PROSPECTUS SUPPLEMENT
(To Prospectus Dated November 20, 1997)
$177,623,300 (APPROXIMATE)
ASSET-BACKED FLOATING RATE CERTIFICATES, SERIES 1997-LB5
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
LONG BEACH MORTGAGE COMPANY
ORIGINATOR AND MASTER SERVICER
The Series 1997-LB5 Certificates will consist of eight classes of certificates
(collectively, the "Certificates"), designated as: (i) the Class A Certificates
(the "Senior Certificates"), (ii) the Class M-1 Certificates, the Class M-2
Certificates and the Class M-3 Certificates (collectively, the "Mezzanine
Certificates"), (iii) the Class CE Certificates (together with the Mezzanine
Certificates, the "Subordinate Certificates"), and (iv) the Class R-I
Certificates, the Class R-II Certificates and the Class R-III Certificates
(collectively, the "Residual Certificates"). Only the Class A Certificates, the
Mezzanine Certificates and the Residual Certificates (collectively, the "Offered
Certificates") are offered hereby.
Distributions on the Offered Certificates will be made on the 25th day of each
month or, if such day is not a business day, on the next succeeding business
day, beginning in December 1997 (each, a "Distribution Date"). As described more
fully herein, interest payable
(COVER CONTINUED ON NEXT PAGE)
-----------------------------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS"
BEGINNING ON PAGE S-23 OF THIS PROSPECTUS SUPPLEMENT.
-----------------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR
INTEREST IN THE DEPOSITOR, THE MASTER SERVICER, THE SUBSERVICER, THE ORIGINATOR,
THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE CERTIFICATES NOR
THE UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
=================== ========================= ================= =================== ========================== =================
INITIAL CERTIFICATE PASS-THROUGH INITIAL CERTIFICATE PASS-THROUGH
CLASS PRINCIPAL BALANCE(1) RATE CLASS PRINCIPAL BALANCE(1) RATE
- ------------------- ------------------------- ----------------- ------------------- -------------------------- -----------------
<S> <C> <C> <C> <C> <C>
A.................. $138,455,000 Variable(2) R-I................ $100 Variable(2)
M-1................ $15,941,000 Variable(2) R-II............... $100 Variable(2)
M-2................ $16,851,000 Variable(2) R-III.............. $100 Variable(2)
M-3................ $6,376,000 Variable(2)
=================== ========================= ================= =================== ========================== =================
</TABLE>
(1) Approximate.
(2) Calculated as described herein.
- ----------------------
The Offered 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 Offered
Certificates, before deducting expenses payable by the Depositor, will be 100%
of the initial Certificate Principal Balance thereof.
The Offered Certificates are offered subject to receipt and acceptance by the
Underwriter, to prior sale and to the Underwriter's right to reject any order in
whole or in part and to withdraw, cancel or modify the offer without notice. It
is expected that delivery of the Class A Certificates and the Mezzanine
Certificates will be made through the facilities of The Depository Trust
Company, Cedel Bank, societe anonyme and the Euroclear System, and that delivery
of the Residual Certificates will be made at the offices of Salomon Brothers
Inc, Seven World Trade Center, New York, New York 10048, in each case, on or
about November 25, 1997 (the "Closing Date"). The Class A Certificates and the
Mezzanine Certificates will be offered in Europe and the United States of
America.
- --------------------
SALOMON BROTHERS INC
- --------------------------------------------------------------------------------
The date of this Prospectus Supplement is November 20, 1997.
<PAGE>
(COVER CONTINUED)
with respect to each Distribution Date will accrue on the Offered Certificates
during the period commencing on the Distribution Date of the month immediately
preceding the month in which such Distribution Date occurs (or, in the case of
the first period, commencing on the Closing Date) and ending on the day
preceding such Distribution Date. Interest on the Offered Certificates will be
calculated on the basis of a 360-day year and the actual number of days in the
applicable accrual period, will be based on the then-outstanding Certificate
Principal Balance thereof and the then-applicable Pass-Through Rate thereon, and
will be reduced by certain interest shortfalls, as described herein. The
Pass-Through Rate on the Offered Certificates is adjustable and will be
calculated for each Distribution Date as described herein. Distributions in
respect of principal of the Offered Certificates will be made as described under
"Description of the Certificates--Principal Distributions on the Offered
Certificates" herein.
The Certificates represent in the aggregate the entire beneficial ownership
interest in a trust fund (the "Trust Fund") consisting primarily of a segregated
pool (the "Mortgage Pool") of conventional, one- to four-family,
adjustable-rate, first lien mortgage loans having original terms to maturity of
not greater than 30 years (the "Mortgage Loans") and having an aggregate
principal balance as of November 1, 1997 (the "Cut-off Date") of approximately
$182,178,062, subject to a permitted variance as described herein under "The
Mortgage Pool". As more fully described herein, the Class A Certificates
evidence an initial undivided interest of approximately 76.00% in the Trust
Fund, the Class M-1 Certificates, the Class M-2 Certificates and the Class M-3
Certificates evidence initial undivided interests of approximately 8.75%,
approximately 9.25% and approximately 3.50%, respectively, in the Trust Fund,
and the Class CE Certificates evidence an initial undivided interest of
approximately 2.50% in the Trust Fund.
Each Mortgage Loan provides for semi-annual adjustment to the Mortgage Rate
thereon (in the case of certain of such Mortgage Loans, after an initial period
of two years from the origination thereof) based on six-month London interbank
offered rates for United States dollar deposits (the "Index") and for
corresponding adjustments to the monthly payment amount due thereon, in each
case subject to the limitations described herein. All of the Mortgage Loans will
be acquired by the Depositor indirectly from Long Beach Mortgage Company (in
such capacity, the "Originator"), as described herein.
It is a condition of the issuance of the Certificates that the Class A
Certificates and the Residual Certificates be rated "AAA" by Standard & Poor's
Ratings Services ("Standard & Poor's") and "AAA" by Fitch Investors Service,
L.P. ("Fitch"), that the Class M-1 Certificates be rated at least "AA" by
Standard & Poor's and "AA" by Fitch, that the Class M-2 Certificates be rated at
least "A" by Fitch and that the Class M-3 Certificates be rated at least "BBB"
by Fitch.
The rights of the holders of the Class A Certificates to receive distributions
in respect of the Mortgage Loans (and the rights of the holders of the Residual
Certificates to receive distributions in respect of the initial Certificate
Principal Balances thereof on the first Distribution Date) will be senior to the
rights of the holders of the Subordinate Certificates; the rights of the holders
of Mezzanine Certificates with lower numerical class designations will be senior
to the rights of holders of Mezzanine Certificates with higher numerical class
designations; and the rights of the holders of the Mezzanine Certificates to
receive distributions in respect of the Mortgage Loans will be senior to the
rights of the holders of the Class CE Certificates, in each case to the extent
described herein.
The Class A Certificates and the Mezzanine Certificates (together, the
"Book-Entry 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 Book-Entry Certificates will
be represented by book entries on the records of participating members of DTC.
Persons acquiring beneficial ownership interests in the Book-Entry Certificates
may elect to hold such interests through DTC in the United States, or Cedel or
Euroclear (each as defined herein) in Europe. Definitive Certificates will be
available for the Book-Entry Certificates only under the limited circumstances
described herein. See "Description of the Certificates--Registration of the
Book-Entry Certificates" herein.
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL BE SENSITIVE IN VARYING
DEGREES TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS,
DEFAULTS AND REPURCHASES) AND ADJUSTMENTS TO THE MORTGAGE RATES ON THE MORTGAGE
LOANS. THE MORTGAGE LOANS GENERALLY MAY BE PREPAID IN FULL OR IN PART AT ANY
TIME; HOWEVER, WITH RESPECT TO APPROXIMATELY 62.47% OF THE MORTGAGE LOANS BY
AGGREGATE PRINCIPAL BALANCE AS OF THE CUT-OFF DATE, A PREPAYMENT MAY SUBJECT THE
RELATED MORTGAGOR TO A PREPAYMENT CHARGE. THE YIELD TO INVESTORS IN THE OFFERED
CERTIFICATES MAY BE ADVERSELY AFFECTED BY SHORTFALLS IN INTEREST COLLECTED ON
THE MORTGAGE LOANS DUE TO PREPAYMENTS, LIQUIDATIONS OR OTHERWISE. SHORTFALLS IN
INTEREST COLLECTED ON THE MORTGAGE LOANS DUE TO PREPAYMENTS WILL BE OFFSET BY
THE MASTER SERVICER TO THE EXTENT DESCRIBED HEREIN. IN ADDITION, THE YIELD TO
MATURITY ON EACH CLASS OF MEZZANINE CERTIFICATES WILL BE EXTREMELY SENSITIVE TO
LOSSES DUE TO DEFAULTS ON THE MORTGAGE LOANS (AND THE TIMING THEREOF) TO THE
EXTENT THAT SUCH LOSSES ARE NOT COVERED BY NET MONTHLY EXCESS CASHFLOW, THE
CLASS CE CERTIFICATES OR A CLASS OF MEZZANINE CERTIFICATES WITH A HIGHER
NUMERICAL CLASS DESIGNATION. SEE "SUMMARY OF THE PROSPECTUS SUPPLEMENT--SPECIAL
PREPAYMENT CONSIDERATIONS" AND "--SPECIAL YIELD CONSIDERATIONS" AND "YIELD ON
THE CERTIFICATES" HEREIN.
S-2
<PAGE>
There is currently no secondary market for the Offered Certificates and there
can be no assurance that a secondary market for the Offered Certificates will
develop. Salomon Brothers Inc (the "Underwriter") intends to establish a market
in the Offered Certificates, other than the Residual Certificates, but is not
obligated to do so. There is no assurance that any such market, if established,
will continue. See "Secondary Market" herein. The Mezzanine Certificates and the
Residual Certificates may not be purchased by or transferred to a Plan (as
defined herein) except upon the delivery of a certification of facts or an
opinion of counsel, as provided herein. In addition, any Plan purchasing the
Mezzanine Certificates will be deemed to have represented that certain
conditions have been satisfied in connection with such purchase. See "ERISA
Considerations" and "Description of the Certificates--Restrictions on Transfer
of the Mezzanine Certificates and the Residual Certificates" herein.
As described herein, three separate "real estate mortgage investment conduit"
("REMIC") elections will be made with respect to the Trust Fund for federal
income tax purposes. As described more fully herein and in the Prospectus, the
Class A Certificates, the Mezzanine Certificates and the Class CE Certificates
will be the "regular interests" in the related REMIC and the Residual
Certificates of each class will be the sole class of "residual interests" in the
related REMIC. See "Certain Federal Income Tax Consequences" herein and in the
Prospectus. Transfer of the Residual Certificates to any non-United States
person will be prohibited, and any transfer of the Residual Certificates will be
subject to certain additional restrictions described under "Certain Federal
Income Tax Consequences--Special Tax Considerations Applicable to the Residual
Certificates" herein and "Certain Federal Income Tax Consequences--REMICs--Tax
on Transfers of REMIC Residual Certificates to Certain Organizations" and
"--Taxation of Owners of REMIC Residual Certificates--Noneconomic REMIC Residual
Certificates" in the Prospectus.
To the extent that the statements contained herein do not relate to historical
or current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect distributions to be made on, or the yield of, the Certificates,
which risks and uncertainties are discussed under "Risk Factors" and "Yield on
the Certificates" herein. As a consequence, no assurance can be given as to the
actual distributions on, or the yield of, the Certificates.
-----------------------------
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT WILL CONSTITUTE A PORTION
OF A SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE DEPOSITOR PURSUANT TO
ITS PROSPECTUS DATED NOVEMBER 20, 1997, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A
PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL.
S-3
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used but not defined herein shall have the meanings assigned
thereto in the Prospectus. An Index of Principal Definitions is included at the
end of the Prospectus.
Title of Series.................. Asset-Backed Floating Rate Certificates,
Series 1997-LB5 (the "Certificates").
The Certificates represent in the aggregate
the entire beneficial ownership interest in a
trust fund (the "Trust Fund") consisting
primarily of a segregated pool (the "Mortgage
Pool") of conventional one- to four-family,
adjustable-rate first lien mortgage loans
(the "Mortgage Loans") having an aggregate
principal balance as of November 1, 1997 (the
"Cut-off Date") of approximately
$182,178,062, subject to a permitted variance
as described herein under "The Mortgage
Pool". The Certificates will consist of eight
classes of certificates, designated as: (i)
the Class A Certificates (the "Senior
Certificates"), (ii) the Class M-1
Certificates, the Class M-2 Certificates and
the Class M-3 Certificates (collectively, the
"Mezzanine Certificates"), (iii) the Class CE
Certificates (together with the Mezzanine
Certificates, the "Subordinate
Certificates"), and (iv) the Class R-I
Certificates, Class R-II Certificates and the
Class R-III Certificates (collectively, the
"Residual Certificates"). The Certificates
will be issued pursuant to a Pooling and
Servicing Agreement, to be dated as of
November 1, 1997 (the "Agreement"), among the
Depositor, the Master Servicer and the
Trustee.
Offered Certificates............. Only the Class A Certificates, the Mezzanine
Certificates and the Residual Certificates
(collectively, the "Offered Certificates")
are offered hereby. The Class A Certificates
will have an aggregate initial Certificate
Principal Balance of approximately
$138,455,000, the Class M-1 Certificates, the
Class M-2 Certificates and the Class M-3
Certificates will have aggregate initial
Certificate Principal Balances of
approximately $15,941,000, approximately
$16,851,000 and approximately $6,376,000,
respectively, and each class of the Residual
Certificates will have an initial Certificate
Principal Balance of $100. The Pass-Through
Rate on the Offered Certificates is
adjustable and will be calculated for each
Distribution Date as described under
"--Pass-Through Rate" herein. The Class A
Certificates evidence an initial undivided
interest of approximately 76.00% in the Trust
Fund, the Class M-1 Certificates, the Class
M-2 Certificates and the Class M-3
Certificates evidence initial undivided
interests of approximately 8.75%,
approximately 9.25% and approximately 3.50%,
respectively, in the Trust Fund.
S-4
<PAGE>
Transfer of the Residual and Mezzanine
Certificates will be subject to certain
restrictions, and transfer of the Residual
Certificates to any non-United States person
will be prohibited, in each case as described
under "Description of the
Certificates--Restrictions on Transfer of the
Residual Certificates", "ERISA
Considerations" and "Certain Federal Income
Tax Consequences--Special Tax Considerations
Applicable to the Residual Certificates"
herein and "Certain Federal Income Tax
Consequences--REMICs--Tax on Transfers of
REMIC Residual Certificates to Certain
Organizations" and "--Taxation of Owners of
Residual Certificates--Noneconomic REMIC
Residual Certificates" in the Prospectus.
Cut-off Date..................... November 1, 1997.
Closing Date..................... On or about November 25, 1997.
Class CE Certificates............ The Class CE Certificates will have an
initial Certificate Principal Balance of
approximately $4,554,762, which is equal to
the initial Required Overcollateralized
Amount (as defined herein), and will have a
variable Pass-Through Rate calculated as
provided in the Agreement. The Class CE
Certificates in the aggregate initially
evidence an interest of approximately 2.50%
in the Trust Fund. The Class CE Certificates,
which are not being offered hereby, will be
sold by the Depositor to Salomon Brothers Inc
on the Closing Date.
Depositor of Mortgage Loans...... Salomon Brothers Mortgage Securities VII,
Inc., an indirect wholly-owned subsidiary of
Salomon Inc and an affiliate of Salomon
Brothers Inc. See "The Depositor" in the
Prospectus.
Mortgage Loan Seller............. Salomon Brothers Realty Corp., an indirect
wholly owned subsidiary of Salomon Inc and an
affiliate of the Depositor and Salomon
Brothers Inc. See "The Mortgage Pool--
Underwriting Standards; Representations"
herein.
Originator....................... Long Beach Mortgage Company. See "The
Mortgage Pool--Underwriting Standards;
Representations" herein.
Master Servicer.................. Long Beach Mortgage Company. See "Pooling and
Servicing Agreement--The Originator and
Master Servicer" herein.
Subservicer...................... Ameriquest Mortgage Company (formerly known
as Long Beach Mortgage Company)
("Ameriquest"). See "Pooling and Servicing
Agreement--The Subservicer" herein.
Trustee.......................... Norwest Bank Minnesota, National Association,
a national banking association. See "Pooling
and Servicing Agreement--The Trustee" herein.
The Mortgage Pool................ The Mortgage Pool will consist of
approximately 1,484 conventional, one- to
four-family, adjustable-rate Mortgage
S-5
<PAGE>
Loans secured by first liens on residential
real properties (the "Mortgaged Properties").
The Mortgage Loans have original terms to
maturity of not greater than 30 years. Each
Mortgage Loan provides for semi-annual
adjustment to the Mortgage Rate thereon and
for corresponding adjustments to the monthly
payment amount due thereon, in each case on
each adjustment date applicable thereto (each
such date, an "Adjustment Date"); provided,
however, that in the case of approximately
67.47% of the Mortgage Loans by aggregate
principal balance as of the Cut-off Date
(each a "Delayed First Adjustment Mortgage
Loan"), the first Adjustment Date for each
such Mortgage Loan will occur after an
initial period of two years from the
origination thereof. On each Adjustment Date,
the Mortgage Rate on each Mortgage Loan will
be adjusted to equal the sum, rounded to the
nearest multiple of 0.125%, of the Index (as
described below) and a fixed percentage
amount (the "Gross Margin"), subject to
periodic and lifetime limitations as
described herein. See "The Mortgage Pool"
herein. None of the Mortgage Loans permits
the related mortgagor to convert the
adjustable Mortgage Rate thereon to a fixed
Mortgage Rate.
As of the Cut-off Date, the Mortgage Loans
have Mortgage Rates ranging from 5.990% per
annum to 14.250% per annum, a weighted
average Mortgage Rate of approximately 9.410%
per annum, a weighted average next Adjustment
Date in March, 1999, Gross Margins ranging
from 3.990% to 8.600% and a weighted average
Gross Margin of approximately 6.392%. As of
the Cut-off Date, the Mortgage Loans will
have a weighted average remaining term to
maturity of approximately 29 years and 10
months.
The Index........................ As of any Adjustment Date, the Index
applicable to the determination of the
Mortgage Rate on each Mortgage Loan will be
the average of the interbank offered rates
for six-month United States dollar deposits
in the London market as published in THE WALL
STREET JOURNAL and as most recently available
as of the first business day 45 days prior to
such Adjustment Date, as specified in the
related Mortgage Note. See "The Mortgage
Pool--The Index" herein.
Registration; Denomination....... The Class A Certificates and the Mezzanine
Certificates (together, the "Book-Entry
Certificates") will initially be represented
by one or more global certificates registered
in the name of CEDE & Co., as nominee of The
Depository Trust Company ("DTC") in minimum
denominations of $10,000 and integral
multiples of $1.00 in excess thereof. No
person acquiring an interest in the
Book-Entry Certificates (a "Certificate
Owner") will be entitled to
S-6
<PAGE>
receive a Book-Entry Certificate in fully
registered, certificated form (a "Definitive
Certificate"), except under the limited
circumstances described herein. See
"Description of the Certificates--Definitive
Certificates" herein. Instead, DTC will
effect payments and transfers by means of its
electronic recordkeeping services, acting
through certain participating organizations
("Participants"). This may result in certain
delays in receipt of distributions by an
investor and may restrict an investor's
ability to pledge its securities. Certificate
Owners may elect to hold their interests in
the Book-Entry Certificates through DTC in
the United States, or Cedel Bank societe
anonyme ("Cedel") or the Euroclear System
("Euroclear") in Europe. Transfers within
DTC, Cedel or Euroclear, as the case may be,
will be in accordance with the usual rules
and operating procedures of the relevant
system. Cross-market transfers between
persons holding directly or indirectly
through DTC on the one hand, and
counterparties holding directly or indirectly
through Cedel or Euroclear, on the other,
will be effected in DTC through Citibank N.A.
("Citibank") or The Chase Manhattan Bank
("Chase"), the relevant depositaries of Cedel
and Euroclear, respectively, and each a
Participant of DTC. All references herein to
Certificateholders of the Book-Entry
Certificates will reflect the rights of
Certificate Owners, as such rights may be
exercised through DTC and its Participants,
except as otherwise specified herein. See
"Description of the
Certificates--Registration of the Book-Entry
Certificates" herein.
The Residual Certificates will be offered in
registered, certificated form, in minimum
denominations of $20 and integral multiples
thereof.
Pass-Through Rate................ The Pass-Through Rate on the Class A
Certificates and the Residual Certificates
for each Distribution Date will be a rate per
annum equal to the lesser of (i) One-Month
LIBOR (as defined herein) plus 0.270%, in the
case of each Distribution Date through and
including the Distribution Date on which the
aggregate principal balance of the Mortgage
Loans is reduced to less than 10% of the
aggregate principal balance of the Mortgage
Loans as of the Cut-off Date, or One-Month
LIBOR plus 0.540%, in the case of any
Distribution Date thereafter and (ii) the Net
WAC Pass-Through Rate for such Distribution
Date.
The Pass-Through Rate on the Class M-1
Certificates for each Distribution Date will
be a rate per annum equal to the lesser of
(i) One-Month LIBOR plus 0.450%, in the case
of each Distribution Date through and
including the Distribution Date on which the
aggregate principal balance of the Mortgage
Loans is reduced to less than 10% of the
S-7
<PAGE>
aggregate principal balance of the Mortgage
Loans as of the Cut-off Date, or One-Month
LIBOR plus 0.675%, in the case of any
Distribution Date thereafter and (ii) the Net
WAC Pass-Through Rate for such Distribution
Date.
The Pass-Through Rate on the Class M-2
Certificates for each Distribution Date will
be a rate per annum equal to the lesser of
(i) One-Month LIBOR plus 0.670%, in the case
of each Distribution Date through and
including the Distribution Date on which the
aggregate principal balance of the Mortgage
Loans is reduced to less than 10% of the
aggregate principal balance of the Mortgage
Loans as of the Cut-off Date, or One-Month
LIBOR plus 1.005%, in the case of any
Distribution Date thereafter and (ii) the Net
WAC Pass-Through Rate for such Distribution
Date.
