........ 16.55553121 May 2004 ......... 1.10931234
August 1994 .............. 96.99335552 July 1999 ........ 15.87785645 June 2004 ........ 1.07088633
September 1994 ........... 96.27562671 August 1999 ...... 15.20473703 July 2004 ........ 1.03377465
October 1994 ............. 95.49668499 September 1999 ... 14.53614356 August 2004 ...... 0.99793273
November 1994 ............ 94.65687467 October 1999 ..... 13.87231898 September 2004 ... 0.96331751
December 1994 ............ 93.75657956 November 1999 .... 13.23273075 October 2004 ..... 0.92988739
January 1995 ............. 92.79622281 December 1999 .... 12.61654700 November 2004 .... 0.89760217
February 1995 ............ 91.77626661 January 2000 ..... 12.02296384 December 2004 .... 0.86642299
March 1995 ............... 90.69721186 February 2000 .... 11.45120437 January 2005 ..... 0.83631231
April 1995 ............... 89.55959782 March 2000 ....... 10.92257741 February 2005 .... 0.80723386
May 1995 ................. 88.36400170 April 2000 ....... 10.41373654 March 2005 ....... 0.77915258
June 1995 ................ 87.11103825 May 2000 ......... 9.92399086 April 2005 ....... 0.75203460
July 1995 ................ 85.80135920 June 2000 ........ 9.45267295 May 2005 ......... 0.72584719
August 1995 .............. 84.43565280 July 2000 ........ 8.99913801 June 2005 ........ 0.70055872
September 1995 ........... 83.01464322 August 2000 ...... 8.56276317 July 2005 ........ 0.67613864
October 1995 ............. 81.53908993 September 2000 ... 8.14294672 August 2005 ...... 0.65255743
November 1995 ............ 80.00978711 October 2000 ..... 7.73910740 September 2005 ... 0.62978654
December 1995 ............ 78.42756289 November 2000 .... 7.35068371 October 2005 ..... 0.60779842
January 1996 ............. 76.79331294 December 2000 .... 6.97713330 November 2005 .... 0.58656642
February 1996 ............ 75.10797404 January 2001 ..... 6.61793224 December 2005 .... 0.56606481
March 1996 ............... 73.37262513 February 2001 .... 6.27257447 January 2006 ..... 0.54626871
April 1996 ............... 71.58847830 March 2001 ....... 5.97763434 February 2006 .... 0.52715412
May 1996 ................. 69.75732100 April 2001 ....... 5.69426005 March 2006 ....... 0.50869780
June 1996 ................ 67.88230793 May 2001 ......... 5.42202989 April 2006 ....... 0.49087733
July 1996 ................ 65.97951756 June 2001 ........ 5.16053693 May 2006 ......... 0.47367103
August 1996 .............. 64.08358009 July 2001 ........ 4.90938852 June 2006 ........ 0.45705796
September 1996 ........... 62.20016578 August 2001 ...... 4.66820578 July 2006 ........ 0.44101789
October 1996 ............. 60.32919478 September 2001 ... 4.43662316 August 2006 ...... 0.42553126
November 1996 ............ 58.47058776 October 2001 ..... 4.21428794 September 2006 ... 0.41057922
December 1996 ............ 56.62426593 November 2001 .... 4.00085981 October 2006 ..... 0.39614349
January 1997 ............. 54.79015100 December 2001 .... 3.79601048 November 2006 .... 0.38220644
February 1997 ............ 52.96816519 January 2002 ..... 3.59942321 December 2006 .... 0.36875105
March 1997 ............... 51.15823127 February 2002 .... 3.41079241 January 2007 ..... 0.35576086
April 1997 ............... 49.36027248 March 2002 ....... 3.25851930 February 2007 .... 0.34321998
May 1997 ................. 47.57421258 April 2002 ....... 3.11222057 March 2007 ....... 0.33111304
June 1997 ................ 45.79997583 May 2002 ......... 2.97167272 April 2007 ....... 0.31942520
July 1997 ................ 44.03748699 June 2002 ........ 2.83666034 May 2007 ......... 0.30814213
August 1997 .............. 42.28667132 July 2002 ........ 2.70697583 June 2007 ........ 0.29724997
September 1997 ........... 40.54745455 August 2002 ...... 2.58241911 July 2007 ........ 0.28673536
October 1997 ............. 38.81976292 September 2002 ... 2.46279738 August 2007 ...... 0.27658535
November 1997 ............ 37.10352318 October 2002 ..... 2.34792484 September 2007 ... 0.26678746
December 1997 ............ 35.39866252 November 2002 .... 2.23762243 October 2007 ..... 0.25732964
January 1998 ............. 33.70510860 December 2002 .... 2.13171764 November 2007 .... 0.24820021
February 1998 ............ 32.02278962 January 2003 ..... 2.03004421 December 2007 .... 0.23938792
March 1998 ............... 30.35163420 February 2003 .... 1.93244196 January 2008 ..... 0.23088190
April 1998 ............... 28.69157144 March 2003 ....... 1.85921870 February 2008 .... 0.22267164
May 1998 ................. 27.04253094 April 2003 ....... 1.78848900 March 2008 ....... 0.21474700
June 1998 ................ 25.40444272 May 2003 ......... 1.72016861 April 2008 ....... 0.20709816
July 1998 ................ 24.42535740 June 2003 ........ 1.65417610 May 2008 ......... 0.19971566
August 1998 .............. 23.68022768 July 2003 ........ 1.59043279 June 2008 ........ 0.19259033
September 1998 ........... 22.94005131 August 2003 ...... 1.52886263 July 2008 ........ 0.18571334
October 1998 ............. 22.20479686 September 2003 ... 1.46992067 August 2008 ...... 0.17907617
November 1998 ............ 21.47443317 October 2003 ..... 1.41917801 September 2008 ... 0.17267056
December 1998 ............ 20.74292922 November 2003 .... 1.37016677 October 2008 ..... 0.16648853
January 1999 ............. 20.02825424 December 2003 .... 1.32282835 November 2008 .... 0.16052241
</TABLE>
A-8
<PAGE>
Planned Group Component Principal Balances
as Percentages of Initial Group Component Principal Balances
PAC I Group Component (Continued)
<TABLE>
<CAPTION>
Percentage of Percentage of Percentage of
Initial Group Initial Group Initial Group
Distribution Component Distribution Component Distribution Component
Date Principal Balance Date Principal Balance Date Principal Balance
------------ ----------------- ------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
December 2008 ............ 0.15476475% August 2012 ...... 0.02958166% April 2016 ....... 0.00450934%
January 2009 ............. 0.14920837 September 2012 ... 0.02844619 May 2016 ......... 0.00429165
February 2009 ............ 0.14384633 October 2012 ..... 0.02735164 June 2016 ........ 0.00408221
March 2009 ............... 0.13867195 November 2012 .... 0.02629655 July 2016 ........ 0.00388071
April 2009 ............... 0.13367874 December 2012 .... 0.02527955 August 2016 ...... 0.00368687
May 2009 ................. 0.12886048 January 2013 ..... 0.02429927 September 2016 ... 0.00350042
June 2009 ................ 0.12421110 February 2013 .... 0.02335444 October 2016 ..... 0.00332108
July 2009 ................ 0.11972478 March 2013 ....... 0.02244379 November 2016 .... 0.00314860