The Pass-Through Rate on the Class M-3
Certificates for each Distribution Date will
be a rate per annum equal to the lesser of
(i) One-Month LIBOR plus 1.000%, in the case
of each Distribution Date through and
including the Distribution Date on which the
aggregate principal balance of the Mortgage
Loans is reduced to less than 10% of the
aggregate principal balance of the Mortgage
Loans as of the Cut-off Date, or One-Month
LIBOR plus 1.500%, in the case of any
Distribution Date thereafter and (ii) the Net
WAC Pass-Through Rate for such Distribution
Date.
The "Net WAC Pass-Through Rate" for any
Distribution Date is a rate per annum equal
to the fraction, expressed as a percentage,
the numerator of which is (i) an amount equal
to 1/12 of the aggregate Scheduled Principal
Balance of the then outstanding Mortgage
Loans multiplied by the weighted average of
the Expense Adjusted Mortgage Rates on the
then outstanding Mortgage Loans, and the
denominator of which is (ii) the aggregate
Scheduled Principal Balance of the then
outstanding Mortgage Loans multiplied by the
actual number of days elapsed in the related
Interest Accrual Period (as defined herein)
and divided by 360. If for any Distribution
Date the Pass-Through Rate for the Class A
Certificates or for any class of the
Mezzanine Certificates is limited to the Net
WAC Pass-Through Rate for such Distribution
Date, the holders of such Certificates WILL
NOT be entitled to recover the resulting
basis risk shortfall on any future
Distribution Date.
The "Expense Adjusted Mortgage Rate" on any
Mortgage Loan is equal to the then applicable
Mortgage Rate thereon minus the sum of (i)
the Trustee Fee Rate and (ii) the Servicing
Fee Rate. For any Distribution Date, the
Trustee Fee Rate is equal to 0.007% per annum
and the Servicing Fee Rate is equal to 0.50%
per annum. See "Pooling and Servicing
Agreement--The Trustee" and
S-8
<PAGE>
"--Servicing and Other Compensation and
Payment of Expenses" herein.
Distributions--General........... The "Due Period" with respect to any
Distribution Date commences on the second day
of the month immediately preceding the month
in which such Distribution Date occurs and
ends on the first day of the month in which
such Distribution Date occurs. The
"Prepayment Period" with respect to any
Distribution Date is the calendar month
immediately preceding the month in which such
Distribution Date occurs. The "Determination
Date" with respect to any Distribution Date
is on the 15th day of the month in which such
Distribution Date occurs or, if such day is
not a business day, on the immediately
preceding business day. The "Interest Accrual
Period" with respect to any Distribution Date
and the Offered Certificates is the period
commencing on the Distribution Date of the
month immediately preceding the month in
which such Distribution Date occurs (or, in
the case of the first period, commencing on
the Closing Date) and ending on the day
preceding such Distribution Date. All
distributions of interest on the Offered
Certificates will be based on a 360- day year
and the actual number of days in the
applicable Interest Accrual Period. See
"Description of the Certificates" herein.
Interest Distributions........... The holders of the Class A Certificates and
the Mezzanine Certificates will be entitled
to receive on each Distribution Date, and
holders of the Residual Certificates will be
entitled to receive on the first Distribution
Date, interest distributions in an aggregate
amount (the "Interest Distribution Amount")
equal to interest accrued during the related
Interest Accrual Period on the Certificate
Principal Balance thereof at the
then-applicable Pass-Through Rate thereon, in
the priorities set forth below. The Interest
Distribution Amount shall be limited to the
extent of interest collections on the
Mortgage Loans during the related Due Period
(such amount, the "Interest Remittance
Amount") and will be subject to reduction
only in the event of shortfalls caused by the
Relief Act (as defined herein) and any
Prepayment Interest Shortfalls (as defined
herein) to the extent not covered by the
Master Servicer, in either case, allocated as
described herein. See "Description of the
Certificates--Interest Distributions on the
Offered Certificates" herein.
On each Distribution Date, the Interest
Distribution Amount will be distributed in
the following order of priority:
FIRST, to the holders of the Class A
Certificates, and to the holders of the
Residual Certificates on the first
Distribution Date, the Senior Interest
Distribution Amount (as defined below);
S-9
<PAGE>
SECOND, to the extent of the Interest
Remittance Amount remaining after
distribution of the Senior Interest
Distribution Amount, to the holders of the
Class M-1 Certificates, the Interest
Distribution Amount allocable to such
Certificates;
THIRD, to the extent of the Interest
Remittance Amount remaining after
distribution of the Senior Interest
Distribution Amount and the Interest
Distribution Amount allocable to the Class
M-1 Certificates, to the holders of the Class
M-2 Certificates, the Interest Distribution
Amount allocable to such Certificates; and
FOURTH, to the extent of the Interest
Remittance Amount remaining after
distribution of the Senior Interest
Distribution Amount and the Interest
Distribution Amounts allocable to the Class
M-1 Certificates and the Class M-2
Certificates, to the holders of the Class M-3
Certificates, the Interest Distribution
Amount allocable to such Certificates.
With respect to any Distribution Date, to the
extent that the Interest Distribution Amount
exceeds the Interest Remittance Amount for
the related Due Period, a shortfall in
interest distributions on one or more classes
of Offered Certificates will result. Any such
shortfall with respect to the Mezzanine
Certificates, however, will be carried
forward to succeeding Distribution Dates and
will be distributed with accrued interest in
the manner set forth in "Description of the
Certificates--Overcollateralization
Provisions" herein. The "Senior Interest
Distribution Amount" on any Distribution Date
is equal to the sum of the Interest
Distribution Amounts for such Distribution
Date on the Class A Certificates and, on the
first Distribution Date, the Residual
Certificates, and the Interest Carry Forward
Amount (as defined herein) allocable to the
Class A Certificates. See "Description of the
Certificates--Interest Distributions on the
Offered Certificates" herein.
Principal Distributions.......... Distributions in respect of principal will be
made to the holders of the Offered
Certificates then entitled to such
distributions in the following manner:
On each Distribution Date (a) prior to the
Stepdown Date or (b) on which a Trigger Event
is in effect, the Principal Distribution
Amount (as defined herein) shall be
distributed: first, to each class of the
Residual Certificates on the first
Distribution Date and to the Class A
Certificates, until the Certificate Principal
Balances thereof have been reduced to zero;
second, to the Class M-1 Certificates, until
the Certificate Principal Balance thereof has
been reduced to zero; third, to the Class M-2
Certificates, until the Certificate Principal
Balance thereof
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<PAGE>
has been reduced to zero; and fourth, to the
Class M-3 Certificates, until the Certificate
Principal Balance thereof has been reduced to
zero.
On each Distribution Date (a) on or after the
Stepdown Date and (b) on which a Trigger
Event is not in effect, the holders of the
Class A Certificates and the Mezzanine
Certificates shall be entitled to receive
distributions in respect of principal to the
extent of the Principal Distribution Amount
in the following amounts and order of
priority:
FIRST, the lesser of (x) the Principal
Distribution Amount and (y) the Class A
Principal Distribution Amount (as defined
herein), shall be distributed to the holders
of the Class A Certificates, until the
Certificate Principal Balance thereof has
been reduced to zero;
SECOND, the lesser of (x) the excess of (i)
the Principal Distribution Amount over (ii)
the amount distributed to the holders of the
Class A Certificates pursuant to clause FIRST
above, and (y) the Class M-1 Principal
Distribution Amount (as defined herein),
shall be distributed to the holders of the
Class M-1 Certificates, until the Certificate
Principal Balance thereof has been reduced to
zero;
THIRD, the lesser of (x) the excess of (i)
the Principal Distribution Amount over (ii)
the sum of the amounts distributed to the
holders of the Class A Certificates pursuant
to clause FIRST above and to the holders of
the Class M-1 Certificates pursuant to clause
SECOND above, and (y) the Class M-2 Principal
Distribution Amount (as defined herein),
shall be distributed to the holders of the
Class M-2 Certificates, until the Certificate
Principal Balance thereof has been reduced to
zero; and
FOURTH, the lesser of (x) the excess of (i)
the Principal Distribution Amount over (ii)
the sum of the amounts distributed to the
holders of the Class A Certificates pursuant
to clause FIRST above, to the holders of the
Class M-1 Certificates pursuant to clause
SECOND above and to the holders of the Class
M-2 Certificates pursuant to clause THIRD
above, and (y) the Class M-3 Principal
Distribution Amount (as defined herein),
shall be distributed to the holders of the
Class M-3 Certificates, until the Certificate
Principal Balance thereof has been reduced to
zero.
The Principal Distribution Amount will
include, to the extent of available funds and
except as otherwise described herein, the
following amounts: the principal portion of
all scheduled monthly payments due on the
Mortgage Loans to the extent received or
advanced during the related Due Period and
all unscheduled amounts received in respect
of the Mortgage Loans during the related
Prepayment Period
S-11
<PAGE>
that are allocable to principal (including
proceeds of repurchases, prepayments,
liquidations and insurance and shortfalls
relating to substitution) and will be
adjusted as a result of the then current
required level of subordination, all as
described herein.
With respect to any Distribution Date, the
"Stepdown Date" is the later to occur of (x)
the Distribution Date occurring in December
2000 and (y) the first Distribution Date on
which the Credit Enhancement Percentage (as
defined herein) is greater than or equal to
48.00%.
With respect to any Distribution Date, a
"Trigger Event" is in effect if the
percentage obtained by dividing (x) the
principal amount of Mortgage Loans delinquent
60 days or more by (y) the aggregate
principal balance of the Mortgage Loans, in
each case, as of the last day of the previous
calendar month, exceeds the lesser of (i)
one-half of the Credit Enhancement Percentage
and (ii) approximately 24.00%.
The Certificate Principal Balance of an
Offered 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 Mortgage Loans and the other
assets in the Trust Fund. The Residual
Certificates also represent the right to
receive distributions in respect of the Trust
Fund on any Distribution Date after all
required payments of principal and interest
have been made on such date in respect of the
Class A Certificates and the Subordinate
Certificates, but it is not anticipated that
there will be any significant amounts
remaining for any such distribution. The
Certificate Principal Balance of an Offered
Certificate as of any date of determination
is equal to the initial Certificate Principal
Balance thereof, reduced by the aggregate of
(a) all amounts allocable to principal
previously distributed with respect to such
Certificate and (b) any reductions in the
Certificate Principal Balance thereof deemed
to have occurred in connection with
allocations of Realized Losses in the manner
described herein. The aggregate Certificate
Principal Balance of the Class CE
Certificates as of any date of determination
is equal to the excess, if any, of (a) the
then aggregate principal balance of the
Mortgage Loans over (b) the then aggregate
Certificate Principal Balance of the Offered
Certificates.
As of the Closing Date, the amount of
overcollateralization provided by the
Mortgage Pool will equal the initial required
amount. However, on any Distribution Date on
which the amount of overcollateralization
provided by the Mortgage Pool is less than
the then current required amount, the
subordination and cash flow provisions
applicable to the
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<PAGE>
Class CE Certificates will, to the extent of
available funds, result in a limited
acceleration of the principal payments to the
holders of the Offered Certificates then
entitled to distributions of principal. Such
subordination and cash flow provisions may
therefore have the effect of shortening the
weighted average life of the Offered
Certificates by increasing the rate at which
principal is distributed to the holders
thereof. The subordination and cash flow
provisions are more fully described under
"--Credit Enhancement" below and "Description
of the Certificates--Overcollateralization
Provisions" herein.
Credit Enhancement............... The credit enhancement provided for the
benefit of the holders of the Class A
Certificates consists of subordination and
overcollateralization, each as described
below and under "Description of the
Certificates--Credit Enhancement" and
"--Overcollateralization Provisions" herein.
SUBORDINATION: The rights of the holders of
the Subordinate Certificates to receive
distributions will be subordinated, to the
extent described herein, to the rights of the
holders of the Class A Certificates. This
subordination is intended to enhance the
likelihood of regular receipt by the holders
of the Class A Certificates of the full
amount of their scheduled monthly payments of
interest and principal and to afford such
holders protection against Realized Losses.
The protection afforded to the holders of the
Class A Certificates by means of the
subordination of the Subordinate Certificates
will be accomplished by (i) the preferential
right of the holders of the Class A
Certificates to receive on any Distribution
Date, prior to distribution on the
Subordinate Certificates, distributions in
respect of interest and principal, subject to
available funds, and (ii) if necessary, the
right of the holders of the Class A
Certificates to receive future distributions
of amounts that would otherwise be payable to
the holders of the Subordinate Certificates.
In addition, the rights of the holders of
Mezzanine Certificates with lower numerical
class designations will be senior to the
rights of holders of Mezzanine Certificates
with higher numerical class designations, and
the rights of the holders of the Mezzanine
Certificates to receive distributions in
respect of the Mortgage Loans will be senior
to the rights of the holders of the Class CE
Certificates, in each case to the extent
described herein. This subordination is
intended to enhance the likelihood of regular
receipt by the holders of more senior
Certificates of distributions in respect of
interest and principal and to afford such
holders protection against Realized Losses,
as
S-13
<PAGE>
described under "Description of the
Certificates-- Allocation of Realized Losses"
herein.
OVERCOLLATERALIZATION: As of the Closing
Date, the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date will
exceed the aggregate Certificate Principal
Balance of the Offered Certificates by an
amount equal to approximately $4,554,762 or
approximately 2.50% of the aggregate
principal balance of the Mortgage Loans as of
the Cut-off Date, which is the initial
Certificate Principal Balance of the Class CE
Certificates and the initial amount of
overcollateralization required to be provided
by the Mortgage Pool under the Agreement.
With respect to any Distribution Date and the
Offered Certificates, the excess, if any, of
(a) the aggregate principal balance of the
Mortgage Loans immediately following such
Distribution Date over (b) the Certificate
Principal Balance of the Offered
Certificates, after taking into account the
payment of the amounts described in clauses
(b)(i) through (iv) of the definition of
Principal Distribution Amount on such
Distribution Date, is the "Overcollateralized
Amount" for the Offered Certificates as of
such Distribution Date. Under the Agreement,
the Overcollateralized Amount is required to
be maintained at the "Required
Overcollateralized Amount". In the event that
Realized Losses are incurred on the Mortgage
Loans, such Realized Losses may result in an
overcollateralization deficiency since the
allocation of such Realized Losses will
reduce the principal balance of the Mortgage
Loans without a corresponding reduction to
the aggregate Certificate Principal Balance
of the Offered Certificates. In such event,
the Agreement requires the payment from Net
Monthly Excess Cashflow (as defined herein),
subject to available funds, of an amount
equal to any such overcollateralization
deficiency, which shall constitute a
principal distribution on the Offered
Certificates in reduction of the Certificate
Principal Balances thereof. This has the
effect of accelerating the amortization of
the Offered Certificates relative to the
amortization of the Mortgage Loans, and of
increasing the Overcollateralized Amount.
On and after the Stepdown Date and provided
that a Trigger Event is not in effect, the
Required Overcollateralized Amount may be
permitted to decrease ("step down") below the
initial approximate $4,554,762 level to a
level equal to approximately 5.00% of the
then current aggregate outstanding principal
balance of the Mortgage Loans (after giving
effect to principal payments to be
distributed on such Distribution Date),
subject to a floor of approximately
$1,366,335. In the event that the Required
Overcollateralized Amount is permitted to
step
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<PAGE>
down on any Distribution Date, the Agreement
provides that a portion of the principal
which would otherwise be distributed to the
holders of the Offered Certificates on such
Distribution Date shall be distributed to the
holders of the Class CE Certificates pursuant
to the priorities set forth under
"Description of the
Certificates--Overcollateralization
Provisions" herein. This has the effect of
decelerating the amortization of the Offered
Certificates relative to the amortization of
the Mortgage Loans, and of reducing the
Overcollateralized Amount.
Allocation of Losses;
Subordination.................. Any Realized Losses, other than any Excess
Losses (as defined herein), on the Mortgage
Loans will be allocated, first, to Net
Monthly Excess Cashflow, second, to the Class
CE Certificates, third, to the Class M-3
Certificates, fourth, to the Class M-2
Certificates, and fifth, to the Class M-1
Certificates. The subordination provided (i)
to the Class A Certificates by the
Subordinate Certificates, (ii) to Mezzanine
Certificates with lower numerical class
designations by Mezzanine Certificates with
higher numerical class designations, and
(iii) to each class of the Mezzanine
Certificates by the Class CE Certificates, is
intended to cover Realized Losses on the
Mortgage Loans, including Fraud Losses,
Bankruptcy Losses and Special Hazard Losses
(each as defined herein). The aggregate
amounts of Realized Losses which may be
allocated by means of subordination to cover
Fraud Losses, Bankruptcy Losses and Special
Hazard Losses, however, is initially limited
to approximately $5,465,342, $100,000 and
$1,821,781, respectively, and each of such
amounts is subject to periodic reduction as
described under "Description of the
Certificates--Allocation of Losses;
Subordination" herein. Any Fraud Losses,
Bankruptcy Losses and Special Hazard Losses
in excess of the respective amounts of
coverage therefor and any Extraordinary
Losses (collectively, "Excess Losses") will
be allocated to all Certificates on a PRO
RATA basis.
If on any Distribution Date the amount of
Realized Losses, other than Excess Losses,
experienced during the related Due Period
exceeds the Overcollateralized Amount after
taking into account distributions of
principal (including any
Overcollateralization Increase Amount) on the
Offered Certificates on such Distribution
Date, the Overcollateralized Amount shall be
reduced to zero and that portion of such
Realized Losses in excess of the
Overcollateralized Amount will be allocated,
first, to the Class M-3 Certificates until
the Certificate Principal Balance thereof has
been reduced to zero, second, to the Class
M-2 Certificates until the Certificate
Principal Balance thereof has been reduced to
zero, and third, to the Class M-1
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<PAGE>
Certificates until the Certificate Principal
Balance thereof has been reduced to zero. The
Agreement does not permit the allocation of
Realized Losses, other than Excess Losses, to
the Class A Certificates.
Once Realized Losses or Excess Losses have
been allocated to the Offered Certificates,
such amounts with respect to such
Certificates will no longer accrue interest
nor will such amounts be reinstated
thereafter.
Neither the Offered Certificates nor the
Mortgage Loans are insured or guaranteed by
any governmental agency or instrumentality or
by the Depositor, the Master Servicer, the
Subservicer, the Originator, the Trustee or
any of their respective affiliates.
P&I Advances..................... The Master Servicer is required to make
advances in respect of delinquent payments of
principal and interest on the Mortgage Loans,
subject to the limitations described herein.
See "Description of the Certificates--P&I
Advances" herein and "Description of the
Certificates--Advances in respect of
Delinquencies" in the Prospectus.
Record Date...................... The "Record Date" for each Distribution Date
will be the close of business on the last
business day of the month preceding the month
in which such Distribution Date occurs. See
"Description of the Certificates--General"
herein.
Optional Termination............. At its option, the majority holder of the
Class CE Certificates (or if such holder does
not exercise such option, the Master
Servicer) may purchase all of the Mortgage
Loans, together with any properties in
respect thereof acquired by the Trustee, and
thereby effect termination and early
retirement of the Certificates, on any
Distribution Date on which the aggregate
principal balance of the Mortgage Loans and
such properties remaining in the Trust Fund
is reduced to less than 10% of the aggregate
principal balance of the Mortgage Loans as of
the Cut-off Date. See "Pooling and Servicing
Agreement--Termination" herein and
"Description of the
Certificates--Termination" in the Prospectus.
Special Prepayment
Considerations................. The rate and timing of distributions
allocable to principal on the Offered
Certificates will depend, in general, on 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 Offered Certificates
as provided herein. As is the case with
mortgage pass- through certificates
generally, the Offered Certificates are
subject to substantial inherent cash-flow
uncertainties
S-16
<PAGE>
because the Mortgage Loans may be prepaid at
any time; however, with respect to
approximately 62.47% of the Mortgage Loans by
aggregate principal balance as of the Cut-off
Date, a prepayment may subject the related
mortgagor to a prepayment charge. See "The
Mortgage Pool" herein.
Generally, when prevailing interest rates are
increasing, prepayment rates on mortgage
loans tend to decrease; a decrease in the
prepayment rates on the Mortgage Loans will
result in a reduced rate of return of
principal to investors in the Offered
Certificates at a time when reinvestment at
such higher prevailing rates would be
desirable. Conversely, when prevailing
interest rates are declining, prepayment
rates on mortgage loans tend to increase; an
increase in the prepayment rates on the
Mortgage Loans will result in a greater rate
of return of principal to investors in the
Offered Certificates at a time when
reinvestment at comparable yields may not be
possible.
Except as otherwise described herein,
distributions of principal will be made to
the Mezzanine Certificates according to the
priorities described herein. The timing of
commencement of principal distributions and
the weighted average life of each such class
of Certificates will be affected by the rates
of prepayment on the Mortgage Loans
experienced both before and after the
commencement of principal distributions on
such class. For further information regarding
the effect of principal prepayments on the
weighted average lives of the Offered
Certificates, see "Yield on the Certificates"
herein and the table entitled "Percent of
Initial Certificate Principal Balance
Outstanding at the Following Percentages of
the Prepayment Assumption" therein.
Special Yield Considerations..... The yield to maturity on the Offered
Certificates will depend, in general, on (i)
the applicable Pass-Through Rate thereon from
time to time, (ii) the applicable purchase
price and (iii) 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 reduce the Certificate
Principal Balance of such Certificates, as
well as other factors.
The yield to investors on any class of
Offered Certificates will be adversely
affected by any allocation thereto of
interest shortfalls on the Mortgage Loans.
In general, if the Offered 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
S-17
<PAGE>
Offered Certificates are purchased at a
discount and principal distributions thereon
occur at a rate slower than anticipated at
the time of purchase, the investor's actual
yield to maturity will be lower than that
originally assumed at the time of purchase.
The proceeds to the Depositor from the sale
of the Offered Certificates were determined
based on a number of assumptions, including a
prepayment assumption of 28% CPR (as defined
herein) and weighted average lives
corresponding thereto. No representation is
made that the Mortgage Loans will prepay at
such rate or at any other rate. The yield
assumptions for the Offered Certificates will
vary as determined at the time of sale.
MEZZANINE CERTIFICATES. The multiple class
structure of the Mezzanine Certificates
causes the yield of certain such classes to
be particularly sensitive to changes in the
rates of prepayment of the Mortgage Loans.
Because distributions of principal will be
made to the Mezzanine Certificates according
to the priorities described herein, the yield
to maturity on the Certificates of any such
class will be sensitive to the rates of
prepayment on the Mortgage Loans experienced
both before and after the commencement of
principal distributions on such classes. The
yield to maturity on the Mezzanine
Certificates will be extremely sensitive to
losses due to defaults on the Mortgage Loans
(and the timing thereof), to the extent such
losses are not covered by Net Monthly Excess
Cashflow, the Class CE Certificates or
Mezzanine Certificates with a higher
numerical class designations. Furthermore, as
described herein, the timing of receipt of
principal and interest by the Mezzanine
Certificates may be adversely affected by
losses even if such class of Certificates
does not ultimately bear such loss.
RESIDUAL CERTIFICATES. Holders of the
Residual Certificates are entitled to receive
distributions of principal and interest as
described herein, but the holders of the
Residual Certificates are not expected to
receive any distributions after the first
Distribution Date. In addition, holders of
the Residual Certificates, particularly the
Class R-III Certificates, will have tax
liabilities with respect to their
Certificates during the early years of the
term of the related REMIC that substantially
exceed the principal and interest payable
thereon during or prior to such periods. See
"--Certain Federal Income Tax Consequences"
below, "Yield on the Certificates--Additional
Yield Considerations Applicable Solely to the
Residual Certificates" herein and "Certain
Federal Income Tax Consequences" herein and
in the Prospectus.
S-18
<PAGE>
Certain Federal Income Tax
Consequences................... Three separate elections will be made to
treat designated portions of the Trust Fund
as real estate mortgage investment conduits
("REMIC I", "REMIC II" and "REMIC III",
respectively, and each a "REMIC") for federal
income tax purposes. Upon the issuance of the
Offered Certificates, Thacher Proffitt &
Wood, counsel to the Depositor, will deliver
its opinion generally to the effect that,
assuming compliance with all provisions of
the Agreement, for federal income tax
purposes, each of REMIC I, REMIC II and REMIC
III will qualify as a REMIC under Sections
860A through 860G of the Internal Revenue
Code of 1986 (the "Code").
For federal income tax purposes, (i) the
Class R-I Certificates will be the sole class
of "residual interests" in REMIC I, (ii)
separate non-certificated regular interests
in REMIC I will be issued and will be the
"regular interests" in REMIC I, (iii) the
Class R-II Certificates will be the sole
class of "residual interests" in REMIC II,
(iv) separate non-certificated regular
interests in REMIC II will be issued and will
be the "regular interests" in REMIC II, (v)
the Class R-III Certificates will be the sole
class of "residual interests" in REMIC III
and (vi) the Class A Certificates, the
Mezzanine Certificates and the Class CE
Certificates will be the "regular interests"
in, and will be treated as debt instruments
of, REMIC III.
The Class A Certificates and the Mezzanine
Certificates will be treated as assets as
described in Section 7701(a)(19)(C) of the
Code and "real estate assets" under Section
856(c)(4)(A) of the Code, generally in the
same proportion that the assets in the Trust
Fund would be so treated. In addition,
interest on the Class A Certificates and the
Mezzanine Certificates will be treated as
"interest on obligations secured by mortgages
on real property" under Section 856(c)(3)(B)
of the Code generally to the extent that such
Certificates are treated as "real estate
assets" under Section 856(c)(4)(A) of the
Code. The Class A Certificates and Mezzanine
Certificates also will be treated as
"qualified mortgages" under Section
860G(a)(3) of the Code. See "Certain Federal
Income Tax Consequences--Characterization of
Investments in REMIC Certificates" in the
Prospectus.
For federal income tax reporting purposes,
the Class A Certificates and the Mezzanine
Certificates will not be treated as having
been issued with original issue discount. The
Class A Certificates may be treated for
federal income tax purposes as having been
issued at a premium. The prepayment
assumption that will be used in determining
the rate of accrual of original issue
discount, premium and market discount, if
any, for federal income tax purposes is
S-19
<PAGE>
28% CPR. No representation is made that the
Mortgage Loans will prepay at that rate or at
any other rate. See "Yield on the
Certificates" herein.
In addition, the Residual Certificates will
constitute "noneconomic" residual interests
for purposes of the REMIC Regulations.
Transfers of the Residual Certificates will
be restricted under the Agreement to United
States persons (as defined in the Prospectus)
in a manner designed to prevent a transfer of
a noneconomic residual interest from being
disregarded under the REMIC Regulations. See
"Certain Federal Income Tax
Consequences--REMICs--Special Tax
Considerations Applicable to the Residual
Certificates" herein and "--Taxation of
Owners of REMIC Residual Certificates--Excess
Inclusions" and "--Noneconomic REMIC Residual
Certificates" in the Prospectus. Transfer of
the Residual Certificates will also be
subject to additional restrictions described
under "Description of the
Certificates--Restrictions on Transfer of the
Residual Certificates" and "ERISA
Considerations" herein.
The holders of the Residual Certificates,
particularly, the Class R-III Certificates
will be required to report an amount of
taxable income with respect to the early
years of the related REMIC's term that
significantly exceeds distributions on such
Residual Certificates during such period,
with corresponding tax deductions or losses
deferred until the later years of the related
REMIC's term. Accordingly, on a present value
basis, the tax detriments occurring in the
earlier years will substantially exceed the
sum of any tax benefits in the later years.
As a result, such holders' after-tax rate of
return may be zero or negative, even if their
pre-tax rate of return is positive. See
"Yield on the Certificates--Additional Yield
Considerations Applicable Solely to the
Residual Certificates" and "Certain Federal
Income Tax Consequences--Special Tax
Considerations Applicable to the Residual
Certificates" herein.
For further information regarding the federal
income tax consequences of investing in the
Offered Certificates, see "Certain Federal
Income Tax Consequences" herein and in the
Prospectus.
Ratings.......................... It is a condition to the issuance of the
Certificates that the Class A Certificates
and the Residual Certificates be rated "AAA"
by Standard & Poor's and "AAA" by Fitch, that
the Class M-1 Certificates be rated at least
"AA" by Standard & Poor's and "AA" by Fitch,
that the Class M-2 Certificates be rated at
least "A" by Fitch and that the Class M-3
Certificates be rated at least "BBB" by
Fitch. The Depositor has not requested that
any rating agency rate the Offered
S-20
<PAGE>
Certificates other than as stated above. If
another rating agency were to rate the
Offered 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. The ratings on
the Residual Certificates do not address the
likelihood of receipt by the holders of the
Residual Certificates of any amounts in
excess of the initial Certificate Principal
Balances thereof and interest thereon. See
"Yield on the Certificates" and "Ratings"
herein and "Yield Considerations" in the
Prospectus.
Legal Investment................. The Class A Certificates, the Class M-1
Certificates and the Residual Certificates
will, and the Class M-2 Certificates and the
Class M-3 Certificates will not, constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") for so long as they are
rated not lower than the second highest
rating category by a Rating Agency (as
defined in the Prospectus) and, as such, will
be legal investments for certain entities to
the extent provided in SMMEA. SMMEA, however,
provides for state limitation on the
authority of such entities to invest in
"mortgage related securities", provided that
such restricting legislation was enacted
prior to October 3, 1991. Institutions whose
investment activities are subject to legal
investment laws and regulations or to review
by regulatory authorities may be subject to
restrictions on investment in the Offered
Certificates, particularly the Residual
Certificates. Any such institution should
consult with their own legal advisors in
determining whether and to what extent the
Offered 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 (the "Exemption"), to the
Underwriter that generally exempts from the
application of certain of the prohibited
transaction provisions of Section 406 of the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the excise
taxes imposed on such prohibited transactions
by Section 4975(a) and (b) of the Code and
Section 502(i) of ERISA, transactions
relating to the purchase, sale and holding of
pass-through certificates underwritten by the
Underwriter, such as the Class A
Certificates, and the servicing and operation
of asset pools such as the
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<PAGE>
Mortgage Pool, provided that certain
conditions are satisfied.
The Exemption will not apply to the Residual
Certificates or the Mezzanine Certificates.
Accordingly, the Residual Certificates may
not be acquired by or on behalf of, or with
the assets of a Plan unless the party
acquiring such Residual Certificates provides
the Depositor, the Trustee and the Master
Servicer with an opinion of counsel, or a
certification in lieu of such opinion of
counsel as described in "ERISA
Considerations" herein. Any Plan acquiring
Mezzanine Certificates or person acquiring
Mezzanine Certificates by, on behalf of or
with the assets of Plan will be deemed to
have made certain representations in
connection with such acquisition as described
in "ERISA Considerations" herein. See "ERISA
Considerations" herein and in the Prospectus.
S-22
<PAGE>
RISK FACTORS
In addition to the matters described elsewhere in this Prospectus
Supplement and the Prospectus, prospective investors should carefully consider
the following factors before deciding to invest in the Offered Certificates.
UNDERWRITING STANDARDS, LIMITED OPERATING HISTORY AND POTENTIAL DELINQUENCIES
THE ORIGINATOR'S UNDERWRITING STANDARDS ARE PRIMARILY INTENDED TO ASSESS
THE VALUE OF THE MORTGAGED PROPERTY AND TO EVALUATE THE ADEQUACY OF SUCH
PROPERTY AS COLLATERAL FOR THE MORTGAGE LOAN. THE ORIGINATOR PROVIDES LOANS
PRIMARILY TO BORROWERS WHO DO NOT QUALIFY FOR LOANS CONFORMING TO FNMA AND FHLMC
GUIDELINES BUT WHO HAVE SUBSTANTIAL EQUITY IN THEIR PROPERTY. WHILE THE
ORIGINATOR'S PRIMARY CONSIDERATION IN UNDERWRITING A MORTGAGE LOAN IS THE VALUE
OF THE MORTGAGED PROPERTY, THE ORIGINATOR ALSO CONSIDERS, AMONG OTHER THINGS, A
MORTGAGOR'S CREDIT HISTORY, REPAYMENT ABILITY AND DEBT SERVICE-TO-INCOME RATIO,
AS WELL AS THE TYPE AND USE OF THE MORTGAGED PROPERTY. THE ORIGINATOR'S
UNDERWRITING STANDARDS DO NOT PROHIBIT A MORTGAGOR FROM OBTAINING SECONDARY
FINANCING FROM OTHER SOURCES AT THE TIME OF ORIGINATION OF THE ORIGINATOR'S
FIRST LIEN. IN ADDITION, THE ORIGINATOR HAS ADVISED THE DEPOSITOR THAT IT MAY
SOLICIT THOSE MORTGAGORS WHOSE MORTGAGED PROPERTIES WERE NOT ENCUMBERED BY
SECONDARY FINANCING AT THE TIME OF ORIGINATION OF THE ORIGINATOR'S FIRST LIEN TO
ACCEPT SUBORDINATE LIEN MORTGAGE LOANS FROM THE ORIGINATOR. ANY SUCH SECONDARY
FINANCING WOULD REDUCE THE EQUITY THE MORTGAGOR WOULD OTHERWISE HAVE IN THE
RELATED MORTGAGED PROPERTY THAT IS INDICATED IN THE ORIGINATOR'S LOAN-TO-VALUE
RATIO DETERMINATION.
AS A RESULT OF THE ORIGINATOR'S UNDERWRITING STANDARDS, THE MORTGAGE LOANS
ARE LIKELY TO EXPERIENCE RATES OF DELINQUENCY, FORECLOSURE AND BANKRUPTCY THAT
ARE HIGHER, AND THAT MAY BE SUBSTANTIALLY HIGHER, THAN THOSE EXPERIENCED BY
MORTGAGE LOANS UNDERWRITTEN IN A MORE
TRADITIONAL MANNER.
Furthermore, changes in the values of Mortgaged Properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Mortgage Loans than on mortgage loans originated in a more traditional
manner. No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at the levels in effect on the dates of origination
of the related Mortgage Loans.
As described below under "Pooling and Servicing Agreement--The Originator
and Master Servicer", the Originator completed a reorganization in May 1997.
Accordingly, the Originator (whether as an originator or acquirer of mortgage
loans or as a servicer of such mortgage loans) does not have representative
historical delinquency, bankruptcy, foreclosure or default experience that may
be referred to for purposes of estimating the future delinquency and loss
experience of the Mortgage Loans. In addition, because the Originator does not
currently have internal servicing capabilities, the Mortgage Loans will be
serviced by the Subservicer. Notwithstanding the foregoing, the Originator will
act as master servicer for the Mortgage Loans (in such capacity, the "Master
Servicer"), and will remain primarily liable for servicing the Mortgage Loans.
However, in the event the Subservicer is removed or resigns prior to the Master
Servicer's developing servicing capability, the servicing of the Mortgage Loans
will be transferred. During such period, interruptions in servicing may occur,
potentially resulting in the Mortgage Loans suffering a higher default rate,
which may result in accelerated prepayment on the Offered Certificates.
SECONDARY FINANCING
As noted above, the Originator's underwriting standards do not prohibit a
mortgagor from obtaining secondary financing from other sources at the time of
origination of the Originator's first lien. In addition, the Originator has
advised the Depositor that it may solicit those mortgagors whose Mortgaged
Properties were not encumbered by secondary financing at the time of origination
of the Originator's first lien to accept subordinate lien mortgage loans from
the Originator. Mortgage loans secured by
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<PAGE>
mortgaged properties that are encumbered by subordinate lien mortgages may
experience different rates of delinquency, foreclosure and losses than mortgage
loans secured by mortgaged properties that are not encumbered by subordinate
lien mortgages. In addition, mortgage loans secured by mortgaged properties that
are encumbered by subordinate lien mortgages may have different prepayment
characteristics than mortgage loans not encumbered by subordinate lien
mortgages. There can be no assurance (i) that the Originator will carry out the
solicitation of borrowers as described above, (ii) that such borrowers will be
interested in obtaining subordinate lien mortgage loans, (iii) that if such
borrowers are interested in obtaining subordinate lien mortgage loans, that they
will find the subordinate lien financing offered by the Originator competitive
with programs offered by other lenders for subordinate lien (or combined first
lien and subordinate lien) mortgage loans, or (iv) that such borrowers will meet
the Originator's underwriting criteria for subordinate lien mortgage loans.
ADDITIONAL RISKS ASSOCIATED WITH THE MORTGAGE LOANS
As of the Cut-off Date, approximately 0.82% of the Mortgage Loans, by
aggregate principal balance as of the Cut-off Date, were thirty days or more but
less than sixty days delinquent in their monthly payments. As of the Cut-off
Date, none of the Mortgage Loans were sixty days or more delinquent in
their monthly payments.
Approximately 28.32% of the Mortgage Loans, by aggregate principal balance
as of the Cut-off Date, had a Loan-to-Value Ratio at origination in excess of
80% but will not be covered by a primary mortgage insurance policy. No Mortgage
Loan will have a Loan-to-Value Ratio exceeding 85.20% at origination. Mortgage
Loans with higher Loan-to-Value Ratios may present a greater risk of loss. There
can be no assurance that the Loan-to-Value Ratio of any Mortgage Loan determined
at any time after origination is less than or equal to its original
Loan-to-Value Ratio. See "The Mortgage Pool--General" herein.
Approximately 33.82% of the Mortgage Loans, by aggregate principal balance
as of the Cut-off Date, are secured by Mortgaged Properties located in the State
of California. The aggregate principal balance of Mortgage Loans in the
California zip code with the largest amount of such Mortgage Loans, by aggregate
principal balance as of the Cut-off Date, was approximately $1,353,132. If the
California residential real estate market should experience an overall decline
in property values after the dates of origination of the Mortgage Loans, the
rates of delinquencies, foreclosures, bankruptcies and losses on the Mortgage
Loans may be expected to increase, and may increase substantially. See "The
Mortgage Pool--Underwriting Standards; Representations" herein.
ADDITIONAL RISKS ASSOCIATED WITH THE MEZZANINE CERTIFICATES
The weighted average lives of, and the yields to maturity on, the Mezzanine
Certificates will be progressively more sensitive, in increasing order of their
numerical class designations, to the rate and timing of mortgagor defaults and
the severity of ensuing losses on the Mortgage Loans. If the actual rate and
severity of losses on the Mortgage Loans is higher than those assumed by an
investor in a Mezzanine Certificate, the actual yield to maturity of such
Certificate may be lower than the yield expected by such holder based on such
assumption. The timing of losses on the Mortgage Loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the Mortgage Pool are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity. Realized Losses on the Mortgage Loans in any
Due Period, to the extent they exceed the Overcollateralized Amount (as defined
herein) following distributions of principal on the related Distribution Date,
will reduce the Certificate Principal Balance of the class of Mezzanine
Certificate then outstanding with the highest numerical class designation. As a
result of such reductions, less interest will accrue on such class of Mezzanine
Certificates than would otherwise be the case.
The Mezzanine Certificates will not be entitled to any principal
distributions until the Stepdown Date or during any period in which a Trigger
Event is in effect. As a result, the weighted average lives of the Mezzanine
Certificates will be longer than would be the case if distributions of principal
were allocated
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<PAGE>
on a PRO RATA basis among the Class A Certificates and Mezzanine Certificates.
As a result of the longer weighted average lives of the Mezzanine Certificates,
the holders of such Certificates have a greater risk of suffering a loss on
their investments.
LIMITED OBLIGATIONS
The Offered Certificates will not represent an interest in or obligation of
the Depositor, the Master Servicer, the Subservicer, the Originator, the Trustee
or any of their respective affiliates. The only obligations of the foregoing
entities with respect to the Certificates or any Mortgage Loan will be the
obligations of the Depositor, of the Mortgage Loan Seller and of the Master
Servicer (in its capacity as Originator) pursuant to certain limited
representations and warranties made with respect to the Mortgage Loans and of
the Master Servicer with respect to its servicing obligations under the
Agreement (including the limited obligation to make certain P&I Advances).
Neither the Certificates nor the underlying Mortgage Loans will be guaranteed or
insured by any governmental agency or instrumentality, or by the Depositor, the
Master Servicer, the Subservicer, the Originator, the Trustee or any of their
respective affiliates. Proceeds of the assets included in the Trust Fund
(including the Mortgage Loans) will be the sole source of payments on the
Offered Certificates, and there will be no recourse to the Depositor, the Master
Servicer, the Subservicer, the Originator, the Trustee or any other entity in
the event that such proceeds are insufficient or otherwise unavailable to make
all payments provided for under the Offered Certificates.
YIELD CONSIDERATIONS
The yield to maturity on the Offered Certificates may be affected by the
resetting of the Mortgage Rates on the Mortgage Loans on the related Adjustment
Dates. In addition, because the Mortgage Rate for each Mortgage Loan is based on
the Index plus the related Gross Margin, such rate could be higher than
prevailing market interest rates, and this may result in an increase in the rate
of prepayments on the Mortgage Loans after such adjustment. Finally, because the
Mortgage Rates on the Mortgage Loans are based on the Index (and a number of the
Mortgage Loans are Delayed First Adjustment Mortgage Loans) while the
Pass-Through Rate on the Offered Certificates is based on One-Month LIBOR, the
application of the Net WAC Pass-Through Rate will adversely affect the yield to
maturity on the Class A Certificates and the Mezzanine Certificates. If for any
Distribution Date the Pass-Through Rate for the Class A Certificates or for any
class of the Mezzanine Certificates is limited to the Net WAC Pass-Through Rate
for such Distribution Date, the holders of such Certificates WILL NOT be
entitled to recover the resulting basis risk shortfall on any future
Distribution Date.
THE MORTGAGE POOL
GENERAL
References to percentages of the Mortgage Loans unless otherwise noted are
calculated based on the aggregate principal balance of the Mortgage Loans as of
the Cut-off Date.
The Mortgage Pool will consist of approximately 1,484 conventional, one- to
four-family, adjustable-rate Mortgage Loans secured by first liens on
residential real properties (the "Mortgaged Properties") and having an aggregate
principal balance as of November 1, 1997 (the "Cut-off Date") of approximately
$182,178,062, after application of scheduled payments due on or before the
Cut-off Date whether or not received, and subject to a permitted variance of
plus or minus 5%. The Mortgage Loans have original terms to maturity of not
greater than 30 years.
The Mortgage Loans are secured by first mortgages or deeds of trust or
other similar security instruments creating first liens on one- to four-family
residential properties consisting of attached, detached or semi-detached one- to
four-family dwelling units, townhouses, individual condominium units and
individual units in planned unit developments and manufactured housing. The
Mortgage Loans to be included in the Mortgage Pool will be acquired by the
Depositor indirectly from the Originator. See
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<PAGE>
"--Underwriting Standards; Representations" herein. The Originator will act as
the master servicer for the Mortgage Loans pursuant to the Agreement (in such
capacity, the "Master Servicer") and Ameriquest Mortgage Company (the
"Subservicer") will act as the subservicer for the Mortgage Loans pursuant to
the Subservicing Agreement. See "Pooling and Servicing Agreement--The
Subservicer" and "--The Subservicing Agreement" herein.
Each Mortgage Loan provides for semi-annual adjustment to the Mortgage Rate
thereon and for corresponding adjustments to the monthly payment amount due
thereon, in each case on each adjustment date applicable thereto (each such
date, an "Adjustment Date"). The first Adjustment Date for each Mortgage Loan
will generally occur six months from the first Due Date thereon; provided,
however, that in the case of approximately 67.47% of the Mortgage Loans (each, a
"Delayed First Adjustment Mortgage Loan"), the first Adjustment Date for each
such Mortgage Loan will occur after an initial period of two years from the
origination thereof. On each Adjustment Date, the Mortgage Rate on each Mortgage
Loan will be adjusted to equal the sum, rounded to the nearest multiple of
0.125%, of the Index (as described below) and a fixed percentage amount (the
"Gross Margin"); provided, however, that with respect to 99.49% of the Mortgage
Loans, the Mortgage Rate will generally not increase or decrease by more than
1.00% per annum on any related Adjustment Date (the "Periodic Rate Cap") and
will not exceed a specified maximum Mortgage Rate over the life of such Mortgage
Loan (the "Maximum Mortgage Rate") or be less than a specified minimum Mortgage
Rate over the life of such Mortgage Loan (the "Minimum Mortgage Rate").
Notwithstanding the foregoing, approximately 89.98% and approximately 9.83% of
the Delayed First Adjustment Mortgage Loans generally have a Periodic Rate Cap
of 1.00% per annum and 3.00% per annum, respectively, as provided in the related
Mortgage Note, for their first Adjustment Date. Effective with the first monthly
payment due on each Mortgage Loan after each related Adjustment Date, the
monthly payment amount will be adjusted to an amount that will amortize fully
the outstanding principal balance of the related Mortgage Loan over its
remaining term, and pay interest at the Mortgage Rate as so adjusted. Due to the
application of the Periodic Rate Caps and the Maximum Mortgage Rates, the
Mortgage Rate on each Mortgage Loan, as adjusted on any related Adjustment Date,
may be less than the sum of the Index and Gross Margin, calculated as described
herein. See "--The Index" herein. None of the Mortgage Loans permits the related
mortgagor to convert the adjustable Mortgage Rate thereon to a fixed Mortgage
Rate.