August 2009 .............. 0.11539590 April 2013 ....... 0.02156613 December 2016 .... 0.00298271
September 2009 ........... 0.11121900 May 2013 ......... 0.02072028 January 2017 ..... 0.00282318
October 2009 ............. 0.10718885 June 2013 ........ 0.01990513 February 2017 .... 0.00266978
November 2009 ............ 0.10330036 July 2013 ........ 0.01911959 March 2017 ....... 0.00252228
December 2009 ............ 0.09954864 August 2013 ...... 0.01836260 April 2017 ....... 0.00238046
January 2010 ............. 0.09592895 September 2013 ... 0.01763316 May 2017 ......... 0.00224412
February 2010 ............ 0.09243672 October 2013 ..... 0.01693029 June 2017 ........ 0.00211305
March 2010 ............... 0.08906753 November 2013 .... 0.01625305 July 2017 ........ 0.00198706
April 2010 ............... 0.08581713 December 2013 .... 0.01560053 August 2017 ...... 0.00186597
May 2010 ................. 0.08268139 January 2014 ..... 0.01497186 September 2017 ... 0.00174958
June 2010 ................ 0.07965634 February 2014 .... 0.01436617 October 2017 ..... 0.00163774
July 2010 ................ 0.07673813 March 2014 ....... 0.01378267 November 2017 .... 0.00153027
August 2010 .............. 0.07392307 April 2014 ....... 0.01322055 December 2017 .... 0.00142699
September 2010 ........... 0.07120755 May 2014 ......... 0.01267906 January 2018 ..... 0.00132777
October 2010 ............. 0.06858815 June 2014 ........ 0.01215745 February 2018 .... 0.00123245
November 2010 ............ 0.06606150 July 2014 ........ 0.01165503 March 2018 ....... 0.00114089
December 2010 ............ 0.06362438 August 2014 ...... 0.01117110 April 2018 ....... 0.00105294
January 2011 ............. 0.06127367 September 2014 ... 0.01070501 May 2018 ......... 0.00096847
February 2011 ............ 0.05900638 October 2014 ..... 0.01025611 June 2018 ........ 0.00088735
March 2011 ............... 0.05681959 November 2014 .... 0.00982380 July 2018 ........ 0.00080945
April 2011 ............... 0.05471050 December 2014 .... 0.00940748 August 2018 ...... 0.00073466
May 2011 ................. 0.05267640 January 2015 ..... 0.00900658 September 2018 ... 0.00066285
June 2011 ................ 0.05071467 February 2015 .... 0.00862054 October 2018 ..... 0.00059392
July 2011 ................ 0.04882279 March 2015 ....... 0.00824882 November 2018 .... 0.00052776
August 2011 .............. 0.04699833 April 2015 ....... 0.00789092 December 2018 .... 0.00046425
September 2011 ........... 0.04523892 May 2015 ......... 0.00754634 January 2019 ..... 0.00040331
October 2011 ............. 0.04354229 June 2015 ........ 0.00721460 February 2019 .... 0.00034483
November 2011 ............ 0.04190626 July 2015 ........ 0.00689524 March 2019 ....... 0.00028873
December 2011 ............ 0.04032869 August 2015 ...... 0.00658781 April 2019 ....... 0.00023491
January 2012 ............. 0.03880754 September 2015 ... 0.00629189 May 2019 ......... 0.00018329
February 2012 ............ 0.03734085 October 2015 ..... 0.00600704 June 2019 ........ 0.00013377
March 2012 ............... 0.03592668 November 2015 .... 0.00573289 July 2019 ........ 0.00008629
April 2012 ............... 0.03456322 December 2015 .... 0.00546904 August 2019 ...... 0.00004076
May 2012 ................. 0.03324867 January 2016 ..... 0.00521511 September 2019
June 2012 ................ 0.03198132 February 2016 .... 0.00497074 and thereafter ... 0.00000000
July 2012 ................ 0.03075952 March 2016 ....... 0.00473559
</TABLE>
A-9
<PAGE>
Planned Group Component Principal Balances
as Percentages of Initial Group Component Principal Balances
PAC II Group Component
<TABLE>
<CAPTION>
Percentage of Percentage of Percentage of
Initial Group Initial Group Initial Group
Distribution Component Distribution Component Distribution Component
Date Principal Balance Date Principal Balance Date Principal Balance
------------ ----------------- ------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
March 1994 ............... 99.74348209% February 1999 .... 26.86894753% January 2004 ..... 5.66650513%
April 1994 ............... 99.37623515 March 1999 ....... 26.43322857 February 2004 .... 5.41018436
May 1994 ................. 98.89837056 April 1999 ....... 26.01133236 March 2004 ....... 5.15897057
June 1994 ................ 98.31019657 May 1999 ......... 25.60303628 April 2004 ....... 4.91277821
July 1994 ................ 97.61221908 June 1999 ........ 25.20812071 May 2004 ......... 4.67152258
August 1994 .............. 96.80514222 July 1999 ........ 24.82636907 June 2004 ........ 4.43511983
September 1994 ........... 95.88986846 August 1999 ...... 24.45756771 July 2004 ........ 4.20348695
October 1994 ............. 94.86749805 September 1999 ... 24.10150586 August 2004 ...... 3.97654183
November 1994 ............ 93.73932831 October 1999 ..... 23.76515673 September 2004 ... 3.75420327
December 1994 ............ 92.50685223 November 1999 .... 23.42190110 October 2004 ..... 3.53639092
January 1995 ............. 91.17175681 December 1999 .... 23.07240317 November 2004 .... 3.32302538
February 1995 ............ 89.73592077 January 2000 ..... 22.71729501 December 2004 .... 3.11402817
March 1995 ............... 88.20141182 February 2000 .... 22.35717797 January 2005 ..... 2.90932180
April 1995 ............... 86.57048362 March 2000 ....... 21.98059668 February 2005 .... 2.70882968
May 1995 ................. 84.84557207 April 2000 ....... 21.60064306 March 2005 ....... 2.51247619
June 1995 ................ 83.02929145 May 2000 ......... 21.21782077 April 2005 ....... 2.32018670
July 1995 ................ 81.12442973 June 2000 ........ 20.83260747 May 2005 ......... 2.13188748
August 1995 .............. 79.13394393 July 2000 ........ 20.44545618 June 2005 ........ 1.94750578
September 1995 ........... 77.06095457 August 2000 ...... 20.05679612 July 2005 ........ 1.76696992
October 1995 ............. 74.90874005 September 2000 ... 19.66703368 August 2005 ...... 1.59020905
November 1995 ............ 72.68073052 October 2000 ..... 19.27655354 September 2005 ... 1.41715340
December 1995 ............ 70.38050130 November 2000 .... 18.88571942 October 2005 ..... 1.33450926
January 1996 ............. 68.01182559 December 2000 .... 18.49487504 November 2005 .... 1.30299231
February 1996 ............ 65.57862025 January 2001 ..... 18.10434492 December 2005 .... 1.27214081
March 1996 ............... 63.08511363 February 2001 .... 17.71443524 January 2006 ..... 1.24194217
April 1996 ............... 60.53581598 March 2001 ....... 17.30780190 February 2006 .... 1.21238411
May 1996 ................. 57.93626596 April 2001 ....... 16.90351860 March 2006 ....... 1.18345445