All of the Mortgage Loans have scheduled monthly payments due on the first
day of the month (with respect to each Mortgage Loan, a "Due Date"). Each
Mortgage Loan will contain a customary "due-on-sale" clause.
Approximately 62.47% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such Mortgage Loan provides for payment of a
prepayment charge on certain partial or full prepayments made within three or
five years from the date of origination of such Mortgage Loan. The amount of the
prepayment charge is as provided in the related Mortgage Note, and such
prepayment charge will generally apply if, in any twelve-month period during the
first three or five years from the date of origination of such Mortgage Loan,
the Mortgagor prepays an aggregate amount exceeding 20% of the original
principal balance of such Mortgage Loan. With respect to 85.77% of such Mortgage
Loans, the amount of the prepayment charge will generally be equal to six
months' advance interest calculated on the basis of the Mortgage Rate in effect
at the time of such prepayment on the amount prepaid in excess of 20% of the
original principal balance of such Mortgage Loan. With respect to 14.23% of such
Mortgage Loans, the prepayment charge is capped at either up to 2% of the
original principal balance of such Mortgage Loan or up to three months interest
on the amount being prepaid. The Mortgage Loan Seller will be entitled to all
prepayment charges received on the Mortgage Loans and such amounts will not be
available for distribution on the Certificates.
The average principal balance of the Mortgage Loans at origination was
approximately $122,904. No Mortgage Loan had a principal balance at origination
greater than approximately $500,000 or less than approximately $14,400. The
average principal balance of the Mortgage Loans as of the Cut-off Date was
approximately $122,762. No Mortgage Loan had a principal balance as of the
Cut-off Date greater than approximately $499,779 or less than approximately
$14,382.
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<PAGE>
The Mortgage Loans had Mortgage Rates as of the Cut-off Date of not less
than approximately 5.990% per annum and not more than approximately 14.250% per
annum and the weighted average Mortgage Rate was approximately 9.410% per annum.
As of the Cut-off Date, the Mortgage Loans had Gross Margins ranging from
approximately 3.990% to approximately 8.600%, minimum Mortgage Rates ranging
from approximately 5.990% per annum to approximately 14.250% per annum and
Maximum Mortgage Rates ranging from approximately 11.990% per annum to
approximately 20.250% per annum. As of the Cut-off Date, the weighted average
Gross Margin was approximately 6.392%, the weighted average Minimum Mortgage
Rate was approximately 9.409% per annum and the weighted average Maximum
Mortgage Rate was approximately 15.413% per annum. The latest first Adjustment
Date following the Cut-off Date on any Mortgage Loan occurs in November 1999 and
the weighted average next Adjustment Date for all of the Mortgage Loans
following the Cut-off Date is March 1999.
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans was approximately 76.88%. No Mortgage Loan had a Loan-to-Value Ratio at
origination greater than approximately 85.20% or less than approximately 12.78%.
The weighted average remaining term to maturity of the Mortgage Loans will
be approximately 29 years and 10 months as of the Cut-off Date. None of the
Mortgage Loans will have a first Due Date prior to March 1997 or after December
1997, or will have a remaining term to maturity of less than 14 years and 9
months or greater than 30 years as of the Cut-off Date. The latest maturity date
of any Mortgage Loan is November 2027.
The Mortgage Loans are expected to have as of the Cut-off Date the
additional characteristics listed on Appendix A hereto.
THE INDEX
As of any Adjustment Date, the Index applicable to the determination of the
Mortgage Rate on each Mortgage Loan will be the average of the interbank offered
rates for six-month United States dollar deposits in the London market as
published in THE WALL STREET JOURNAL and as most recently available as of the
first business day 45 days prior to such Adjustment Date, as specified in the
related Mortgage Note. In the event that the Index becomes unavailable or
otherwise unpublished, the Master Servicer will select a comparable alternative
index over which it has no direct control and which is readily verifiable.
The table below sets forth historical average rates of six-month LIBOR for
the months indicated as made available from FNMA, which rates may differ from
the rates of the Index, which is six-month LIBOR as published in THE WALL STREET
JOURNAL as described above. The table does not purport to be representative of
the subsequent rates of the Index which will be used to determine the Mortgage
Rate on each Mortgage Loan.
YEAR
----------------------------------------------------------
MONTH 1997 1996 1995 1994 1993 1992 1991
- ----- ---- ---- ---- ---- ---- ---- ----
January........... 5.71% 5.34% 6.69% 3.39% 3.44% 4.25% 7.13%
February.......... 5.68 5.29 6.44 4.00 3.33 4.38 6.89
March............. 5.96 5.52 6.44 4.25 3.38 4.55 6.53
April............. 6.08 5.42 6.31 4.63 3.31 4.27 6.31
May............... 6.01 5.64 6.06 5.00 3.44 4.25 6.19
June.............. 5.94 5.84 5.88 5.25 3.56 4.13 6.56
July.............. 5.83 5.92 5.88 5.33 3.56 3.63 6.31
August............ 5.86 5.74 5.94 5.33 3.44 3.63 5.88
September......... 5.85 5.75 5.99 5.69 3.38 3.31 5.69
October........... 5.80 5.58 5.95 6.00 3.50 3.64 5.36
November.......... 5.55 5.74 6.44 3.52 3.89 4.94
December.......... 5.62 5.56 7.00 3.50 3.64 4.25
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UNDERWRITING STANDARDS; REPRESENTATIONS
The Mortgage Loans will be acquired by the Depositor from the Mortgage Loan
Seller, who in turn will have acquired the Mortgage Loans from the Originator.
All of the Mortgage Loans were originated or acquired by the Originator,
generally in accordance with the underwriting criteria described below.
The information set forth below with regard to the Originator's
underwriting standards has been provided to the Depositor or compiled from
information provided to the Depositor by the Originator. None of the Depositor,
the Mortgage Loan Seller, the Trustee, the Subservicer, the Underwriter or any
of their respective affiliates has made any independent investigation of such
information or has made or will make any representation as to the accuracy or
completeness of such information.
The Mortgage Loans were originated generally in accordance with guidelines
(the "Underwriting Guidelines") established by the Originator under the "Full
Documentation", "Fast Trac", "Stated Income", "QuickCredit Full Documentation",
"QuickCredit Fast Trac", "INSTA Credit Full Documentation" or "INSTA Credit Fast
Trac" residential loan programs (the "Underwriting Programs"). The Underwriting
Guidelines are primarily intended to evaluate the value and adequacy of the
mortgaged property as collateral and are also intended to consider the
mortgagor's credit standing and repayment ability. On a case-by-case basis and
only with the approval of two or more senior lending officers, the Originator
may determine that, based upon compensating factors, a prospective mortgagor not
strictly qualifying under the underwriting risk category guidelines described
below warrants an underwriting exception. Compensating factors may include, but
are not limited to, low loan-to-value ratio, low debt-to-income ratio, good
credit history, stable employment and time in residence at the applicant's
current address. It is expected that a substantial number of the Mortgage Loans
to be included in the Mortgage Pool will represent such underwriting exceptions.
Under the Underwriting Programs, during the underwriting process, the
Originator or an originator on behalf of the Originator reviews and verifies the
loan applicant's sources of income (except under the Stated Income and Fast Trac
residential loan programs), calculates the amount of income from all such
sources indicated on the loan application, reviews the credit history of the
applicant and calculates the debt-to-income ratio to determine the applicant's
ability to repay the loan, and reviews the mortgaged property for compliance
with the Underwriting Guidelines. The Underwriting Guidelines are applied in
accordance with a procedure which complies with applicable federal and state
laws and regulations and requires (i) an appraisal of the mortgaged property
which conforms to FHLMC and FNMA standards and (ii) a review of such appraisal,
which review may be conducted by a representative of the Originator or a staff
appraiser and, depending upon the original principal balance and loan-to-value
ratio of the mortgaged property, may include a desk review of the original
appraisal or a drive-by review appraisal of the mortgaged property. The
Underwriting Guidelines permit loans with loan-to-value ratios at origination of
up to 90%. The maximum allowable loan-to-value ratio varies based upon the
income documentation, property type, creditworthiness, debt service-to-income
ratio of the mortgagor and the overall risks associated with the loan decision.
Under the residential loan programs, the maximum combined loan-to-value ratio,
including any second deeds of trust subordinate to the Originator's first deed
of trust, is generally 90% (or 95%, if the loan amount is $250,000 or less, the
credit grade is B- or above and the loan-to-value ratio is 75% or less).
All of the Mortgage Loans originated in the Underwriting Programs are based
on loan application packages submitted through mortgage brokerage companies or
the Originator's retail branches, or are purchased from approved originators
pursuant to the Underwriting Guidelines described herein. Loan application
packages submitted through mortgage brokerage companies, containing in each case
relevant credit, property and underwriting information on the loan request, are
compiled by the applicable mortgage brokerage company and submitted to the
Originator for approval and funding. The mortgage brokerage companies receive a
portion of the loan origination fee charged to the mortgagor at the time the
loan is made. No single mortgage brokerage company accounts for more than 5%,
measured by outstanding principal balance, of the single-family mortgage loans
originated by the Originator.
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<PAGE>
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history
and employment history, as well as certain other personal information. The
Originator obtains a credit report on each applicant from a credit reporting
company. The applicant must generally provide to the Originator or the
originator for the Originator a letter explaining all late payments on mortgage
debt and, generally, consumer (I.E., non-mortgage) debt. The report typically
contains information relating to such matters as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcy, repossession, suits or judgments. Under the Full
Documentation residential loan program, self-employed individuals are generally
required to submit their most recent federal income tax return. As part of its
quality control system, the Originator reverifies information with respect to
the foregoing matters that has been provided by the mortgage brokerage company
prior to funding a loan and periodically audits files based on a random sample
of closed loans. In the course of its pre-funding audit, the Originator
reverifies the income of each mortgagor or, for a self-employed individual,
reviews the income documentation obtained pursuant to the Underwriting
Guidelines (except under the Stated Income program). The Originator generally
verifies the source of funds for the down payment.
Mortgaged properties that are to secure mortgage loans underwritten under
the Underwriting Programs are appraised by qualified independent appraisers who
are approved by the Originator's internal chief appraiser. In most cases,
below-average properties (including properties requiring major deferred
maintenance) are not acceptable as security for mortgage loans in the
Underwriting Programs. Each appraisal includes a market data analysis based on
recent sales of comparable homes in the area and, where deemed appropriate,
replacement cost analysis based on the current cost of constructing a similar
home. Every independent appraisal is reviewed by a representative of the
Originator or a staff appraiser before the loan is funded.
The Underwriting Guidelines are less stringent than the standards generally
acceptable to FNMA and FHLMC with regard to the mortgagor's credit standing and
repayment ability. Mortgagors who qualify under the Underwriting Programs
generally have payment histories and debt ratios which would not satisfy FNMA
and FHLMC underwriting guidelines and may have a record of major derogatory
credit items such as outstanding judgments or prior bankruptcies. The
Underwriting Guidelines establish the maximum permitted loan-to-value ratio for
each loan type based upon these and other risk factors.
The QuickCredit Full Documentation and QuickCredit Fast Trac residential
loan programs are alternative risk grading programs whereby the various risk
categories are assigned in a manner similar to that used for the Full
Documentation and Fast Trac residential loan programs except that consumer
credit history is not used to determine the appropriate risk grading. As in the
Full Documentation and Fast Trac residential loan programs, the QuickCredit Full
Documentation and QuickCredit Fast Trac residential loan programs use consumer
credit to determine debt-to-income ratios. Maximum loan-to-value ratios and
maximum loan amounts are generally lower under the QuickCredit Full
Documentation and QuickCredit Fast Trac residential loan programs than those
permitted under the Full Documentation or Fast Trac residential loan programs,
respectively. In general, the QuickCredit Full Documentation residential loan
program is similar to the Full Documentation residential loan program except
that the QuickCredit Full Documentation residential loan program does not
consider consumer credit history, requires lower maximum loan-to-value ratios
and requires lower maximum loan amounts. In most other respects, the
requirements of the QuickCredit Full Documentation and the QuickCredit Fast Trac
residential loan programs correspond to the requirements of the Full
Documentation and Fast Trac residential loan programs, respectively.
Under the Stated Income residential loan program, the mortgagor's
employment and income sources must be stated on the mortgagor's application. The
mortgagor's income as stated must be reasonable for the related occupation and
such determination as to reasonableness is subject to the loan underwriter's
discretion. However, the mortgagor's income as stated on the application is not
independently verified. Verification of employment is required for salaried
mortgagors only. Maximum loan-to-value ratios are generally lower under the
Stated Income residential loan program than those permitted under the Full
Documentation residential loan program. Except as otherwise stated above,
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the same mortgage credit, consumer credit and collateral property underwriting
guidelines that apply to the Full Documentation residential loan program apply
to the Stated Income residential loan program.
Under the INSTA Credit Full Documentation and INSTA Credit Fast Trac
residential loan programs, the mortgagor's derogatory consumer and mortgage
credit history may be waived if a reasonable explanation for the problem is
given, and the problem which caused the derogatory items to occur no longer
exists. Any bankruptcy must be discharged or dismissed prior to funding by the
Originator. The maximum loan-to-value ratios for the INSTA Credit Full
Documentation and the INSTA Credit Fast Trac residential loan programs are
generally 55% and 50%, respectively, and the maximum debt-to-income ratios are
generally 60% and 55%, respectively.
The Originator requires that all mortgage loans in the Underwriting
Programs have title insurance and be secured by liens on real property. The
Originator also requires that fire and extended coverage casualty insurance be
maintained on the secured property in an amount at least equal to the principal
balance of the related single-family loan or the replacement cost of the
property, whichever is less.
RISK CATEGORIES
Under the Underwriting Programs, various risk categories are used to grade
the likelihood that the mortgagor will satisfy the repayment conditions of the
mortgage loan. These risk categories establish the maximum permitted
loan-to-value ratio and loan amount, given the occupancy status of the mortgaged
property and the mortgagor's credit history and debt ratio. In general, higher
credit risk mortgage loans are graded in categories which permit higher debt
ratios and more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies; however, the Underwriting Programs
establish lower maximum loan-to-value ratios and maximum loan amounts for loans
graded in such categories.
The Underwriting Guidelines have the following categories and criteria for
grading the potential likelihood that an applicant will satisfy the repayment
obligations of a mortgage loan:
"PROGRAM I"; CREDIT GRADE: "A-". Under the "A-" risk category, the
applicant generally must have repaid installment or revolving debt according to
its terms and have demonstrated steady employment over the last two years. A
maximum of two 30-day late payment and no 60-day late payments within the last
12 months is permitted on an existing mortgage loan. Certain non-consumer
credit, collections or judgments may be disregarded on a case-by-case basis. Any
and all payments 60 days or more late within the past 12 months may not
represent more than 25% of the credit reported during that period. Minor
derogatory items are permitted on a case-by-case basis as to non-mortgage credit
when the majority of the consumer credit is deemed good. No bankruptcy,
discharge or notice of default filings may have occurred during the preceding
three years. The mortgaged property must be in at least average condition. A
maximum loan-to-value ratio of 85% is permitted for a purchase money and/or
refinance mortgage loan on a single family property, and a maximum loan-to-value
ratio of 75% is permitted on a mortgaged property consisting of two-to-four
units and condominium properties. A maximum loan-to-value ratio of 70% is
permitted for non-owner occupied purchase money and refinance loans on single
family and condominium properties, and a maximum loan-to-value ratio of 65% is
permitted for a mortgage loan on a non-owner occupied mortgaged property
consisting of two units or second home properties. Generally, the debt
service-to-income ratio must be 47%, but this may be allowed to be increased to
55% based on the mortgagor's net disposable income and/or loan-to-value ratio.
"PROGRAM II"; CREDIT GRADE: "B+". Under the "B+" risk category, the
applicant must have generally repaid installment or revolving debt according to
its terms and have demonstrated steady employment over the last two years. A
maximum of three 30-day late payments and no 60-day late payments within the
last 12 months is permitted on an existing mortgage loan. Certain non-consumer
credit, collections or judgments may be disregarded on a case-by-case basis. Any
and all payments 60 days or more late within the past 12 months may not
represent more than 35% of the credit reported during that period. One to three
minor derogatory items that are 90 days or more late are permitted on a
case-by-case basis as to non-mortgage credit when the majority of the consumer
credit is deemed good. No
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<PAGE>
bankruptcy, discharge or notice of default filings may have occurred during the
preceding three years. The mortgaged property must be in at least average
condition. A maximum loan-to-value ratio of 80% is permitted for a purchase
money and/or refinance mortgage loan on a single family property, and a maximum
loan-to-value ratio of 75% is permitted on a mortgaged property consisting of
two-to-four units and condominium properties. A maximum loan-to-value ratio of
70% is permitted for non-owner occupied purchase money and refinance mortgage
loans on single family and condominium properties and a maximum loan-to-value
ratio of 65% is permitted for non-owner occupied purchase money and refinance
mortgage loans on mortgaged properties consisting of two units or second homes
properties. Generally, the debt service-to-income ratio must be 50% or less, but
this may be increased to 55% based on the mortgagor's net disposable income
and/or loan-to-value ratio.
"PROGRAM III"; CREDIT GRADE: "B". Under the "B" risk category, the
applicant must have generally repaid installment or revolving debt according to
its terms and have demonstrated steady employment over the last two years. A
maximum of four 30-day late payments within the last 12 months is acceptable on
an existing mortgage loan. Certain non-consumer credit, collections or judgments
may be disregarded on a case-by-case basis. One to four minor derogatory items
that are late 90 days or more are permitted on a case-by-case basis as to
non-mortgage credit when the majority of the consumer credit is deemed good. Any
and all payments 60 days or more late within the past 12 months may not
represent more than 50% of the credit reported during that period. No
bankruptcy, discharge or notice of default filings may have occurred during the
preceding two years. The mortgaged property must be in at least average
condition. A maximum loan-to-value ratio of 80% is permitted for a purchase
money and/or refinance mortgage loan on a single family property, and a maximum
loan-to-value ratio of 75% is permitted on mortgaged properties consisting of
two-to-four units and condominiums. For non-owner occupied purchase money and
refinance properties, the maximum loan-to-value ratio is 70% for single family
and condominium properties, and 65% for non-owner occupied mortgaged properties
consisting of two units or second homes. Generally, the debt service-to-income
ratio must be 50% or less but this may be increased to 55% based on the
mortgagor's net disposable income and/or loan-to-value ratio.
"PROGRAM IV"; CREDIT GRADE: "B-". Under the "B-" risk category, the
applicant must have generally repaid installment or revolving debt according to
its terms and have demonstrated steady employment over the last two years. A
maximum of one 60-day late payment within the last 12 months, and no payments
delinquent more than 30 days at the time of application is permitted on an
existing mortgage loan. Certain non-consumer credit, collections or judgments
may be disregarded on a case-by-case basis. Payments 60 days or more late within
the last 12 months may not represent more than 50% of the credit items reported
during that period. No bankruptcy, discharge or notice of default filings may
have occurred within the preceding two years. The mortgaged property must be in
at least average condition. A maximum loan-to-value ratio of 75% is permitted
for a purchase money and/or refinance mortgage loan on an owner-occupied
property. For non-owner occupied purchase and refinance properties, the maximum
loan-to-value ratio is 65% for single family and second home properties.
Generally, the debt service-to-income ratio must not exceed 55%.
"PROGRAM V"; CREDIT GRADE: "C". Under the "C" risk category, the applicant
may have experienced significant credit problems in the past. A maximum of two
60-day and one 90-day late payments, or three 60-day late payments and no 90-day
late payments, within the last 12 months is permitted on an existing mortgage
loan. An existing mortgage loan is not required to be current at the time the
application is submitted. Consumer credit derogatory items will be considered on
a case-by-case basis. No bankruptcy, discharge or notice of default filings may
have occurred during the preceding twelve months. The mortgaged property must be
in at least average condition. A maximum loan-to-value ratio of 75% is permitted
for a purchase money and refinance mortgage loan on an owner-occupied property.
For non-owner occupied purchase money and refinance properties, the maximum
loan-to-value ratio is 60% for single family and second home properties.
Generally, the debt service-to-income ratio must not exceed 55%; however, a debt
service-to-income ratio of 55% to 60% will be considered on a case-by-case
basis.
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<PAGE>
"PROGRAM VI"; CREDIT GRADE: "C-". Under the "C-" risk category, the
applicant may have experienced significant credit problems in the past. A
maximum of two 60-day and one 90-day late payments, or three 60-day late
payments and no 90-day late payments, within the last 12 months is permitted on
an existing mortgage loan. On a case-by-case basis, the applicant may have a
notice of default or foreclosure within the last 24 months with a good
explanation. The applicant may not currently be in bankruptcy; however, the
applicant may have had a bankruptcy with a good explanation and proof of
dismissal or discharge. Consumer derogatory items will be considered on a
case-by-case basis. The mortgaged property must be in at least average
condition. A maximum loan-to-value ratio of 70% is permitted for a purchase
money mortgage and/or refinance loan. On a case-by-case basis, the maximum
loan-to-value ratio permitted for a non-owner occupied purchase money and
refinance mortgage loan is 50%. Generally, the debt service-to-income ratio must
not exceed 55%; however, a debt service-to-income ratio of 55% to 60% will be
considered on a case-by-case basis.
The Originator will make representations and warranties as of the Closing
Date with respect to the Mortgage Loans, and will be obligated to repurchase any
such Mortgage Loan in respect of which a material breach of the representations
and warranties it has made has occurred (other than those breaches which have
been cured). For a discussion of the representations and warranties made and the
repurchase obligation, see "Mortgage Loan Program--Representations by or on
behalf of the Mortgage Loan Seller; Repurchases" in the Prospectus.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Certificates,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise if the Depositor deems such removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the Mortgage Pool prior to the issuance of the
Certificates unless including such mortgage loans would materially alter the
characteristics of the Mortgage Pool as described herein. The Depositor believes
that the information set forth herein will be representative of the
characteristics of the Mortgage Pool as it will be constituted at the time the
Certificates are issued, although the range of Mortgage Rates and maturities and
certain other characteristics of the Mortgage Loans may vary.
YIELD ON THE CERTIFICATES
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of such prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan, the
mortgagor is not charged interest on the amount of such prepayment for the month
in which such prepayment is made. In addition, the application of the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"), to any
Mortgage Loan will adversely affect, for an indeterminate period of time, the
ability of the Master Servicer to collect full amounts of interest on such
Mortgage Loan. See "Certain Legal Aspects of the Mortgage Loans--Soldiers' and
Sailors' Civil Relief Act of 1940" in the Prospectus. The Master Servicer is
obligated to pay from its own funds only those interest shortfalls attributable
to full and partial prepayments by the mortgagors on the Mortgage Loans, but
only to the extent of its aggregate Servicing Fee for the related Due Period.
See "Pooling and Servicing Agreement--Servicing and Other Compensation and
Payment of Expenses" herein. Accordingly, the effect of (i) any principal
prepayments on the Mortgage Loans, to the extent that any resulting shortfall (a
"Prepayment Interest Shortfall") exceeds any payments made by the Master
Servicer from its own funds ("Compensating Interest"), or (ii) any shortfalls
resulting from the application of the Relief Act, will be to reduce the
aggregate amount of interest collected that is available for distribution to
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<PAGE>
Certificateholders. Any such shortfalls will be allocated among the Certificates
as provided under "Description of the Certificates--Interest Distributions on
the Offered Certificates" and "--Overcollateralization Provisions" herein.
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Offered Certificates, the aggregate
amount of distributions on the Offered Certificates and the yield to maturity of
the Offered Certificates will be related to the rate and timing of payments of
principal on the Mortgage Loans. The rate of principal payments on the Mortgage
Loans will in turn be affected by the amortization schedules of such Mortgage
Loans as they change from time to time to accommodate changes in the Mortgage
Rates and by the rate of principal prepayments thereon (including for this
purpose, payments resulting from refinancings, liquidations of the Mortgage
Loans due to defaults, casualties, condemnations and repurchases, whether
optional or required, by the Depositor, the Mortgage Loan Seller, the
Originator, the majority holder of the Class CE Certificates or the Master
Servicer, as the case may be). The Mortgage Loans generally may be prepaid by
the mortgagors at any time; however, as described under "The Mortgage Pool"
herein, with respect to approximately 62.47% of the Mortgage Loans, by aggregate
principal balance as of the Cut-off Date, a prepayment may subject the related
mortgagor to a prepayment charge.
Prepayments, liquidations and repurchases of the Mortgage Loans will result
in distributions in respect of principal to the holders of the class or classes
of Offered Certificates then entitled to receive such distributions that
otherwise would be distributed over the remaining terms of the Mortgage Loans.
See "Maturity and Prepayment Considerations" in the Prospectus. Since the rates
of payment of principal on the Mortgage Loans will depend on future events and a
variety of factors (as described more fully herein and in the Prospectus under
"Yield Considerations" and "Maturity and Prepayment Considerations"), no
assurance can be given as to such rate or the rate of principal prepayments. The
extent to which the yield to maturity of any class of Offered Certificates may
vary from the anticipated yield will depend upon the degree to which such
Certificates are purchased at a discount or premium and the degree to which the
timing of payments thereon is sensitive to prepayments on the Mortgage Loans.
Further, an investor should consider, in the case of any such Certificate
purchased at a discount, the risk that a slower than anticipated rate of
principal payments on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield and, in the case of any such
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 is made on the Mortgage Loans, the greater the effect on the yield to
maturity of the Offered Certificates. As a result, the effect on an investor's
yield of principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of such Certificates would not be fully offset by a subsequent like reduction
(or increase) in the rate of principal payments.
It is highly unlikely that the Mortgage Loans will prepay at any constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate. Moreover, the timing of prepayments on the Mortgage Loans may
significantly affect the actual yield to maturity on the Offered Certificates,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation.
The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment (and refinancing) would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans would be expected to decrease. Other factors affecting prepayment of
mortgage loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. In addition, in the case of the Mortgage Loans in the Mortgage Pool,
the existence of the applicable Periodic Rate Cap, Maximum Mortgage Rate and
Minimum Mortgage Rate may affect
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the likelihood of prepayments resulting from refinancings. There can be no
certainty as to the rate of prepayments on the Mortgage Loans during any period
or over the life of the Certificates. See "Yield Considerations" and "Maturity
and Prepayment Considerations" in the Prospectus.
Because principal distributions are paid to certain classes of Offered
Certificates before other such classes, holders of classes of Offered
Certificates having a later priority of payment bear a greater risk of losses
(because such Certificates will represent an increasing percentage interest in
the Trust Fund during the period prior to the commencement of distributions of
principal thereon) than holders of classes having earlier priorities for
distribution of principal. As described under "Description of the
Certificates--Principal Distributions on the Offered Certificates" herein, prior
to the Stepdown Date (as defined herein), all principal payments on the Mortgage
Loans will be allocated to the Class A Certificates. Thereafter, as further
described herein, during certain periods, subject to certain delinquency
triggers described herein, all principal payments on the Mortgage Loans will be
allocated among the Offered Certificates.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years. In addition, default rates may be higher for
mortgage loans used to refinance an existing mortgage loan. In the event of a
mortgagor's default on a Mortgage Loan, there can be no assurance that recourse
will be available beyond the specific Mortgaged Property pledged as security for
repayment. See "The Mortgage Pool--Underwriting Standards; Representations"
herein.
SPECIAL YIELD CONSIDERATIONS
The Mortgage Rates on the Mortgage Loans adjust semi-annually based upon
the Index, whereas the Pass-Through Rate on the Offered Certificates adjusts
monthly based upon One-Month LIBOR as described under "Description of the
Certificates--Calculation of One-Month LIBOR" herein, subject to the Net WAC
Pass-Through Rate, with the result that increases in the Pass-Through Rate on
the Offered Certificates may be limited for extended periods in a rising
interest rate environment. Investors should note that approximately 67.47% of
the Mortgage Loans, by aggregate principal balance as of the Cut-off Date, are
Delayed First Adjustment Mortgage Loans. The interest due on the Mortgage Loans
during any Due Period may not equal the amount of interest that would accrue at
One-Month LIBOR plus the applicable spread on the Offered Certificates during
the related Interest Accrual Period. In addition, the Index and One-Month LIBOR
may respond differently to economic and market factors. Thus, it is possible,
for example, that if both One-Month LIBOR and the Index rise during the same
period, One-Month LIBOR may rise more rapidly than the Index or may rise higher
than the Index, potentially resulting in the application of the Net WAC
Pass-Through Rate on the Class A Certificates and the Mezzanine Certificates,
which would adversely affect the yield to maturity on such Certificates, and the
holders of such Certificates WILL NOT be entitled to interest in excess of the
Net WAC Pass-Through Rate on any future Distribution Date.
As described under "Description of the Certificates--Allocation of Losses;
Subordination", amounts otherwise distributable to holders of the Mezzanine
Certificates may be made available to protect the holders of the Class A
Certificates against interruptions in distributions due to certain mortgagor
delinquencies, to the extent not covered by P&I Advances. Such delinquencies may
affect the yield to investors on such classes of Mezzanine Certificates and,
even if subsequently cured, will affect the timing of the receipt of
distributions by the holders of such classes of Mezzanine Certificates. In
addition, a larger than expected rate of delinquencies or losses will affect the
rate of principal payments on each class of Mezzanine Certificates. See
"Description of the Certificates--Principal Distributions on the Offered
Certificates" herein.
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<PAGE>
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 life of each class
of Offered Certificates will be influenced by the rate at which principal on the
Mortgage Loans is paid, which may be in the form of scheduled payments or
prepayments (including repurchases and prepayments of principal by the borrower
as well as amounts received by virtue of condemnation, insurance or foreclosure
with respect to the Mortgage Loans), and the timing thereof.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") assumes a prepayment rate for the Mortgage Loans of 28%
CPR. The Constant Prepayment Rate model ("CPR") assumes that the outstanding
principal balance of a pool of mortgage loans prepays at a specified constant
annual rate or CPR. In generating monthly cash flows, this rate is converted to
an equivalent constant monthly rate. To assume 28% CPR or any other CPR
percentage is to assume that the stated percentage of the outstanding principal
balance of the pool is prepaid over the course of a year. No representation is
made that the Mortgage Loans will prepay at 28% CPR or any other rate.
The tables following the next paragraph indicate the percentage of the
initial Certificate Principal Balance of the Class A Certificates and the
Mezzanine Certificates that would be outstanding after each of the dates shown
at various percentages of the Prepayment Assumption and the corresponding
weighted average lives of such Certificates. The tables are based on the
following assumptions (the "Modeling Assumptions"): (i) the Mortgage Pool
consists of two Mortgage Loans with the characteristics set forth below, (ii)
distributions on such Certificates are received, in cash, on the 25th day of
each month, commencing in December 1997, (iii) the Mortgage Loans prepay at the
percentages of the Prepayment Assumption indicated, (iv) no defaults or
delinquencies occur in the payment by mortgagors of principal and interest on
the Mortgage Loans and no shortfalls due to the application of the Relief Act
are incurred, (v) none of the Depositor, the Mortgage Loan Seller, the
Originator, the majority holder of the Class CE Certificates, the Master
Servicer or any other person purchases from the Trust Fund any Mortgage Loan
pursuant to any obligation or option under the Agreement, except as indicated in
footnote two in the tables, (vi) scheduled monthly payments on the Mortgage
Loans are received on the first day of each month commencing in December 1997,
and are computed prior to giving effect to any prepayments received in the prior
month, (vii) prepayments representing payment in full of individual Mortgage
Loans are received on the last day of each month commencing in November 1997,
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) the Certificates are purchased on
November 25, 1997, (x) the Index remains constant at 5.812% per annum and the
Mortgage Rate on each Mortgage Loan is adjusted on the next Adjustment Date (and
on subsequent Adjustment Dates if necessary) to equal the Index plus the
applicable Gross Margin, subject to the applicable Periodic Rate Cap, (xi)
One-Month LIBOR remains constant at 5.625% per annum, (xii) the monthly payment
on each Mortgage Loan is adjusted on the Due Date immediately following the next
Adjustment Date (and on subsequent Adjustment Dates if necessary) to equal a
fully amortizing monthly payment as described in clause (viii) above, and (xiii)
the Servicing Fee Rate is equal to 0.50% per annum and the Trustee Fee Rate is
equal to 0.007%.
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<PAGE>
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
PRINCIPAL ORIGINAL REMAINING INITIAL
BALANCE TERM TERM PERIODIC SUBSEQUENT
AS OF THE MORTGAGE TO MATURITY TO MATURITY NEXT GROSS MAXIMUM RATE PERIODIC
CUT-OFF DATE RATE(%) (MONTHS) (MONTHS) ADJUSTMENT DATE MARGIN(%) MORTGAGE RATE(%) CAP(%) RATE CAP(%)
- -------------- ---------- ------------ ------------ --------------- --------- ---------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$122,853,422 9.6880 360 358 September 1999 6.341 15.693 1.198 1.000
$ 59,324,640 8.8329 360 358 March 1998 6.497 14.831 1.001 1.001
</TABLE>
The first hypothetical Mortgage Loan above is a Mortgage Loan that IS a Delayed
First Adjustment Mortgage Loan. The second hypothetical Mortgage Loan above is a
Mortgage Loan that IS NOT a Delayed First Adjustment Mortgage Loan.
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the tables. Any such
discrepancy may have an effect upon the percentages of the initial Certificate
Principal Balance outstanding (and the weighted average lives) of the Offered
Certificates set forth in the tables. In addition, since the actual Mortgage
Loans included in the Mortgage Pool will have characteristics that differ from
those assumed in preparing the tables set forth below and since it is not likely
the level of the Index or One-Month LIBOR will remain constant as assumed, the
Offered Certificates may mature earlier or later than indicated by the tables.
In addition, as described under "Description of the Certificates--Principal
Distributions on the Offered Certificates" herein, the occurrence of the
Stepdown Date or a Trigger Event (each as defined herein) will have the effect
of accelerating or decelerating the amortization of the Offered Certificates,
affecting the weighted average lives of the Offered Certificates. Based on the
foregoing assumptions, the tables indicate the weighted average lives of the
Class A Certificates and the Mezzanine Certificates and sets forth the
percentages of the initial Certificate Principal Balance of such Certificates
that would be outstanding after each of the Distribution Dates shown, at various
percentages of the Prepayment Assumption. Neither the prepayment model used
herein nor any other prepayment model or assumption purports to be a 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 Mortgage Pool. Variations in the prepayment experience and the balance of
the Mortgage Loans that prepay may increase or decrease the percentages of
initial Certificate Principal Balances (and weighted average lives) shown in the
following tables. Such variations may occur even if the average prepayment
experience of all the Mortgage Loans equals any of the specified percentages of
the prepayment assumption.
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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A CERTIFICATES CLASS M-1 CERTIFICATES CLASS M-2 CERTIFICATES
-------------------------------- ------------------------------- ---------------------------------
DISTRIBUTION DATE 0% 20% 28% 35% 45% 0% 20% 28% 35% 45% 0% 20% 28% 35% 45%
- ----------------- -------------------------------- ------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date......... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
November 25, 1998.... 99 73 63 53 40 100 100 100 100 100 100 100 100 100 100
November 25, 1999.... 98 52 36 23 8 100 100 100 100 100 100 100 100 100 100
November 25, 2000.... 98 35 17 4 0 100 100 100 100 13 100 100 100 100 100
November 25, 2001.... 97 27 17 4 0 100 80 64 100 13 100 80 53 39 73
November 25, 2002.... 96 22 13 4 0 100 64 38 55 13 100 64 38 23 33
November 25, 2003.... 96 17 9 4 0 100 51 27 24 13 100 51 27 15 9
November 25, 2004.... 95 14 7 3 0 100 40 19 9 8 100 40 19 7 0
November 25, 2005.... 93 11 5 2 0 100 32 14 6 1 100 32 14 2 0
November 25, 2006.... 92 9 3 1 0 100 25 10 2 0 100 25 8 0 0
November 25, 2007.... 91 7 2 1 0 100 20 7 0 0 100 20 3 0 0
November 25, 2008.... 89 5 2 0 0 100 16 5 0 0 100 16 0 0 0
November 25, 2009.... 88 4 1 0 0 100 12 1 0 0 100 12 0 0 0
November 25, 2010.... 86 3 1 0 0 100 10 0 0 0 100 8 0 0 0
November 25, 2011.... 83 3 0 0 0 100 8 0 0 0 100 5 0 0 0
November 25, 2012.... 81 2 0 0 0 100 6 0 0 0 100 2 0 0 0
November 25, 2013.... 78 2 0 0 0 100 4 0 0 0 100 0 0 0 0
November 25, 2014.... 75 1 0 0 0 100 1 0 0 0 100 0 0 0 0
November 25, 2015.... 71 1 0 0 0 100 0 0 0 0 100 0 0 0 0
November 25, 2016.... 67 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 25, 2017.... 62 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 25, 2018.... 57 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 25, 2019.... 51 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 25, 2020.... 44 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 25, 2021.... 37 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 25, 2022.... 31 0 0 0 0 91 0 0 0 0 91 0 0 0 0
November 25, 2023.... 26 0 0 0 0 76 0 0 0 0 76 0 0 0 0
November 25, 2024.... 20 0 0 0 0 60 0 0 0 0 60 0 0 0 0
November 25, 2025.... 14 0 0 0 0 41 0 0 0 0 41 0 0 0 0
November 25, 2026.... 7 0 0 0 0 20 0 0 0 0 20 0 0 0 0
November 25, 2027.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years(1).... 20.76 3.40 2.26 1.51 0.95 27.41 7.22 5.41 5.47 3.28 27.41 7.07 5.10 4.44 4.71
Weighted Average
Life in Years(2).... 20.73 3.15 2.08 1.39 0.95 27.33 6.54 4.93 4.97 2.85 27.33 6.54 4.73 4.16 3.81
</TABLE>
<TABLE>
<CAPTION>
CLASS M-3 CERTIFICATES
--------------------------------
DISTRIBUTION DATE 0% 20% 28% 35% 45%
- ----------------- --------------------------------
<S> <C> <C> <C> <C> <C>
Closing Date......... 100% 100% 100% 100% 100%
November 25, 1998.... 100 100 100 100 100
November 25, 1999.... 100 100 100 100 100
November 25, 2000.... 100 100 100 100 100
November 25, 2001.... 100 80 53 35 9
November 25, 2002.... 100 64 38 17 0
November 25, 2003.... 100 51 25 4 0
November 25, 2004.... 100 40 12 0 0
November 25, 2005.... 100 32 2 0 0
November 25, 2006.... 100 22 0 0 0
November 25, 2007.... 100 13 0 0 0
November 25, 2008.... 100 6 0 0 0
November 25, 2009.... 100 0 0 0 0
November 25, 2010.... 100 0 0 0 0
November 25, 2011.... 100 0 0 0 0
November 25, 2012.... 100 0 0 0 0
November 25, 2013.... 100 0 0 0 0
November 25, 2014.... 100 0 0 0 0
November 25, 2015.... 100 0 0 0 0
November 25, 2016.... 100 0 0 0 0
November 25, 2017.... 100 0 0 0 0
November 25, 2018.... 100 0 0 0 0
November 25, 2019.... 100 0 0 0 0
November 25, 2020.... 100 0 0 0 0
November 25, 2021.... 100 0 0 0 0
November 25, 2022.... 91 0 0 0 0
November 25, 2023.... 76 0 0 0 0
November 25, 2024.... 60 0 0 0 0
November 25, 2025.... 41 0 0 0 0
November 25, 2026.... 12 0 0 0 0
November 25, 2027.... 0 0 0 0 0
Weighted Average
Life in Years(1).... 27.34 6.60 4.70 3.94 3.53
Weighted Average
Life in Years(2).... 27.31 6.48 4.62 3.88 3.48
</TABLE>
- -----------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number
of years from the date of issuance of the Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by
the initial Certificate Principal Balance of the Certificate.
(2) Calculated pursuant to footnote one but assumes the majority holder of
the Class CE Certificates exercises its option to purchase the Mortgage
Loans. See "Pooling and Servicing Agreement --Termination" herein.
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There is no assurance that prepayments of the Mortgage Loans will conform
to any of the levels of the Prepayment Assumption indicated in the tables above,
or to any other level, or that the actual weighted average lives of the Offered
Certificates will conform to any of the weighted average lives set forth in the
tables above. Furthermore, the information contained in the tables with respect
to the weighted average lives of the Offered Certificates is not necessarily
indicative of the weighted average lives that might be calculated or projected
under different or varying prepayment or Index level assumptions.
The characteristics of the Mortgage Loans will differ from those assumed in
preparing the tables above. In addition, it is unlikely that any Mortgage Loan
will prepay at any constant percentage until maturity, that all of the Mortgage
Loans will prepay at the same rate or that the level of the Index will remain
constant or at any level for any period of time. The timing of changes in the
rate of prepayments may significantly affect the actual yield to maturity to
investors, even if the average rate of principal prepayments and the level of
the Index is consistent with the expectations of investors.
YIELD SENSITIVITY OF THE MEZZANINE CERTIFICATES
If the Certificate Principal Balances of the Class CE Certificates, the
Class M-3 Certificates and the Class M-2 Certificates have been reduced to zero,
the yield to maturity on the Class M-1 Certificates will become extremely
sensitive to losses on the Mortgage Loans (and the timing thereof) that are
covered by subordination, because the entire amount of any Realized Losses (to
the extent not covered by Net Monthly Excess Cashflow), other than Excess
Losses, will be allocated to the Class M-1 Certificates. If the Certificate
Principal Balances of the Class CE Certificates and the Class M-3 Certificates
have been reduced to zero, the yield to maturity on the Class M-2 Certificates
will become extremely sensitive to losses on the Mortgage Loans (and the timing
thereof) that are covered by subordination, because the entire amount of any
Realized Losses (to the extent not covered by Net Monthly Excess Cashflow),
other than Excess Losses, will be allocated to the Class M-2 Certificates. If
the Certificate Principal Balance of the Class CE Certificates has been reduced
to zero, the yield to maturity on the Class M-3 Certificates will become
extremely sensitive to losses on the Mortgage Loans (and the timing thereof)
that are covered by subordination, because the entire amount of any Realized
Losses (to the extent not covered by Net Monthly Excess Cashflow), other than
Excess Losses, will be allocated to the Class M-3 Certificates. The initial
undivided interests in the Trust Fund evidenced by the Class M-1 Certificates,
the Class M-2 Certificates, the Class M-3 Certificates and the Class CE
Certificates are approximately 8.75%, approximately 9.25%, approximately 3.50%
and approximately 2.50%, respectively. Investors in the Mezzanine Certificates
should fully consider the risk that Realized Losses on the Mortgage Loans could
result in the failure of such investors to fully recover their investments. For
additional considerations relating to the yield on the Mezzanine Certificates,
see "Yield Considerations" and "Maturity and Prepayment Considerations" in the
Prospectus.
ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE RESIDUAL CERTIFICATES
The after-tax rate of return to holders of Residual Certificates on such
Certificates will reflect such holders' pre-tax rate of return, reduced by the
taxes required to be paid with respect to their Residual Certificates. Holders
of the Residual Certificates, particularly the Class R-III Certificates, will
have tax liabilities with respect to their Residual Certificates during the
early years of the related REMIC's term that substantially exceed any
distributions payable thereon during or prior to any such period. In addition,
holders of Residual Certificates will have tax liabilities with respect to their
Residual Certificates the present value of which substantially exceeds the
present value of distributions payable thereon and of any tax benefits that may
arise with respect thereto. Accordingly, the after-tax rate of return on the
Residual Certificates may be negative or may otherwise be significantly
adversely affected. The timing and amount of taxable income attributable to the
Residual Certificates will depend on, among other things, the timing and amounts
of prepayments and losses experienced with respect to the Mortgage Pool.