June 1996 ................ 55.29434733 May 2001 ......... 16.50179956 April 2006 ....... 1.15514119
July 1996 ................ 52.64000145 June 2001 ........ 16.10284476 May 2006 ......... 1.12743256
August 1996 .............. 50.03406904 July 2001 ........ 15.70684052 June 2006 ........ 1.10031694
September 1996 ........... 47.48584492 August 2001 ...... 15.31396008 July 2006 ........ 1.07378291
October 1996 ............. 46.45113047 September 2001 ... 14.92436436 August 2006 ...... 1.04781920
November 1996 ............ 45.49441932 October 2001 ..... 14.53820239 September 2006 ... 1.02241473
December 1996 ............ 44.55937397 November 2001 .... 14.15561187 October 2006 ..... 0.99755860
January 1997 ............. 43.64566852 December 2001 .... 13.77671973 November 2006 .... 0.97324009
February 1997 ............ 42.75298144 January 2002 ..... 13.40164264 December 2006 .... 0.94944868
March 1997 ............... 41.88099545 February 2002 .... 13.03048748 January 2007 ..... 0.92617395
April 1997 ............... 41.02939754 March 2002 ....... 12.65290003 February 2007 .... 0.90340570
May 1997 ................. 40.19787887 April 2002 ....... 12.28056583 March 2007 ....... 0.88113388
June 1997 ................ 39.38613468 May 2002 ......... 11.91350658 April 2007 ....... 0.85934863
July 1997 ................ 38.59386428 June 2002 ........ 11.55173825 May 2007 ......... 0.83804026
August 1997 .............. 37.82077105 July 2002 ........ 11.19527128 June 2007 ........ 0.81719921
September 1997 ........... 37.06656227 August 2002 ...... 10.84411095 July 2007 ........ 0.79681610
October 1997 ............. 36.33094921 September 2002 ... 10.49825773 August 2007 ...... 0.77688174
November 1997 ............ 35.61364693 October 2002 ..... 10.15770748 September 2007 ... 0.75738706
December 1997 ............ 34.91437435 November 2002 .... 9.82245170 October 2007 ..... 0.73832314
January 1998 ............. 34.23285418 December 2002 .... 9.49247788 November 2007 .... 0.71968122
February 1998 ............ 33.56881277 January 2003 ..... 9.16776960 December 2007 .... 0.70145277
March 1998 ............... 32.92198021 February 2003 .... 8.84830695 January 2008 ..... 0.68362929
April 1998 ............... 32.29209021 March 2003 ....... 8.52995419 February 2008 .... 0.66620250
May 1998 ................. 31.67888005 April 2003 ....... 8.21769600 March 2008 ....... 0.64916431
June 1998 ................ 31.08209055 May 2003 ......... 7.91143968 April 2008 ....... 0.63250666
July 1998 ................ 30.50146601 June 2003 ........ 7.61109300 May 2008 ......... 0.61622175
August 1998 .............. 29.93675417 July 2003 ........ 7.31656422 June 2008 ........ 0.60030186
September 1998 ........... 29.38770622 August 2003 ...... 7.02776217 July 2008 ........ 0.58473940
October 1998 ............. 28.85407662 September 2003 ... 6.74459626 August 2008 ...... 0.56952694
November 1998 ............ 28.33562324 October 2003 ..... 6.46697654 September 2008 ... 0.55465723
December 1998 ............ 27.83210716 November 2003 .... 6.19481372 October 2008 ..... 0.54012309
January 1999 ............. 27.34329275 December 2003 .... 5.92801921 November 2008 .... 0.52591748
</TABLE>
A-10
<PAGE>
Planned Group Component Principal Balances
as Percentages of Initial Group Component Principal Balances
PAC II Group Component (Continued)
<TABLE>
<CAPTION>
Percentage of Percentage of Percentage of
Initial Group Initial Group Initial Group
Distribution Component Distribution Component Distribution Component
Date Principal Balance Date Principal Balance Date Principal Balance
------------ ----------------- ------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
December 2008 ............ 0.51203353% August 2011 ...... 0.20250528% April 2014 ....... 0.05913120%
January 2009 ............. 0.49846448 September 2011 ... 0.19611949 May 2014 ......... 0.05623829
February 2009 ............ 0.48520369 October 2011 ..... 0.18988610 June 2014 ........ 0.05341794
March 2009 ............... 0.47224464 November 2011 .... 0.18380171 July 2014 ........ 0.05066844
April 2009 ............... 0.45958095 December 2011 .... 0.17786298 August 2014 ...... 0.04798814
May 2009 ................. 0.44720633 January 2012 ..... 0.17206663 September 2014 ... 0.04537538
June 2009 ................ 0.43511467 February 2012 .... 0.16640945 October 2014 ..... 0.04282861
July 2009 ................ 0.42329995 March 2012 ....... 0.16088832 November 2014 .... 0.04034622
August 2009 .............. 0.41175620 April 2012 ....... 0.15550015 December 2014 .... 0.03792675
September 2009 ........... 0.40047769 May 2012 ......... 0.15024192 January 2015 ..... 0.03556866
October 2009 ............. 0.38945870 June 2012 ........ 0.14511072 February 2015 .... 0.03327051
November 2009 ............ 0.37869366 July 2012 ........ 0.14010368 March 2015 ....... 0.03103089
December 2009 ............ 0.36817713 August 2012 ...... 0.13521793 April 2015 ....... 0.02884840
January 2010 ............. 0.35790370 September 2012 . . 0.13045074 May 2015 ......... 0.02672168
February 2010 ............ 0.34786819 October 2012 ..... 0.12579941 June 2015 ........ 0.02464942
March 2010 ............... 0.33806541 November 2012 .... 0.12126129 July 2015 ........ 0.02263028
April 2010 ............... 0.32849032 December 2012 .... 0.11683382 August 2015 ...... 0.02066304
May 2010 ................. 0.31913794 January 2013 ..... 0.11251443 September 2015 ... 0.01874644
June 2010 ................ 0.31000348 February 2013 .... 0.10830067 October 2015 ..... 0.01687925
July 2010 ................ 0.30108217 March 2013 ....... 0.10419010 November 2015 .... 0.01506032
August 2010 .............. 0.29236934 April 2013 ....... 0.10018034 December 2015 .... 0.01328846
September 2010 ........... 0.28386042 May 2013 ......... 0.09626910 January 2016 ..... 0.01156254
October 2010 ............. 0.27555094 June 2013 ........ 0.09245407 February 2016 .... 0.00988147
November 2010 ............ 0.26743654 July 2013 ........ 0.08873308 March 2016 ....... 0.00824414
December 2010 ............ 0.25951294 August 2013 ...... 0.08510391 April 2016 ....... 0.00664953
January 2011 ............. 0.25177591 September 2013 . . 0.08156445 May 2016 ......... 0.00509656
February 2011 ............ 0.24422133 October 2013 ..... 0.07811264 June 2016 ........ 0.00358428
March 2011 ............... 0.23684519 November 2013 .... 0.07474640 July 2016 ........ 0.00211164
April 2011 ............... 0.22964352 December 2013 .... 0.07146379 August 2016 ...... 0.00067774
May 2011 ................. 0.22261245 January 2014 ..... 0.06826286 September 2016
June 2011 ................ 0.21574816 February 2014 .... 0.06514169 and thereafter ... 0.00000000