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The Residual Certificateholders should consult their own tax advisors as to
the effect of taxes and the receipt of any payments made to such holders in
connection with the transfer of the Residual Certificates on after-tax rates of
return on the Residual Certificates. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Asset-Backed Floating Rate Certificates, Series 1997-LB5 (the
"Certificates") will consist of eight classes of certificates, designated as:
(i) the Class A Certificates (the "Senior Certificates"), (ii) the Class M-1
Certificates, the Class M-2 Certificates and the Class M-3 Certificates
(collectively, the "Mezzanine Certificates"); (iii) the Class CE Certificates
(together with the Mezzanine Certificates, the "Subordinate Certificates"), and
(iv) the Class R-I Certificates, the Class R-II Certificates and the Class R-III
Certificates (collectively, the "Residual Certificates"). Only the Class A
Certificates, the Mezzanine Certificates and the Residual Certificates
(collectively, the "Offered Certificates") are offered hereby. The Class CE
Certificates, which are not being offered hereby, will be sold by the Depositor
to Salomon Brothers Inc on the Closing Date.
The Certificates represent in the aggregate the entire beneficial ownership
interest in a trust fund (the "Trust Fund") consisting primarily of a pool (the
"Mortgage Pool") of conventional, one- to four-family, adjustable-rate, first
lien mortgage loans having original terms to maturity of not greater than 30
years (the "Mortgage Loans") having an aggregate principal balance as of the
Cut-off Date of approximately $182,178,062, subject to a permitted variance as
described under "The Mortgage Pool" herein.
The Class A Certificates will have an aggregate initial Certificate
Principal Balance of approximately $138,455,000, the Class M-1 Certificates, the
Class M-2 Certificates and the Class M-3 Certificates will have aggregate
initial Certificate Principal Balances of approximately $15,941,000,
approximately $16,851,000 and approximately $6,376,000, respectively, and each
class of the Residual Certificates will have an initial Certificate Principal
Balance of $100. The Pass-Through Rate on the Offered Certificates is adjustable
and will be calculated for each Distribution Date as described under
"--Pass-Through Rate" herein. The Class A Certificates evidence an initial
undivided interest of approximately 76.00% in the Trust Fund, the Class M-1
Certificates, the Class M-2 Certificates and the Class M-3 Certificates evidence
initial undivided interests of approximately 8.75%, approximately 9.25% and
approximately 3.50%, respectively, in the Trust Fund, and the Class CE
Certificates evidence an initial undivided interest of approximately 2.50% in
the Trust Fund.
The Class A Certificates and the Mezzanine Certificates (together, the
"Book-Entry Certificates") will be issued, maintained and transferred on the
book-entry records of DTC and its Participants in minimum denominations of
$10,000 and integral multiples of $1.00 in excess thereof. The Residual
Certificates will be offered in registered, certificated form, in minimum
denominations of $20 and integral multiples thereof.
The Book-Entry Certificates will initially be represented by one or more
global certificates registered in the name of the nominee of DTC (together with
any successor clearing agency selected by the Depositor, the "Clearing Agency"),
except as provided below. The Depositor has been informed by DTC that DTC's
nominee will be CEDE & Co. ("CEDE"). No person acquiring an interest in any
class of the Book-Entry Certificates (a "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
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distributions, notices, reports and statements to DTC or CEDE, as the registered
holder of the Book-Entry Certificates, for distribution to Certificate Owners in
accordance with DTC procedures. See "--Registration of the Book-Entry
Certificates" and "--Definitive Certificates" herein.
The Residual Certificates and any Definitive Certificates will be
transferable and exchangeable at the offices of the Trustee. The Residual
Certificates may not be purchased by or transferred to a Plan (as defined
herein) except upon delivery of a certification of facts or an opinion of
counsel, as provided herein. In addition, any Plan purchasing the Mezzanine
Certificates will be deemed to have represented that certain conditions have
been satisfied in connection with such purchase. See "--Restrictions on Transfer
of the Mezzanine Certificates and the Residual Certificates" and "ERISA
Considerations" herein. Transfer of the Residual Certificates will be subject to
certain additional restrictions and transfer of the Residual Certificates to any
non-United States person will be prohibited, in each case as described under
"Certain Federal Income Tax Consequences--Special Tax Considerations Applicable
to Residual Certificates" herein and under "Certain Federal Income Tax
Consequences--REMICs--Tax On Transfers of REMIC Residual Certificates to Certain
Organizations" and "--Taxation of Owners of Residual Certificates--Noneconomic
REMIC Residual Certificates" in the Prospectus. No service charge will be
imposed for any registration of transfer or exchange, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
All distributions to holders of the Certificates, other than the final
distribution on any class of Certificates, will be made by or on behalf of the
Trustee to the persons in whose names such Certificates are registered at the
close of business on each Record Date, which will be the last business day of
the month preceding the month in which the related Distribution Date occurs.
Such distributions will be made either (a) by check mailed to the address of
each such Certificateholder as it appears in the Certificate Register or (b)
upon written request to the Trustee at least five business days prior to the
relevant Record Date by any holder of Certificates having an aggregate initial
Certificate Principal Balance that is in excess of the lesser of (i) $5,000,000
or (ii) two-thirds of the initial aggregate Certificate Principal Balance of
such class of Certificates, by wire transfer in immediately available funds to
the account of such Certificateholder specified in the request. The final
distribution on any class of Certificates will be made in like manner, but only
upon presentment and surrender of such 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
Salomon Brothers Inc), banks, trust companies and clearing corporations.
Indirect access to the DTC system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Certificate Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, the 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
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<PAGE>
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
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.
Cedel or the Euroclear Operator (as defined herein), as the case may be, will
take any other action permitted to be taken by a Certificateholder under the
Agreement on behalf of a Cedel Participant (as defined herein) or Euroclear
Participant (as defined herein) only in accordance with its relevant rules and
procedures and subject to the ability of the Relevant Depositary (as defined
herein) to effect such actions on its behalf through DTC. 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
Book-Entry Certificates evidence 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 evidence such Voting
Rights, authorize divergent action.
The Depositor, the Originator, the Master Servicer, the Subservicer and the
Trustee will have no liability for any actions taken by DTC or its nominee or
Cedel or Euroclear, including, without limitation, actions for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Book-Entry Certificates held by CEDE, as nominee for DTC, or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
DEFINITIVE CERTIFICATES
Definitive Certificates will be issued to Certificate Owners or their
nominees, 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, advises the Trustee in writing that it 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.
S-41
<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. Such Definitive Certificates will be
issued in minimum denominations of $10,000, except that any beneficial ownership
represented by a Book-Entry Certificate in an amount less than $10,000
immediately prior to the issuance of a Definitive Certificate shall be issued in
a minimum denomination equal to the amount represented by such Book-Entry
Certificate.
BOOK-ENTRY FACILITIES
Certificate Owners may elect to hold their interests in the Book-Entry
Certificates through DTC in the United States or through Cedel or Euroclear in
Europe, if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry
Certificates of each class will be issued in one or more certificates which
equal the aggregate Certificate Principal Balance of such class and will
initially be registered in the name of Cede, the nominee of DTC. Cedel and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in Cedel's and Euroclear's names on the books of
their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank will act as depositary for Cedel and Chase will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries").
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear
Participants or Cedel Participants on such business day. Cash received in Cedel
or Euroclear as a result of sales of securities by or through a Cedel
Participant or Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant Cedel or
Euroclear cash account only as of the business day following settlement in DTC.
For information with respect to tax documentation procedures relating to the
Certificates, see "Certain Federal Income Tax Consequences--REMICS--Backup
Withholding with Respect to REMIC Certificates" and "--Foreign Investors in
REMIC Certificates" in the Prospectus.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates.
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<PAGE>
Transactions may be settled in Cedel in any of 28 currencies, including United
States dollars. Cedel provides to its Cedel Participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. Cedel
interfaces with domestic markets in several countries. As a professional
depository, Cedel is subject to regulation by the Luxembourg Monetary Institute.
Cedel participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Indirect access to Cedel
is also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Cedel
Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Certificates held through Cedel or Euroclear
will be credited to the cash accounts of Cedel Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by the Relevant Depositary. Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences--REMICS--Backup
Withholding with Respect to REMIC Certificates" and "--Foreign Investors in
REMIC Certificates" in the Prospectus.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time. See
Annex I hereto.
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<PAGE>
PASS-THROUGH RATE
The Pass-Through Rate on the Class A Certificates and the Residual
Certificates on each Distribution Date will be a rate per annum equal to the
lesser of (i) One-Month LIBOR plus 0.270% in the case of each Distribution Date
through and including the Distribution Date on which the aggregate principal
balance of the Mortgage Loans is reduced to less than 10% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date, or One-Month
LIBOR plus 0.540%, in the case of any Distribution Date thereafter and (ii) the
Net WAC Pass-Through Rate for such Distribution Date.
The Pass-Through Rate on the Class M-1 Certificates on each Distribution
Date will be a rate per annum equal to the lesser of (i) One-Month LIBOR plus
0.450% in the case of each Distribution Date through and including the
Distribution Date on which the aggregate principal balance of the Mortgage Loans
is reduced to less than 10% of the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date, or One-Month LIBOR plus 0.675%, in the case of any
Distribution Date thereafter and (ii) the Net WAC Pass-Through Rate for such
Distribution Date.
The Pass-Through Rate on the Class M-2 Certificates on each Distribution
Date will be a rate per annum equal to the lesser of (i) One-Month LIBOR plus
0.670% in the case of each Distribution Date through and including the
Distribution Date on which the aggregate principal balance of the Mortgage Loans
is reduced to less than 10% of the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date, or One-Month LIBOR plus 1.005%, in the case of any
Distribution Date thereafter and (ii) the Net WAC Pass-Through Rate for such
Distribution Date.
The Pass-Through Rate on the Class M-3 Certificates on each Distribution
Date will be a rate per annum equal to the lesser of (i) One-Month LIBOR plus
1.000% in the case of each Distribution Date through and including the
Distribution Date on which the aggregate principal balance of the Mortgage Loans
is reduced to less than 10% of the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date, or One-Month LIBOR plus 1.500%, in the case of any
Distribution Date thereafter and (ii) the Net WAC Pass-Through Rate for such
Distribution Date. See "--Calculation of One-Month LIBOR" herein.
The "Net WAC Pass-Through Rate" for any Distribution Date is a rate per
annum equal to the fraction, expressed as a percentage, the numerator of which
is (i) an amount equal to 1/12 of the aggregate Scheduled Principal Balance of
the then outstanding Mortgage Loans multiplied by the weighted average of the
Expense Adjusted Mortgage Rates on the then outstanding Mortgage Loans, and the
denominator of which is (ii) the aggregate Scheduled Principal Balance of the
then outstanding Mortgage Loans multiplied by the actual number of days elapsed
in the related Interest Accrual Period and divided by 360. If for any
Distribution Date the Pass-Through Rate for the Class A Certificates or for any
class of the Mezzanine Certificates is limited to the Net WAC Pass-Through Rate
for such Distribution Date, the holders of such Certificates WILL NOT be
entitled to recover the resulting basis risk shortfall on any future
Distribution Date.
The "Expense Adjusted Mortgage Rate" on any Mortgage Loan is equal to the
then applicable Mortgage Rate thereon minus the sum of (i) the Trustee Fee Rate
and (ii) the Servicing Fee Rate. For any Distribution Date, the Trustee Fee Rate
is equal to 0.007% per annum and the Servicing Fee Rate is equal to 0.50% per
annum. See "Pooling and Servicing Agreement--The Trustee" and "--Servicing and
Other Compensation and Payment of Expenses" herein.
The Pass-Through Rate on the Offered Certificates for the current related
Interest Accrual Period, to the extent it has been determined, and for the
immediately preceding Interest Accrual Period may be obtained by telephoning the
Trustee at (410) 884-2090.
INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES
Holders of the Class A Certificates and the Mezzanine Certificates will be
entitled to receive on each Distribution Date, and holders of the Residual
Certificates will be entitled to receive on the first Distribution Date,
interest distributions in an aggregate amount equal to interest accrued during
the
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related Interest Accrual Period on the Certificate Principal Balance thereof at
the then-applicable Pass-Through Rate thereon, in the priorities set forth
below.
On each Distribution Date, the Interest Remittance Amount will be
distributed in the following order of priority:
FIRST, to the holders of the Class A Certificates, and to the holders of
the Residual Certificates on the first Distribution Date, the Senior
Interest Distribution Amount;
SECOND, to the extent of the Interest Remittance Amount remaining after
distribution of the Senior Interest Distribution Amount, to the holders of
the Class M-1 Certificates, the Interest Distribution
Amount allocable to such Certificates;
THIRD, to the extent of the Interest Remittance Amount remaining after
distribution of the Senior Interest Distribution Amount and the Interest
Distribution Amount allocable to the Class M-1 Certificates, to the holders
of the Class M-2 Certificates, the Interest Distribution Amount allocable
to such Certificates; and
FOURTH, to the extent of the Interest Remittance Amount remaining after
distribution of the Senior Interest Distribution Amount and the Interest
Distribution Amounts allocable to the Class M-1 Certificates and the Class
M-2 Certificates, to the holders of the Class M-3 Certificates, the
Interest Distribution Amount allocable to such Certificates.
The "Interest Distribution Amount" for the Offered 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
Certificates immediately prior to such Distribution Date at the then applicable
Pass-Through Rate for such class, and reduced (to not less than zero), in the
case of each such class, by the allocable share for such class of Prepayment
Interest Shortfalls to the extent not covered by Compensating Interest (as
defined herein) paid by the Master Servicer, shortfalls resulting from the
application of the Relief Act and certain other interest shortfalls not covered
by the subordination provided by more subordinate classes of Certificates. Any
Prepayment Interest Shortfalls for any Distribution Date to the extent not
covered by Compensating Interest paid by the Master Servicer will be allocated
among the holders of all of the Certificates on a PRO RATA basis based on the
respective amounts of interest accrued on such Certificates for such
Distribution Date. In addition, any shortfalls resulting from the application of
the Relief Act will be allocated among the holders of all of the Certificates on
a PRO RATA basis as described above. The Holders of the Class A Certificates and
the Mezzanine Certificates will be entitled to reimbursement for any such
interest shortfalls, subject to available funds, in the priorities described
under "--Overcollateralization Provisions" herein. The "Senior Interest
Distribution Amount" on any Distribution Date is equal to the sum of the
Interest Distribution Amounts for such Distribution Date for the Class A
Certificates and, on the first Distribution Date, the Residual Certificates, and
the Interest Carry Forward Amount with respect to the Class A Certificates.
The "Interest Remittance Amount" for any Distribution Date is that portion
of the Available Distribution Amount for such Distribution Date allocable to
interest.
With respect to any Distribution Date, to the extent that the Interest
Distribution Amount exceeds the Interest Remittance Amount for the related Due
Period, a shortfall in interest distributions on one or more classes of Offered
Certificates will result. The "Interest Carry Forward Amount" with respect to
the Class A Certificates and any class of the Mezzanine Certificates and any
Distribution Date is equal to the amount, if any, by which the Interest
Distribution Amount for such class of Certificates for the immediately preceding
Distribution Date exceeded the actual amount distributed on such Certificates in
respect of interest on such immediately preceding Distribution Date, plus any
Interest Carry Forward Amount with respect to such Certificates remaining unpaid
from previous Distribution Dates. The Interest Carry Forward Amount with respect
to the Mezzanine Certificates will be carried forward to succeeding Distribution
Dates and, subject to available funds, will be distributed with interest
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accrued at the related Pass-Through Rate on such Certificates for each Interest
Accrual Period such amount remained outstanding, in the manner set forth in
"--Overcollateralization Provisions" herein.
The "Interest Accrual Period" for any Distribution Date and the Offered
Certificates of any class is the period commencing on the Distribution Date of
the month immediately preceding the month in which such Distribution Date occurs
(or, in the case of the first period, commencing on the Closing Date) and ending
on the day preceding such Distribution Date, and all distributions of interest
on the Offered Certificates will be based on a 360-day year and the actual
number of days in the applicable Interest Accrual Period.
The Certificate Principal Balance of an Offered 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
Mortgage Loans and the other assets in the Trust Fund. The Residual Certificates
also represent the right to receive distributions in respect of the Trust Fund
on any Distribution Date after all required payments of principal and interest
have been made on such date in respect of the Class A Certificates and the
Subordinate Certificates, but it is not anticipated that there will be any
significant amounts remaining for any such distribution. The Certificate
Principal Balance of an Offered Certificate as of any date of determination is
equal to the initial Certificate Principal Balance thereof reduced by the
aggregate of (a) all amounts allocable to principal previously distributed with
respect to such Certificate and (b) any reductions in the Certificate Principal
Balance thereof deemed to have occurred in connection with allocations of
Realized Losses in the manner described herein. The Certificate Principal
Balance of the Class CE Certificates as of any date of determination is equal to
the excess, if any, of (a) the then aggregate principal balance of the Mortgage
Loans over (b) the then aggregate Certificate Principal Balance of the Offered
Certificates.
CALCULATION OF ONE-MONTH LIBOR
With respect to each Interest Accrual Period, on the second business day
preceding such Interest Accrual Period, (each such date, an "Interest
Determination Date"), the Trustee will determine the London interbank offered
rate for one-month U.S. dollar deposits ("One-Month LIBOR") for the next
Interest Accrual Period on the basis of the offered rates of the Reference Banks
for one-month U.S. dollar deposits, as such rates appear on the Reuter Screen
LIBO Page, as of 11:00 a.m. (London time) on such Interest Determination Date.
As used in this section, "business day" means a day on which banks are open for
dealing in foreign currency and exchange in London and New York City; "Reuter
Screen LIBO Page" means the display designated as page "LIBO" on the Reuter
Monitor Money Rates Service (or such other page as may replace the LIBO page on
that service for the purpose of displaying London interbank offered rates of
major banks); and "Reference Banks" means leading banks selected by the Trustee
and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (i) with an established place of business in London, (ii)
whose quotations appear on the Reuter Screen LIBO Page on the Interest
Determination Date in question, (iii) which have been designated as such by the
Trustee and (iv) not controlling, controlled by, or under common control with,
the Depositor or the Mortgage Loan Seller.
On each Interest Determination Date, One-Month LIBOR for the related Due
Period will be established by the Trustee as follows:
(a) If on such Interest Determination Date two or more Reference Banks
provide such offered quotations, One-Month LIBOR for the related Interest
Accrual Period shall be the arithmetic mean of such offered quotations
(rounded upwards if necessary to the nearest whole multiple of 0.0625%).
(b) If on such Interest Determination Date fewer than two Reference
Banks provide such offered quotations, One-Month LIBOR for the related
Interest Accrual Period shall be the higher of (x) One- Month LIBOR as
determined on the previous Interest Determination Date and (y) the Reserve
Interest Rate. The "Reserve Interest Rate" shall be the rate per annum that
the Trustee determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of
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0.0625%) of the one-month U.S. dollar lending rates which New York City
banks selected by the Trustee are quoting on the relevant Interest
Determination Date to the principal London offices of leading banks in the
London interbank market or, (ii) in the event that the Trustee can
determine no such arithmetic mean, the lowest one-month U.S. dollar lending
rate which New York City banks selected by the Trustee are quoting on such
Interest Determination Date to leading European banks.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Trustee and the Trustee's calculation of the rate of interest applicable to
the Offered Certificates for the related Interest Accrual Period shall (in the
absence of manifest error) be final and binding.
PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES
On each Distribution Date, the Principal Distribution Amount will be
distributed to the holders of the Offered Certificates then entitled to such
distributions. The "Principal Distribution Amount" for any Distribution Date
will be the lesser of:
(a) the excess of the Available Distribution Amount over the aggregate
of the Interest Distribution Amounts for the Offered Certificates; and
(b) THE SUM OF:
(i) the principal portion of all scheduled monthly payments on
the Mortgage Loans due during the related Due Period, whether or
not received on or prior to the related Determination Date;
(ii) the principal portion of all proceeds received in respect
of the repurchase of a Mortgage Loan (or, in the case of a
substitution, certain amounts representing a principal adjustment)
as required by the Agreement during the related Prepayment Period;
(iii) the principal portion of all other unscheduled
collections, including insurance proceeds, liquidation proceeds and
all full and partial principal prepayments, received during the
related Prepayment Period, to the extent applied as recoveries of
principal on the Mortgage Loans;
(iv) the principal portion of any Realized Losses incurred or
deemed to have been incurred on any Mortgage Loans in the calendar
month preceding such Distribution Date to the extent covered by Net
Monthly Excess Cashflow (as defined herein) for such Distribution
Date; and
(v) the amount of any Overcollateralization Increase Amount (as
defined herein) for such Distribution Date;
MINUS
(vi) the amount of any Overcollateralization Reduction Amount
(as defined herein) for such Distribution Date.
In no event will the Principal Distribution Amount with respect to any
Distribution Date be (x) less than zero or (y) greater than the then outstanding
aggregate Certificate Principal Balance of the Offered Certificates.
On each Distribution Date (a) prior to the Stepdown Date or (b) on which a
Trigger Event is in effect, the Principal Distribution Amount shall be
distributed: first, to each class of the Residual Certificates on the first
Distribution Date and to the Class A Certificates, until the Certificate
Principal Balances thereof have been reduced to zero; second, to the Class M-1
Certificates, until the Certificate Principal Balance thereof has been reduced
to zero; third, to the Class M-2 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero; and fourth, to the Class M-3
Certificates, until the Certificate Principal Balance thereof has been reduced
to zero. The distribution of the Principal Distribution Amount on the first
Distribution Date will be made: first, concurrently, on a PRO RATA basis to the
holders
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of each class of Residual Certificates, an amount equal to the entire
Certificate Principal Balance of each such class; and second, to the holders of
the Class A Certificates, in reduction of the Certificate Principal Balance
thereof.
On each Distribution Date (a) on or after the Stepdown Date and (b) on
which a Trigger Event is not in effect, the holders of the Class A Certificates
and the Mezzanine Certificates shall be entitled to receive distributions in
respect of principal to the extent of the Principal Distribution Amount in the
following amounts and order of priority:
FIRST, the lesser of (x) the Principal Distribution Amount and (y) the
Class A Principal Distribution Amount, shall be distributed to the holders
of the Class A Certificates, until the Certificate Principal Balance
thereof has been reduced to zero;
SECOND, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the amount distributed to the holders of the Class A
Certificates pursuant to clause FIRST above, and (y) the Class M-1
Principal Distribution Amount, shall be distributed to the holders of the
Class M-1 Certificates, until the Certificate Principal Balance thereof has
been reduced to zero;
THIRD, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amounts distributed to the holders of the
Class A Certificates pursuant to clause FIRST above and to the holders of
the Class M-1 Certificates pursuant to clause SECOND above, and (y) the
Class M-2 Principal Distribution Amount, shall be distributed to the
holders of the Class M-2 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero; and
FOURTH, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amounts distributed to the holders of the
Class A Certificates pursuant to clause FIRST above, to the holders of the
Class M-1 Certificates pursuant to clause SECOND above and to the holders
of the Class M-2 Certificates pursuant to clause THIRD above, and (y) the
Class M-3 Principal Distribution Amount, shall be distributed to the
holders of the Class M-3 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero.
The allocation of distributions in respect of principal to the Class A
Certificates on each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event has occurred, will have the effect of accelerating the
amortization of the Class A Certificates while, in the absence of Realized
Losses, increasing the respective percentage interest in the principal balance
of the Mortgage Loans evidenced by the Subordinate Certificates. Increasing the
respective percentage interest in the Trust Fund of the Subordinate Certificates
relative to that of the Class A Certificates is intended to preserve the
availability of the subordination provided by the Subordinate Certificates.
The "Available Distribution Amount" for any Distribution Date is equal to
the sum, net of amounts reimbursable therefrom to the Master Servicer or the
Trustee, of (i) the aggregate amount of scheduled monthly payments on the
Mortgage Loans due on the related Due Date and received on or prior to the
related Determination Date, after deduction of the Servicing Fee and the Trustee
Fee, (ii) certain unscheduled payments in respect of the Mortgage Loans,
including prepayments, insurance proceeds, liquidation proceeds and proceeds
from repurchases of and substitutions for the Mortgage Loans occurring during
the preceding calendar month and (iii) all P&I Advances with respect to the
Mortgage Loans received for such Distribution Date.
The "Class A Principal Distribution Amount" for any Distribution Date on or
after the Stepdown Date and on which a Trigger Event is not in effect, an amount
equal to the excess of (x) the Certificate Principal Balance of the Class A
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) approximately 52.00% and (ii) the aggregate principal
balance of the Mortgage Loans as of the last day of the related Due Period and
(B) the aggregate principal balance of the Mortgage Loans as of the last day of
the related Due Period minus approximately $1,366,335.
The "Class M-1 Principal Distribution Amount" for any Distribution Date on
or after the Stepdown Date and on which a Trigger Event is not in effect, is an
amount equal to the excess of (x) the sum of (i) the Certificate Principal
Balance of the Class A Certificates (after taking into account the payment
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of the Class A Principal Distribution Amount on such Distribution Date) and (ii)
the Certificate Principal Balance of the Class M-1 Certificates immediately
prior to such Distribution Date over (y) the lesser of (A) the product of (i)
approximately 69.50% and (ii) the aggregate principal balance of the Mortgage
Loans as of the last day of the related Due Period and (B) the aggregate
principal balance of the Mortgage Loans as of the last day of the related Due
Period minus approximately $1,366,335.
The "Class M-2 Principal Distribution Amount" for any Distribution Date on
or after the Stepdown Date and on which a Trigger Event is not in effect, is an
amount equal to the excess of (x) the sum of (i) the Certificate Principal
Balance of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date) and (iii) the Certificate Principal Balance of the Class M-2
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) approximately 88.00% and (ii) the aggregate principal
balance of the Mortgage Loans as of the last day of the related Due Period and
(B) the aggregate principal balance of the Mortgage Loans as of the last day of
the related Due Period minus approximately $1,366,335.
The "Class M-3 Principal Distribution Amount" for any Distribution Date on
or after the Stepdown Date and on which a Trigger Event is not in effect, is an
amount equal to the excess of (x) the sum of (i) the Certificate Principal
Balance of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such date) and (iv) the Certificate Principal Balance of
the Class M-3 Certificates immediately prior to such Distribution Date over (y)
the lesser of (A) the product of (i) approximately 95.00% and (ii) the aggregate
principal balance of the Mortgage Loans as of the last day of the related Due
Period and (B) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period minus $1,366,335.
The "Stepdown Date" for any Distribution Date is the later to occur of (x)
the Distribution Date occurring in December 2000 and (y) the first Distribution
Date on which the Credit Enhancement Percentage (calculated for this purpose
only after taking into account distributions of principal on the Mortgage Loans,
but prior to any distribution of the Principal Distribution Amount to the
Certificates on such Distribution Date) is greater than or equal to
approximately 48.00%.
With respect to any Distribution Date, a "Trigger Event" is in effect if
the percentage obtained by dividing (x) the principal amount of Mortgage Loans
delinquent 60 days or more by (y) the aggregate principal balance of the
Mortgage Loans, in each case, as of the last day of the previous calendar month,
exceeds the lesser of (i) one-half of the Credit Enhancement Percentage and (ii)
approximately 24.00%.
The "Credit Enhancement Percentage" for any Distribution Date is the
percentage obtained by dividing (x) the aggregate Certificate Principal Balance
of the Subordinate Certificates by (y) the aggregate principal balance of the
Mortgage Loans, calculated after taking into account distributions of principal
on the Mortgage Loans and distribution of the Principal Distribution Amount to
the Certificates on such Distribution Date.
The "Scheduled 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 (x) the principal portion of
all monthly payments due on or before the date of determination, whether or not
received, (y) all amounts allocable to unscheduled principal that were received
prior to the calendar month in which the date of determination occurs, and (z)
any Bankruptcy Loss occurring out of a Deficient Valuation (as defined herein)
that was incurred prior to the calendar month in which the date of determination
occurs.
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CREDIT ENHANCEMENT
The Credit Enhancement provided for the benefit of the holders of the Class
A Certificates consists of subordination, as described below, and
overcollateralization, as described under "--Overcollateralization Provisions"
herein.
The rights of the holders of the Subordinate Certificates to receive
distributions will be subordinated, to the extent described herein, to the
rights of the holders of the Class A Certificates. This subordination is
intended to enhance the likelihood of regular receipt by the holders of the
Class A Certificates of the full amount of their scheduled monthly payments of
interest and principal and to afford such holders protection against Realized
Losses.
The protection afforded to the holders of the Class A Certificates by means
of the subordination of the Subordinate Certificates will be accomplished by (i)
the preferential right of the holders of the Class A Certificates to receive on
any Distribution Date, prior to distribution on the Subordinate Certificates,
distributions in respect of interest and principal, subject to available funds,
and (ii) if necessary, the right of the holders of the Class A Certificates to
receive future distributions of amounts that would otherwise be payable to the
holders of the Subordinate Certificates.
In addition, the rights of the holders of Mezzanine Certificates with lower
numerical class designations will be senior to the rights of holders of
Mezzanine Certificates with higher numerical class designations, and the rights
of the holders of the Mezzanine Certificates to receive distributions in respect
of the Mortgage Loans will be senior to the rights of the holders of the Class
CE Certificates, in each case to the extent described herein. This subordination
is intended to enhance the likelihood of regular receipt by the holders of more
senior Certificates of distributions in respect of interest and principal and to
afford such holders protection against Realized Losses.
OVERCOLLATERALIZATION PROVISIONS
The weighted average Expense Adjusted Mortgage Rate for the Mortgage Loans
is generally expected to be higher than the weighted average of the Pass-Through
Rates on the Offered Certificates, thus generating excess interest collections
which, in the absence of Realized Losses, will not be necessary to fund interest
distributions on the Offered Certificates. The Agreement requires that, on each
Distribution Date, the Net Monthly Excess Cashflow, if any, be applied on such
Distribution Date as an accelerated payment of principal on class or classes of
Offered Certificates then entitled to receive distributions in respect of
principal, but only to the limited extent hereafter described. The "Net Monthly
Excess Cashflow" for any Distribution Date is equal to the sum of (a) any
Overcollateralization Reduction Amount and (b) the excess of (x) the Available
Distribution Amount for such Distribution Date over (y) the sum for such
Distribution Date of the aggregate of the Interest Distribution Amounts payable
to the holders of the Offered Certificates and the sum of the amounts described
in clauses (b)(i) through (iii) of the definition of Principal Distribution
Amount.
With respect to any Distribution Date, any Net Monthly Excess Cashflow (or,
in the case of clause FIRST below, the Net Monthly Excess Cashflow exclusive of
any Overcollateralization Reduction
Amount) shall be paid as follows:
FIRST, to the holders of the class or classes of Certificates then entitled
to receive distributions in respect of principal, in an amount equal to the
principal portion of any Realized Losses (other than Excess Losses)
incurred or deemed to have been incurred on the Mortgage Loans;
SECOND, to the holders of the class or classes of Certificates then
entitled to receive distributions in respect of principal, in an amount
equal to the Overcollateralization Increase Amount;
THIRD, to the holders of the Class M-1 Certificates, in an amount equal to
the Interest Carry Forward Amount allocable to such Certificates, plus
accrued interest;
FOURTH, to the holders of the Class M-2 Certificates, in an amount equal to
the Interest Carry Forward Amount allocable to such Certificates, plus
accrued interest;
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FIFTH, to the holders of the Class M-3 Certificates, in an amount equal to
the Interest Carry Forward Amount allocable to such Certificates, plus
accrued interest;
SIXTH, to the holders of the Class A Certificates, in an amount equal to
such Certificates' allocated share of any Prepayment Interest Shortfalls on
the Mortgage Loans to the extent not covered by Compensating Interest paid
by the Master Servicer and any shortfalls resulting from the application
of the Relief Act with respect to the Mortgage Loans;
SEVENTH, to the holders of the Class M-1 Certificates, in an amount equal
to such Certificates' allocated share of any Prepayment Interest Shortfalls
on the Mortgage Loans to the extent not covered by Compensating Interest
paid by the Master Servicer and any shortfalls resulting from the
application of the Relief Act with respect to the Mortgage Loans;
EIGHTH, to the holders of the Class M-2 Certificates, in an amount equal to
such Certificates' allocated share of any Prepayment Interest Shortfalls on
the Mortgage Loans to the extent not covered by Compensating Interest paid
by the Master Servicer and any shortfalls resulting from the application of
the Relief Act with respect to the Mortgage Loans;
NINTH, to the holders of the Class M-3 Certificates, in an amount equal to
such Certificates' allocated share of any Prepayment Interest Shortfalls on
the Mortgage Loans to the extent not covered by Compensating Interest paid
by the Master Servicer and any shortfalls resulting from the application
of the Relief Act with respect to the Mortgage Loans; and
TENTH, to the holders of the Class CE Certificates as provided in the
Agreement.
With respect to any Distribution Date and the Offered Certificates, the
excess, if any, of (a) the aggregate principal balance of the Mortgage Loans
immediately following such Distribution Date over (b) the Certificate Principal
Balance of the Offered Certificates, after taking into account the payment of
the amounts described in clauses (b)(i) through (iv) of the definition of
Principal Distribution Amount on such Distribution Date, is the
"Overcollateralized Amount" for the Offered Certificates as of such Distribution
Date. As of the Closing Date, the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date will exceed the aggregate Certificate Principal
Balance of the Offered Certificates by an amount equal to approximately
$4,554,762 or approximately 2.50% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date, which is the initial amount of
overcollateralization required to be provided by the Mortgage Pool under the
Agreement. Under the Agreement, the Overcollateralized Amount is required to be
maintained at the "Required Overcollateralized Amount". In the event that
Realized Losses are incurred on the Mortgage Loans, such Realized Losses may
result in an overcollateralization deficiency since such Realized Losses will
reduce the principal balance of the Mortgage Loans without a corresponding
reduction to the aggregate Certificate Principal Balance of the Offered
Certificates. In such event, the Agreement requires the payment from Net Monthly
Excess Cashflow, subject to available funds, of an amount equal to any such
overcollateralization deficiency, which shall constitute a principal
distribution on the Offered Certificates in reduction of the Certificate
Principal Balances thereof. This has the effect of accelerating the amortization
of the Offered Certificates relative to the amortization of the Mortgage Loans,
and of increasing the Overcollateralized Amount. With respect to the Offered
Certificates and any Distribution Date, any amount of Net Monthly Excess
Cashflow actually applied as an accelerated payment of principal to the extent
the Required Overcollateralized Amount exceeds the Overcollateralized Amount as
of such Distribution Date is the "Overcollateralization Increase Amount".
On and after the Stepdown Date and provided that a Trigger Event is not in
effect, the Required Overcollateralized Amount may be permitted to decrease
("step down") below the initial $4,554,762 level to a level equal to
approximately 5.00% of the then current aggregate outstanding principal balance
of the Mortgage Loans (after giving effect to principal payments to be
distributed on such Distribution Date), subject to a floor of approximately
$1,366,335. In the event that the Required Overcollateralized Amount is
permitted to step down on any Distribution Date, the Agreement provides that a
portion of the principal which would otherwise be distributed to the holders of
the Offered
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Certificates on such Distribution Date shall be distributed to the holders of
the Class CE Certificates pursuant to the priorities set forth above. With
respect to each such Distribution Date, the Principal Distribution Amount will
be reduced by the amount by which the Overcollateralized Amount exceeds the
Required Overcollateralized Amount (the "Overcollateralization Reduction
Amount") after taking into account all other distributions to be made on such
Distribution Date, which amount shall be distributed as Net Monthly Excess
Cashflow pursuant to the priorities set forth above. This has the effect of
decelerating the amortization of the Offered Certificates relative to the
amortization of the Mortgage Loans, and of reducing the Overcollateralized
Amount.
ALLOCATION OF LOSSES; SUBORDINATION
With respect to any defaulted Mortgage Loan that is finally liquidated
through foreclosure sale, disposition of the related Mortgaged Property (if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure) or
otherwise, the amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the Master
Servicer for P&I Advances, Servicing Fees and Servicing Advances with respect to
such Mortgage Loan) towards interest and principal owing on the Mortgage Loan.
Such amount of loss realized and any Special Hazard Losses, Fraud Losses,
Bankruptcy Losses and Extraordinary Losses are referred to herein as "Realized
Losses".
Any Realized Losses on the Mortgage Loans, other than Excess Special Hazard
Losses, Excess Bankruptcy Losses, Excess Fraud Losses and Extraordinary Losses,
will be allocated on any Distribution Date, first, to Net Monthly Excess
Cashflow, second, to the Class CE Certificates, third, to the Class M-3
Certificates, fourth, to the Class M-2 Certificates, and fifth, to the Class M-1
Certificates. Excess Special Hazard Losses, Excess Bankruptcy Losses, Excess
Fraud Losses and Extraordinary Losses with respect to the Mortgage Loans will be
allocated on any Distribution Date among all classes of Certificates on a PRO
RATA basis.
Any allocation of a Realized Loss to a Certificate will be made by reducing
the Certificate Principal Balance thereof by the amount so allocated as of the
Distribution Date in the month following the calendar month in which such
Realized Loss was incurred. An allocation of a Realized Loss on a PRO RATA basis
between two or more classes of Certificates means an allocation to each such
class of Certificates on the basis of its then outstanding Certificate Principal
Balance prior to giving effect to distributions to be made on such Distribution
Date. Notwithstanding anything to the contrary described herein, in no event
will the Certificate Principal Balance of any Certificate be reduced more than
once in respect of any particular amount both (i) allocable to such Certificates
in respect of Realized Losses and (ii) payable as principal to the holder of
such Certificates from Net Monthly Excess Cashflow.
If, on any Distribution Date, the amount of Realized Losses, other than
Excess Losses, experienced during the related Due Period exceeds the
Overcollateralized Amount after taking into account distributions of principal
(including any Overcollateralization Increase Amount) on the Offered
Certificates on such Distribution Date, the Overcollateralized Amount shall be
reduced to zero and that portion of such Realized Losses in excess of the
Overcollateralized Amount will be allocated, first, to the Class M-3
Certificates until the Certificate Principal Balance thereof has been reduced to
zero, second, to the Class M-2 Certificates until the Certificate Principal
Balance thereof has been reduced to zero, and third, to the Class M-1
Certificates until the Certificate Principal Balance thereof has been reduced to
zero. The Agreement does not permit the allocation of Realized Losses, other
than Excess Losses, to the Class A Certificates.
Once Realized Losses or Excess Losses have been allocated to the Offered
Certificates, such amounts with respect to such Certificates will no longer
accrue interest nor will such amounts be reinstated thereafter.
The aggregate amount of Realized Losses which may be allocated to the
Subordinate Certificates in connection with Special Hazard Losses on the
Mortgage Loans (the "Special Hazard Amount") shall
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initially be equal to approximately $1,821,781. As of any date of determination
following the Cut-off Date, the Special Hazard Amount shall equal the amount set
forth in the preceding sentence less the sum of (A) any amounts allocated solely
to the Subordinate Certificates in respect of Special Hazard Losses and (B) the
Adjustment Amount. The Adjustment Amount will be as calculated pursuant to the
terms of the Agreement.
The aggregate amount of Realized Losses which may be allocated to the
Subordinate Certificates in connection with Fraud Losses on the Mortgage Loans
(the "Fraud Loss Amount") shall initially be equal to approximately $5,465,342.
As of any date of determination after the Cut-off Date, the Fraud Loss Amount
shall equal (X) prior to the first anniversary of the Cut-off Date, an amount
equal to 3.00% of the aggregate principal balance of all of the Mortgage Loans
as of the Cut-off Date minus the aggregate amounts allocated to the Subordinate
Certificates in respect of Fraud Losses on the Mortgage Loans up to such date of
determination, (Y) from the first to the second anniversary of the Cut-off Date,
an amount equal to (1) the lesser of (a) the Fraud Loss Amount as of the most
recent anniversary of the Cut-off Date and (b) 2.00% of the aggregate principal
balance of all of the Mortgage Loans as of the most recent anniversary of the
Cut-off Date minus (2) the aggregate amounts allocated to the Subordinate
Certificates in respect of Fraud Losses on the Mortgage Loans since the most
recent anniversary of the Cut-off Date up to such date of determination and (Z)
from the second to the fifth anniversary of the Cut-off Date, an amount equal to
(1) the lesser of (a) the Fraud Loss Amount as of the most recent anniversary of
the Cut-off Date, and (b) 1.00% of the aggregate principal balance of all of the
Mortgage Loans as of the most recent anniversary of the Cut-off Date minus (2)
the aggregate amounts allocated to the Subordinate Certificates in respect of
Fraud Losses on the Mortgage Loans since the most recent anniversary of the
Cut-off Date up to such date of determination. On and after the fifth
anniversary of the Cut-off Date, the Fraud Loss Amount shall be zero.
The aggregate amount of Realized Losses which may be allocated to the
Subordinate Certificates in connection with Bankruptcy Losses on the Mortgage
Loans (the "Bankruptcy Amount") will initially be equal to approximately
$100,000. As of any date of determination, the Bankruptcy Amount shall equal the
approximate amount set forth in the preceding sentence less the sum of any
amounts allocated to the Subordinate Certificates in respect of Bankruptcy
Losses on the Mortgage Loans up to such date of determination.
Notwithstanding the foregoing, for purposes of determining the Special
Hazard Amount, the Fraud Loss Amount and the Bankruptcy Amount as of any date of
determination, Special Hazard Losses, Fraud Losses and Bankruptcy Losses paid
from Net Monthly Excess Cashflow which would otherwise have been payable to the
holders of the Subordinate Certificates as provided in the Agreement shall be
deemed to have been allocated to the Subordinate Certificates.
A "Special Hazard Loss" is a loss incurred in respect of any defaulted
Mortgage Loan as a result of direct physical loss or damage to the Mortgaged
Property (except as a result of the exclusions described below), which is not
insured against under the standard hazard insurance policy or blanket policy
insuring against hazard losses which the Master Servicer is required to cause to
be maintained on each Mortgage Loan. See "Description of Primary Insurance
Policies--Primary Hazard Insurance Policies" in the Prospectus.
Special Hazard Losses will not include any loss resulting from:
(i) wear and tear, deterioration, rust or corrosion, mold, wet or
dry rot; inherent vice or latent defect; animals, birds, vermin, insects;
(ii) smog, smoke, vapor, liquid or dust discharge from agricultural
or industrial operations; pollution; contamination;
(iii) settling, subsidence, cracking, shrinkage, bulging or
expansion of pavements, foundations, walls, floors, roofs or ceilings; and
(iv) errors in design, faulty workmanship or faulty materials,
unless the collapse of the property or a part thereof ensues and then only
for the ensuing loss.
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Special Hazard Losses will also not include any loss (any such loss, an
"Extraordinary Loss") resulting from:
(i) nuclear or chemical reaction or nuclear radiation or radioactive
or chemical contamination, all whether controlled or uncontrolled and
whether such loss be direct or indirect, proximate or remote or be in whole
or in part caused by, contributed to or aggravated by a peril insured
against;
(ii) hostile or warlike action in time of peace or war, including
action in hindering, combating or defending against an actual, impending or
expected attack by any government or sovereign power, de jure or de facto,
or by any authority maintaining or using military, naval or air forces, or
by military, naval or air forces, or by an agent of any such government,
power, authority or forces;
(iii) any weapon of war employing atomic fission or radioactive
forces whether in time of peace or war; and
(iv) insurrection, rebellion, revolution, civil war, usurped power
or action taken by governmental authority in hindering, combating or
defending against such an occurrence, seizure or destruction under
quarantine or customs regulations, confiscation by order of any government
or public authority, or risks of contraband or illegal transactions or
trade.
"Excess Special Hazard Losses" are Special Hazard Losses in excess of the
Special Hazard Amount.
A "Fraud Loss" is a loss incurred on a defaulted Mortgage Loan as to which
there was intentional fraud, dishonesty or misrepresentation in the origination
of such Mortgage Loan.
"Excess Fraud Losses" are Fraud Losses in excess of the Fraud Loss Amount.
A "Bankruptcy Loss" is a Deficient Valuation or a Debt Service Reduction.
With respect to any Mortgage Loan, a "Deficient Valuation" is a valuation by a
court of competent jurisdiction of the Mortgaged Property in an amount less than
the then outstanding indebtedness under the Mortgage Loan, which valuation
results from a proceeding initiated under the United States Bankruptcy Code. A
"Debt Service Reduction" is any reduction in the amount which a mortgagor is
obligated to pay on a monthly basis with respect to a Mortgage Loan as a result
of any proceeding initiated under the United States Bankruptcy Code, other than
a reduction attributable to a Deficient Valuation.
"Excess Bankruptcy Losses" are Bankruptcy Losses in excess of the
Bankruptcy Amount.
"Excess Losses" are Excess Special Hazard Losses, Excess Fraud Losses,
Excess Bankruptcy Losses and Extraordinary Losses.