July 2011 ................ 0.20904700 March 2014 ....... 0.06209840
</TABLE>
A-11
<PAGE>
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 September 20, 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.
-------------------------------------------
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........................................................... 14
The Mortgage Loans..................................................... 14
Agency Securities...................................................... 19
Private Mortgage-Backed Securities..................................... 24
Use of Proceeds........................................................... 26
Yield Considerations...................................................... 26
Maturity and Prepayment Considerations.................................... 27
The Depositor............................................................. 29
Mortgage Loan Program..................................................... 29
Underwriting Standards................................................. 29
Qualifications of Originators and Mortgage Loan Sellers................ 31
Representations by or on behalf of Mortgage Loan Sellers; Repurchases.. 31
Description of the Certificates........................................... 33
General................................................................ 33
Assignment of Trust Fund Assets........................................ 35
Deposits to Certificate Account........................................ 38
Payments Mortgage Loans................................................ 39
Payments on Agency Securities and Private Mortgage-Backed Securities.....41
Distributions.......................................................... 41
Available Distribution Amount.......................................... 41
Interest on the Certificates........................................... 42
Principal of the Certificates.......................................... 42
Allocation of Losses................................................... 43
Advances in Respect of Delinquencies................................... 43
Reports to Certificateholders.......................................... 44
Collection and Other Servicing Procedures.............................. 45
Sub-Servicing.......................................................... 46
Realization Upon Defaulted Mortgage Loans.............................. 47
Retained Interest; Servicing or Administration Compensation and Payment
of Expenses.......................................................... 49
Evidence as to Compliance.............................................. 49
Certain Matters Regarding the Master Servicer and the Depositor........ 50
Events of Default...................................................... 51
Rights Upon Event of Default........................................... 51
Amendment.............................................................. 52
Termination............................................................ 52
Duties of the Trustee.................................................. 53
The Trustee............................................................ 53
2
<PAGE>
CAPTION PAGE
Description of Credit Support............................................. 53
Subordination.......................................................... 54
Letter of Credit....................................................... 55
Mortgage Pool Insurance Policy......................................... 57
Special Hazard Insurance Policy........................................ 58
Bankruptcy Bond........................................................ 60
Certificate Guarantee Insurance........................................ 60
Reserve Fund........................................................... 60
Description of Primary Insurance Policies................................. 61
Primary Mortgage Insurance Policies.................................... 61
Primary Hazard Insurance Policies...................................... 61
FHA Insurance.......................................................... 63
VA Guarantees............................................................63
Certain Legal Aspects of Mortgage Loans................................... 64
General................................................................ 64
Single-Family Loans and Multifamily Loans.............................. 64
Leases and Rents....................................................... 65
Cooperative Loans...................................................... 65
Contracts.............................................................. 66
Foreclosure on Mortgages............................................... 68
Foreclosure on Cooperative Shares...................................... 70
Repossession with respect to Contracts................................. 71
Louisiana Law.......................................................... 72
Rights of Redemption with respect to Single-Family Properties and
Multifamily Properties.............................................. 72
Notice of Sale; Redemption Rights with respect to Manufactured Homes... 72
Anti-Deficiency Legislation and Other Limitations on Lenders........... 73
Junior Mortgages....................................................... 74
Consumer Protection Laws with respect to Contracts..................... 74
Other Limitations...................................................... 75
Enforceability of Certain Provisions................................... 75
Subordinate Financing.................................................. 77
Applicability of Usury Laws............................................ 77
Alternative Mortgage Instruments....................................... 78
Formaldehyde Litigation with respect to Contracts...................... 79
Soldiers' and Sailors' Civil Relief Act of 1940........................ 79
Certain Federal Income Tax Consequences................................... 80
General................................................................ 80
REMICs................................................................. 81
Grantor Trust Funds.................................................... 98
Partnership Trust Funds.................................................108
State and Other Tax Consequences.......................................... 115
ERISA Considerations...................................................... 115
Legal Investment.......................................................... 118
Methods of Distribution................................................... 118
Legal Matters............................................................. 119
Financial Information..................................................... 119
Index of Principal Definitions............................................ 120
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.
3
<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
enhancement also may be provided with respect to
any series by means of various pool insurance
policies, letters of credit, reserve 5
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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 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
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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 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;
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(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
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
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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 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
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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 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
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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 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)
and (ii) owned by a real estate investment trust
will be treated as "real estate assets" for
purposes of Section 856(c)(5)(A)
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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
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, (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.
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 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 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 7701(a)(19)(C)
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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, 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 term or for a specified number of years, as
described in the related Prospectus Supplement;
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(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 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.
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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 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
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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, 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
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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 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
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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 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
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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 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
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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
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
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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 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
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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.
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.
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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 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
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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.
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
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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.
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
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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 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
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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 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.
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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 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
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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 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
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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.
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
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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 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".
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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".
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
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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 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
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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".
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
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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 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
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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 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)
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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)
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)
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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-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;
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(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
(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 evidencing an interest in
Mortgage Loans, by the amount of any Realized Losses, as defined below,
allocated thereto.
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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 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
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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;
(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;
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(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 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
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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.
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,
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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 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
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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 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
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
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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
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
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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
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
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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 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
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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,
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
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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, 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.
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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
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
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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 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
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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 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
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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 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
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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 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
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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 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
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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 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
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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.
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.
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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.
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
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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 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
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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 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
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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.
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
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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, 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
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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 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.
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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 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
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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 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.
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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 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
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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 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.
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ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the remedies of
a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against
the former borrower following a judicial sale to the excess of the outstanding
debt over the fair market value of the property at the time of the public sale.
The purpose of these statutes is generally to prevent a beneficiary or a
mortgagee from obtaining a large deficiency judgment against the former borrower
as a result of low or no bids at the judicial sale.
In addition to 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.In addition, certain of the Mortgage Loans may be subject
to special rules, disclosure requirements and other provisions that were added
to the federal Truth-in-Lending Act by the Homeownership and Equity Protection
Act of 1994 (such Mortgage Loans, "High Cost Loans"), if such Mortgage Loans
were originated on or after October 1, 1995, are not mortgage loans made to
finance the purchase of the mortgaged property and have interest rates or
origination costs in excess of certain prescribed levels. Purchasers or
assignees of any High Cost Loan could be liable for all claims and subject to
all defenses arising under such provisions that the mortgagor could assert
against the originator thereof. Remedies available to the mortgagor include
monetary penalties, as well as rescission rights if the appropriate disclosures
were not given as required. See "Mortgage Loan Program-Representations by or on
Behalf of Mortgage Loan Sellers; Repurchases."
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
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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 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
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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
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
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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 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.
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Therefore, in a state that has not taken the requisite action to reject
application of Title V or to adopt a provision limiting discount points or other
charges prior to origination of such mortgage loans, any such limitation under
such state's usury law would not apply to such mortgage loans.
In any state in which application of Title V has been expressly rejected or a
provision limiting discount points or other charges is adopted, no Mortgage
Loans originated after the date of such state action will be eligible 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
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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 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 "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. 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 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
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considered part of the Mortgage Loans for purposes of Section
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.
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
"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 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
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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 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
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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
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
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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, 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
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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 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
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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
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.
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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 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.
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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 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.
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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.
EXCESS INCLUSIONS
Any "excess inclusions" with respect to a REMIC Residual Certificate will 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
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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. Although it has not done so, the Treasury 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."
For REMIC Residual Certificateholders, excess inclusions (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. Furthermore, for purposes of the alternative
minimum tax, (i) excess inclusions will not be permitted to be offset by the
alternative tax net operating loss deduction and (ii) alternative minimum
taxable income may not be less than the taxpayer's excess inclusions. The latter
rule has the effect of preventing nonrefundable tax credits from reducing the
taxpayer's income tax to an amount lower than the tentative minimum tax on
excess inclusions.
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
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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.
MARK-TO-MARKET RULES
On December 28, 1993, the IRS released temporary regulations (the
"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 Mark-to-Market Regulations provide that for purposes of this mark-to-market
requirement, a "negative value" REMIC Residual Certificate is not treated as a
security and thus generally may not be marked to market. This exclusion from the
mark-to-market requirement is expanded to include all REMIC Residual
Certificates under proposed Treasury regulations published January 4, 1995 which
provide that any REMIC Residual Certificate issued after January 4, 1995 will
not be treated as a security and therefore generally may not be marked to
market.
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
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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 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 four 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
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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 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
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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 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.
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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
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 IRS 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
IRS; 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 IRS. 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.
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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
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 whose income is subject to
United States federal income tax regardless of its source, or a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. 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.
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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.
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) "loans . . . secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code; (ii) "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 (iii) "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, 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 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
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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 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
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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 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
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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 "-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
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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 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
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(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 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 and its adjusted basis, recognized on the
sale 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 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
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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 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
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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 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); (ii) 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 (iii) 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 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.
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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 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
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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.
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
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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 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,
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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 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 Section 17A 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
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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 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.
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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 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,
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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 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
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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 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.
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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.
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
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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.
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 ............................................42
Agency Securities ........................................................1
Agreement ...............................................................33
ARM Loans ............................................................7, 14
Available Distribution Amount ...........................................41
Bankruptcy Amount .......................................................53
BIF .....................................................................31
Buydown Account .........................................................40
Buydown Funds ...........................................................17
Buydown Mortgage Loans ..................................................16
Buydown Period ..........................................................17
Certificate .............................................................33
Certificate Account ..................................................9, 38
Certificate Guarantee Insurance .........................................60
Certificate Principal Balance ........................................5, 42
Certificates .............................................................4
Charter Act .............................................................23
Closing Date ............................................................83
Code .............................................................6, 34, 80
Commission ...............................................................4
Committee Report ........................................................82
Contracts ...............................................................14
Contributions Tax .......................................................94
Cooperative ..........................................................7, 14
Cooperative Loans ....................................................7, 14
Cooperative Notes .......................................................19
Cooperative Unit ........................................................14
Credit Support ......................................................10, 34
Cut-off Date ............................................................10
Defaulted Mortgage Amount ...............................................53
Deficient Valuation .....................................................43
Deleted Mortgage Loan ...................................................36
Depositor ...............................................................14
Determination Date ......................................................41
Distribution Date .......................................................10
DOL ....................................................................115
DTC .....................................................................33
Due Period ..............................................................41
ERISA ..............................................................13, 115
Excluded Plan ..........................................................117
Exemption ..............................................................116
FDIC ....................................................................31
FHA ......................................................................8
FHA Loans ...............................................................19
FHLMC ....................................................................1
FHLMC Act ...............................................................21
FHLMC Certificates .......................................................8
FNMA .....................................................................1
FNMA Certificates ........................................................8
FTC Rule ................................................................75
Garn-St Germain Act .....................................................75
GNMA .....................................................................1
GNMA Certificates ........................................................8
GNMA Issuer .............................................................19
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<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
Grantor Trust Certificates ..........................................11, 80
Grantor Trust Fractional Interest Certificate............................98
Grantor Trust Fractional Interest Certificates...........................12
Grantor Trust Fund.......................................................80
Grantor Trust Strip Certificate..........................................98
Grantor Trust Strip Certificates.........................................12
Guaranty Agreement.......................................................20
High Cost Loans..........................................................74
Holder-in-Due-Course.....................................................75
Housing Act..............................................................19
HUD......................................................................63
Insurance Instruments....................................................46
Insurance Proceeds.......................................................39
Interest Rate.........................................................7, 14
IRS......................................................................83
Issue Premium............................................................89
Letter of Credit Bank....................................................55
Liquidated Loan..........................................................43
Liquidation Proceeds.....................................................39
Loan-to-Value Ratio......................................................15
Lockout Period...........................................................27
Manufacturer's Invoice Price.............................................16
Master Servicer...........................................................5
Mortgage Loan Seller.....................................................14
Mortgage Loans.........................................................1, 7
Mortgage Notes...........................................................18
Mortgage Pool.............................................................7
Mortgaged Properties...................................................7,14
Mortgages................................................................18
Multifamily Loans........................................................14
Multifamily Properties...................................................14
Net Interest Rate........................................................35
Nonrecoverable Advance...................................................44
OID Regulations..........................................................80
Originator...............................................................14
Parties in Interest.....................................................115
Pass-Through Rate.........................................................5
Permitted Investments....................................................38
Plans...................................................................115
PMBS Agreement...........................................................24
PMBS Issuer..............................................................25
PMBS Servicer............................................................25
PMBS Trustee.............................................................25
Prepayment Assumption...............................................82, 101
Prepayment Period........................................................27
Private Mortgage-Backed Securities........................................1
Prohibited Transactions Tax..............................................94
Proposed Mark-to-Market Regulations......................................92
PTCE 83-1...............................................................117
Purchase Price...........................................................32
Rating Agency............................................................35
Record Date..............................................................41
Related Proceeds.........................................................44
Relief Act...............................................................79
REMIC....................................................................80
REMIC Certificates.......................................................80
REMIC Provisions.........................................................80
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<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
REMIC Regular Certificates...........................................11, 81
REMIC Regulations........................................................80
REMIC Residual Certificates..........................................11, 81
Reserve Fund.............................................................60
Reserve Funds............................................................55
Restricted Group........................................................116
Retained Interest........................................................34
SAIF.....................................................................31
Sales of Grantor Trust Certificates.....................................100
Salomon.............................................................13, 118
Scheduled Principal Balance..............................................54
Senior Certificates................................................5, 6, 354
Senior Liens.............................................................15
Senior Percentage........................................................43
Senior/Subordinate Series................................................34
Single Family Loans......................................................14
Single Family Properties.................................................14
SMMEA...............................................................13, 118
Special Hazard Amount....................................................53
Special Hazard Realized Losses...........................................54
Special Hazard Subordination Amount......................................54
Stated Principal Balance.................................................33
Strip Certificates....................................................6, 34
Stripped Interest........................................................26
Sub-Servicer.............................................................46
Sub-Servicing Account....................................................39
Sub-Servicing Agreement..................................................47
Subordinate Certificates...........................................5, 6, 34
Substitute Mortgage Loan.................................................36
Tiered REMICs............................................................82
Title V..................................................................77
Title VIII...............................................................78
Trust Fund.............................................................1, 5
Trust Fund Asset..........................................................5
Trustee...................................................................5
Underwriter.............................................................116
United States person.....................................................97
Unrecovered Senior Portion...............................................54
VA Loans.................................................................19
Window Period Loans......................................................76
122
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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
Description of the Trust Certificates .................................... S-19
Description of the Underlying Certificates ............................... S-23
The Mortgage Pool ........................................................ S-38
Yield on the Trust Certificates .......................................... S-45
Trust Agreement .......................................................... S-53
Pooling and Servicing Agreement .......................................... S-54
Certain Federal Income Tax Consequences .................................. S-55
Method of Distribution ................................................... S-57
Secondary Market ......................................................... S-58
Ratings .................................................................. S-58
Legal Investment ......................................................... S-58
ERISA Considerations ..................................................... S-59
Appendix A ............................................................... A-1
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 .................................. 64
Certain Federal Income Tax Consequences .................................. 80
State and Other Tax Consequences ......................................... 115
Erisa Considerations ..................................................... 115
Legal Investment ......................................................... 118
Methods of Distribution .................................................. 118
Legal Matters ............................................................ 119
Financial Information .................................................... 119
Index of Principal Definitions ........................................... 120
----------
Until December 30, 1996, all dealers effecting transactions in the Trust
Certificates, whether or not participating in this distribution, may be required
to deliver a prospectus supplement and the prospectus in which it relates. This
delivery requirement is in addition to the obligation of dealers to deliver a
prospectus supplement and prospectus when acting as underwriters and with
respect to their unsold allottments or subscription.
$49,000,000 (Approximate)
Trust Certificates, Series 1996-4A
Salomon Brothers Mortgage
Securities VII, Inc.
Depositor
-------------------------
Salomon Brothers Inc
-------------------------
Prospectus Supplement
Dated September 30, 1996