P&I ADVANCES
Subject to the following limitations, the Master Servicer will be obligated
to advance or cause to be advanced on or before each Distribution Date its own
funds, or funds in the Certificate Account that are not included in the
Available Distribution Amount for such Distribution Date, in an amount equal to
the aggregate of all payments of principal and interest, net of the Servicing
Fee, that were due during the related Due Period on the Mortgage Loans and that
were delinquent on the related Determination Date, plus certain amounts
representing assumed payments not covered by any current net income on the
Mortgaged Properties acquired by foreclosure or deed in lieu of foreclosure (any
such advance, a "P&I Advance").
P&I Advances are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making such P&I Advances is to
maintain a regular cash flow to the Certificateholders, rather than to guarantee
or insure against losses. The Master Servicer will not be required to make any
P&I Advances with respect to reductions in the amount of the monthly payments on
the Mortgage Loans due to bankruptcy proceedings or the application of the
Relief Act.
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All P&I Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which such unreimbursed P&I Advance was made. In addition, any P&I
Advances previously made in respect of any Mortgage Loan that are deemed by the
Master Servicer to be nonrecoverable from related late collections, insurance
proceeds or liquidation proceeds may be reimbursed to the Master Servicer out of
any funds in the Certificate Account prior to the distributions on the
Certificates. In the event that the Master Servicer fails in its obligation to
make any such advance, the Trustee will be obligated to make any such advance,
to the extent required in the Agreement.
RESTRICTIONS ON TRANSFER OF THE MEZZANINE CERTIFICATES AND THE RESIDUAL
CERTIFICATES
The Residual Certificates may not be purchased by or transferred to a Plan
(as defined herein) except upon the delivery of a certification of facts or an
opinion of counsel, as provided herein. The Residual Certificates will be
subject to certain additional restrictions described under "Certain Federal
Income Tax Consequences--Special Tax Considerations Applicable to the Residual
Certificates" herein and "Certain Federal Income Tax Consequences--REMICs--Tax
on Transfers of REMIC Residual Certificates to Certain Organizations" and
"--Taxation of Owners of REMIC Residual Certificates--Noneconomic REMIC Residual
Certificates" in the Prospectus. See "ERISA Considerations" herein. In addition,
because the Mezzanine Certificates are subordinate to the Senior Certificates,
any Plan purchasing such Mezzanine Certificates will be deemed to have
represented that certain conditions have been satisfied in connection with such
purchase. See "ERISA Considerations" herein.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Agreement, a form of which
is filed as an exhibit to the Registration Statement. A Current Report on Form
8-K relating to the Certificates containing a copy of the Agreement as executed
will be filed by the Depositor with the Securities and Exchange Commission
within fifteen days of the initial issuance of the Certificates. The Trust Fund
created under the Agreement will consist of (i) all of the Depositor's right,
title and interest in the Mortgage Loans, the related Mortgage Notes, Mortgages
and other related documents, (ii) all payments on or collections in respect of
the Mortgage Loans due after the Cut-off Date, together with any proceeds
thereof, (iii) any Mortgaged Properties acquired on behalf of Certificateholders
by foreclosure or by deed in lieu of foreclosure, and any revenues received
thereon, (iv) the rights of the Trustee under all insurance policies required to
be maintained pursuant to the Agreement and (v) certain of the rights of the
Depositor under the Mortgage Loan Purchase Agreement among the Depositor, the
Originator and the Mortgage Loan Seller. Reference is made to the Prospectus for
important information in addition to that set forth herein regarding the Trust
Fund, the terms and conditions of the Agreement and the Offered Certificates.
The Offered Certificates will be transferable and exchangeable at the corporate
trust offices of the Trustee, located in Minneapolis, 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.
ASSIGNMENT OF THE MORTGAGE LOANS
The Depositor will deliver to the Trustee with respect to each Mortgage
Loan (i) the mortgage note endorsed without recourse to the Trustee to reflect
the transfer of the Mortgage Loan, (ii) the original mortgage with evidence of
recording indicated thereon and (iii) an assignment of the mortgage in
recordable form to the Trustee, reflecting the transfer of the Mortgage Loan.
Such assignments of
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Mortgage Loans are required to be recorded by or on behalf of the Depositor in
the appropriate offices for real property records.
THE ORIGINATOR AND MASTER SERVICER
The information set forth in the following paragraphs has been provided by
Long Beach Mortgage Company. None of the Depositor, the Mortgage Loan Seller,
the Trustee, the Subservicer, the Underwriter or any of their respective
affiliates has made or will make any representation as to the accuracy or
completeness of such information.
Long Beach Mortgage Company, a Delaware corporation ("Long Beach"), is a
specialty finance company engaged in the business of originating, purchasing and
selling sub-prime mortgage loans secured by one- to four-family residences. Long
Beach began originating sub-prime mortgage loans in 1988 as a division of Long
Beach Bank, F.S.B. To gain greater operating flexibility and improve its ability
to compete against other financial services companies, in October 1994, Long
Beach Bank, F.S.B. ceased operations, voluntarily surrendered its federal thrift
charter and transferred its mortgage banking business to a new Delaware
corporation called Long Beach Mortgage Company ("Old Long Beach").
In May 1997, Old Long Beach completed a reorganization (the
"Reorganization") of its business operations by transferring to its wholly-owned
subsidiary, Long Beach Financial Corporation ("LBFC"), the assets and personnel
related to Old Long Beach's broker-sourced mortgage lending and loan sales
operations and approximately $40 million in cash. The assets received from Old
Long Beach by LBFC were then transferred to Long Beach, a wholly-owned
subsidiary of LBFC. Immediately following the Reorganization, Long Beach
continued the activities previously conducted by the broker-sourced and loan
sales divisions of Old Long Beach. LBFC is a publicly-traded company based in
Orange, California.
Substantially all of the loans originated by Long Beach while it operated
as a division of Old Long Beach were serviced by the servicing division of Old
Long Beach. Because Long Beach does not currently have internal servicing
capabilities, the loans originated or purchased by Long Beach will be
sub-serviced by the servicing division of Ameriquest Mortgage Company until Long
Beach develops such capabilities. Ameriquest and Long Beach have entered into a
contract (the "Subservicing Agreement") pursuant to which Ameriquest will
sub-service the Mortgage Loans indirectly sold by Long Beach to the Depositor.
Notwithstanding the foregoing, Long Beach will act as master servicer for such
Mortgage Loans (in such capacity, the "Master Servicer"), and will remain
primarily liable for servicing such Mortgage Loans.
Because of the recent date of the Reorganization, there is currently no
meaningful data regarding originations and sales or loss and delinquency
experience relating to loans originated or purchased by Long Beach following the
Reorganization.
THE SUBSERVICER
The information set forth in the following paragraphs has been provided by
the Subservicer. None of the Depositor, the Master Servicer, the Originator, the
Mortgage Loan Seller, the Trustee, the Underwriter or any of their respective
affiliates has made or will make any representation as to the accuracy or
completeness of such information.
Ameriquest Mortgage Company, a Delaware corporation (the "Subservicer" or
"Ameriquest"), will act as the subservicer for the Mortgage Loans. The
Subservicer is a specialty finance company engaged in the business of
originating, purchasing and selling sub-prime mortgage loans secured by one- to
four-family residences. Ameriquest's mortgage business was begun in 1985 by Long
Beach Savings and Loan Association (later known as Long Beach Bank, F.S.B.,
together, the "Bank"). To gain greater operating flexibility and improve its
ability to compete against other financial services companies, in October 1994,
the Bank ceased operations, voluntarily surrendered its federal thrift charter
and transferred its mortgage banking business to Old Long Beach.
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<PAGE>
In May 1997, Old Long Beach completed the Reorganization of its business
operations by transferring to its wholly-owned subsidiary LBFC the assets and
personnel related to Old Long Beach's broker-sourced mortgage lending and loan
sales operations. The assets received from Old Long Beach by LBFC were
transferred to a wholly-owned subsidiary of LBFC which was named "Long Beach
Mortgage Company". The assets transferred included loans in process at the time
of the Reorganization, but did not include loans funded by the broker-sourced
mortgage lending division of Old Long Beach prior to the Reorganization or
servicing rights with respect to loans funded prior to the Reorganization. As
part of the Reorganization, Old Long Beach changed its name to "Ameriquest
Mortgage Company". Immediately following the Reorganization, Ameriquest sold all
of the outstanding shares of Common Stock of LBFC in an underwritten public
offering (the "Offering"). As a result of the Reorganization and Offering,
Ameriquest commenced operations under its new name and the new Long Beach
Mortgage Company commenced operations as an independent company with the assets
and personnel that were previously operating as the broker-sourced mortgage
lending and loan sales divisions of Old Long Beach.
Ameriquest is approved as a seller/servicer for FNMA and FHLMC and as a
non-supervised mortgagee by the U.S. Department of Housing and Urban
Development.
LOAN SERVICING. Generally, Ameriquest services all the mortgage loans it
originates whether those loans are sold or retained in its portfolio. Servicing
includes collecting and remitting loan payments, accounting for principal and
interest, contacting delinquent mortgagors, and supervising foreclosure in the
event of unremedied defaults. Ameriquest's servicing activities are audited
regularly by its internal auditors and examined periodically by applicable
regulatory authorities. Certain financial records of Ameriquest relating to its
loan servicing activities are reviewed annually as part of the audit of
Ameriquest's financial statements conducted by its independent accountants.
COLLECTION PROCEDURES; DELINQUENCY AND LOSS EXPERIENCE. When a mortgagor
fails to make a required payment on a residential mortgage loan, Ameriquest
attempts to cause the deficiency to be cured by corresponding with the
mortgagor. In most cases deficiencies are cured promptly. Pursuant to
Ameriquest's customary procedures for residential mortgage loans serviced by it
for its own account, Ameriquest generally mails a notice of intent to foreclose
to the mortgagor after the loan has become 31 days past due (two payments due
but not received) and, within one month thereafter, if the loan remains
delinquent, typically institutes appropriate legal action to foreclose on the
property securing the loan. If foreclosed, the property is sold at public or
private sale and may be purchased by Ameriquest. In California, real estate
lenders are generally unable as a practical matter to obtain a deficiency
judgment against the mortgagor on a loan secured by single-family real estate.
AMERIQUEST PROGRAMS -- SERVICING PORTFOLIO
The following table sets forth Ameriquest's delinquency and loss experience
(including that of its predecessor in interest, the Bank, and excluding that of
Long Beach Mortgage Company after the Reorganization) at the dates indicated on
its servicing portfolio of mortgage loans originated under the Ameriquest
sub-prime underwriting programs (the majority of such mortgage loans reflected
in the following table are adjustable rate mortgage loans):
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<PAGE>
<TABLE>
<CAPTION>
AT
SEPTEMBER
AT DECEMBER 31, 30,
--------------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal
Balance................................ $1,947,949 $2,418,848 $2,397,950 $3,001,542 $3,587,724
Number of Loans.......................... 16,282 21,260 22,700 29,710 37,068
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance............... $13,079 $16,816 $32,483 $43,421 $48,717
Number of Loans................. 106 131 286 422 529
Delinquency as a Percentage
of Total Outstanding Principal
Balance....................... 0.67% 0.70% 1.35% 1.45% 1.36%
Delinquency as a Percentage
of Number of Loans............ 0.65% 0.62% 1.26% 1.42% 1.43%
61-90 Days
Principal Balance............... $13,144 $18,104 $21,249 $28,064 $42,312
Number of Loans................. 93 129 188 271 392
Delinquency as a Percentage
of Total Outstanding
Principal Balance............. 0.67% 0.75% 0.89% 0.93% 1.18%
Delinquency as a Percentage
of Number of Loans............ 0.57% 0.61% 0.83% 0.91% 1.06%
91 Days or More
Principal Balance............... $60,621 $70,034 $94,201 $126,502 $163,095
Number of Loans................. 418 509 765 1,173 1,605
Delinquency as a Percentage
of Total Outstanding
Principal Balance............. 3.11% 2.90% 3.93% 4.21% 4.55%
Delinquency as a Percentage
of Number of Loans............ 2.57% 2.39% 3.37% 3.95% 4.33%
Total Delinquencies:
Principal Balance............... $86,844 $104,953 $147,933 $197,988 $254,123
Number of Loans................. 617 769 1,239 1,866 2,526
Delinquency as a Percentage
of Total Outstanding
Principal Balance............. 4.46% 4.34% 6.17% 6.60% 7.08%
Delinquency as a Percentage
of Number of Loans............ 3.79% 3.62% 5.46% 6.28% 6.81%
FORECLOSURES PENDING(1)
Principal Balance............... $64,443 $77,960 $102,962 $127,002 $146,503
Number of Loans................. 449 583 859 1,184 1,540
Foreclosures Pending as a
Percentage of Total
Outstanding Principal 3.31% 3.22% 4.29% 4.23% 4.08%
Balance.........................
Foreclosures Pending as
a Percentage of Number of
Loans........................... 2.76% 2.74% 3.78% 3.99% 4.15%
NET LOAN LOSSES for the Period(2)........ $13,449 $24,617 $24,320 $29,674 $22,462
NET LOAN LOSSES as a Percentage
of Total Outstanding Principal
Balance................................ 0.69% 1.02% 1.01% 0.98% 0.63%
</TABLE>
- ----------
(1) Mortgage loans which are in foreclosure but as to which title to the
mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set forth
above.
(2) Net Loan Losses is calculated for loans conveyed to REMIC trust funds as
the aggregate of the net loan loss for all such loans liquidated during the
period indicated. The net loan loss for any such loan is equal to the
difference between (a) the principal balance plus accrued interest through
the date of liquidation plus all liquidation expenses related to such loan
and (b) all amounts received in connection with the liquidation of such
loan. The majority of loans serviced by Ameriquest have been conveyed to
REMIC trust funds.
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As of September 30, 1997, 691 one- to four-family residential properties
relating to loans in Ameriquest's total servicing portfolio had been acquired
through foreclosure or deed in lieu of foreclosure and were not liquidated, 582
of which properties relate to the Full Documentation, Fast Trac, QuickCredit and
QuickCredit Fast Trac residential mortgage loan servicing portfolio.
There can be no assurance that the delinquency and loss experience of the
Mortgage Loans will correspond to the loss experience of Ameriquest's mortgage
portfolio set forth in the foregoing table. The statistics shown above represent
the delinquency and loss experience for residential mortgages originated under
the Ameriquest sub-prime underwriting programs and serviced by Ameriquest only
for the years presented, whereas the aggregate delinquency and loss experience
on the Mortgage Loans will depend on the results obtained over the life of the
Trust Fund. Ameriquest's servicing portfolio includes mortgage loans with
payment and other characteristics which are not representative of the payment
and other characteristics of the Mortgage Loans. A substantial number of the
Mortgage Loans may also have been originated based on guidelines that are less
stringent than those generally applicable to the servicing portfolio reflected
in the foregoing table. If the residential real estate market should experience
an overall decline in property values, the actual rates of delinquencies,
foreclosures and losses could be higher than those previously experienced by
Ameriquest. In addition, adverse economic conditions (which may or may not
affect real property values) may affect the timely payment by mortgagors of
scheduled payments of principal and interest on the Mortgage Loans and,
accordingly, the actual rates of delinquencies, foreclosures and losses with
respect to the Mortgage Loans.
RESIDENTIAL LOAN SERVICING PORTFOLIO
The following table sets forth Ameriquest's delinquency and loss experience
(including that of its predecessor in interest, the Bank, and excluding that of
Long Beach Mortgage Company after the Reorganization) at the dates indicated on
its entire residential (including multi-family) mortgage loan servicing
portfolio (inclusive of loans originated under the Ameriquest sub-prime
underwriting programs):
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<PAGE>
<TABLE>
<CAPTION>
AT
SEPTEMBER
AT DECEMBER 31, 30,
--------------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal $2,434,615 $2,721,665 $2,790,704 $3,622,400 $4,365,773
Balance...............................
Number of Loans......................... 21,159 24,669 26,766 36,564 46,084
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance............... $21,834 $20,923 $35,503 $54,719 $55,522
Number of Loans................. 224 195 327 557 623
Delinquency as a Percentage
of Total Outstanding
Principal
Balance....................... 0.90% 0.77% 1.27% 1.51% 1.27%
Delinquency as a Percentage
of Number of Loans............ 1.06% 0.79% 1.22% 1.52% 1.35%
61-90 Days
Principal Balance............... $19,321 $24,013 $25,237 $36,565 $46,446
Number of Loans................. 177 193 253 382 439
Delinquency as a Percentage
of Total Outstanding
Principal Balance............. 0.79% 0.88% 0.90% 1.01% 1.06%
Delinquency as a Percentage
of Number of Loans............ 0.84% 0.78% 0.95% 1.04% 0.95%
91 Days or More
Principal Balance............... $92,100 $97,202 $109,703 $152,537 $192,134
Number of Loans................. 765 771 977 1,531 1,919
Delinquency as a Percentage
of Total Outstanding
Principal Balance............. 3.78% 3.57% 3.93% 4.21% 4.40%
Delinquency as a Percentage
of Number of Loans............ 3.62% 3.13% 3.65% 4.19% 4.16%
Total Delinquencies:
Principal Balance............... $133,255 $142,138 $170,444 $243,822 $294,102
Number of Loans................. 1,166 1,159 1,557 2,470 2,981
Delinquency as a Percentage
of Total Outstanding
Principal Balance............. 5.47% 5.22% 6.11% 6.73% 6.74%
Delinquency as a Percentage
of Number of Loans............ 5.51% 4.70% 5.82% 6.76% 6.47%
FORECLOSURES PENDING(1)
Principal Balance............... $96,810 $111,514 $132,679 $165,525 $195,350
Number of Loans................. 748 955 1,200 1,591 1,925
Foreclosures Pending as a
Percentage of Total
Outstanding Principal
Balance....................... 3.98% 4.10% 4.75% 4.57% 4.47%
Foreclosures Pending as
a Percentage of Number of
Loans........................... 3.54% 3.87% 4.48% 4.35% 4.18%
NET LOAN LOSSES for the
Period(2)............................. $35,474 $51,296 $37,914 $38,915 $28,008
NET LOAN LOSSES as a
Percentage of Total Outstanding
Principal Balance..................... 1.46% 1.88% 1.36% 1.07% 0.64%
</TABLE>
- ----------
(1) Mortgage loans which are in foreclosure but as to which title to the
mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set forth
above.
(2) Net Loan Losses is calculated for loans conveyed to REMIC trust funds as
the aggregate of the net loan loss for all such loans liquidated during the
period indicated. The net loan loss for any such loan is equal to the
difference between (a) the principal balance plus accrued interest through
the date of liquidation plus all liquidation expenses related to such loan
and (b) all amounts received in connection with the liquidation of such
loan. The majority of residential loans serviced by Ameriquest have been
conveyed to REMIC trust funds.
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The delinquency and loss experience percentages set forth above in the
immediately preceding table are calculated on the basis of the total mortgage
loans serviced as of the end of the periods indicated. However, because the
total outstanding principal balance of residential loans serviced by Ameriquest
has increased from $2,434,615 at December 31, 1993 to $4,365,773 at September
30, 1997, the total outstanding principal balance of residential loans serviced
as of the end of any indicated period includes many loans that will not have
been outstanding long enough to give rise to some or all of the indicated
periods of delinquency. In the absence of such substantial and continual
additions of newly originated loans to the total amount of loans serviced, the
percentages indicated above would be higher and could be substantially higher.
The actual delinquency percentages with respect to the Mortgage Loans may be
expected to be substantially higher than the delinquency percentages indicated
above because the composition of the Mortgage Loans will not change.
If the residential real estate market should experience an overall decline
in property values, the actual rates of delinquencies and foreclosures could be
higher than those previously experienced by Ameriquest.
THE SUBSERVICING AGREEMENT
Pursuant to the Subservicing Agreement between the Master Servicer and the
Subservicer, the Subservicer will service the Mortgage Loans. The terms and
conditions of the Subservicing Agreement are consistent with and do not violate
the provisions of the Agreement. The Subservicing Agreement does not relieve the
Master Servicer from any of its obligations to service the Mortgage Loans in
accordance with the terms and conditions of the Agreement. In the event the
Master Servicer is no longer the Master Servicer with respect to any or all of
the Mortgage Loans, the Subservicer may be terminated without cause or the
payment of any fee.
The Master Servicer, if a Subservicer Event of Default has occurred under
the Subservicing Agreement, may remove the Subservicer. A "Subservicer Event of
Default" under the Subservicing Agreement includes, but is not limited to (i)
the Subservicer's failure, within one business day after notice, to deliver
funds or make payments when due, failure to perform any other obligation of the
Subservicer under the Subservicing Agreement or failure to cure a breach of a
representation or warranty by the Subservicer which materially and adversely
affects the interests of the Certificateholders, subject to specified cure
periods following notice of any such failure or (ii) the Subservicer's
commencement, or the commencement against it without prompt discharge, of
bankruptcy or similar proceedings jeopardizing or eliminating the ability of the
Subservicer to pay or otherwise discharge its obligations.
THE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association, will act as Trustee for the Certificates pursuant to the Agreement.
The Trustee's offices for notices under the Agreement are located at Sixth
Street and Marquette Avenue, Minneapolis, Minnesota 55479-0070, Attention:
Corporate Trust Services and its telephone number is (612) 667-1117.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Agreement will be equal to accrued interest at the Trustee
Fee Rate of 0.007% per annum on the Scheduled Principal Balance of each Mortgage
Loan. The Agreement will provide that the Trustee and any director, officer,
employee or agent of the Trustee will be indemnified by the Trust Fund and will
be held harmless against any loss, liability or expense (not including expenses,
disbursements and advances incurred or made by the Trustee, including the
compensation and the expenses and disbursements of its agents and counsel, in
the ordinary course of the Trustee's performance in accordance with the
provisions of the Agreement) incurred by the Trustee in connection with any
pending or threatened claim or legal action arising out of or in connection with
the acceptance or administration of its obligations and duties under the
Agreement, other than any loss, liability or expense (i) resulting from a breach
of the Master Servicer's obligations and duties under the Agreement, (ii) that
constitutes a specific liability of Trustee under the Agreement or (iii)
incurred by reason of willful misfeasance, bad faith or negligence in the
performance of the Trustee's duties under the Agreement or as a result of a
breach, or by reason of reckless disregard, of the Trustee's obligations and
duties under the Agreement.
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SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect of
its servicing activities for the Certificates will be equal to accrued interest
at the Servicing Fee Rate of 0.50% per annum with respect to each Mortgage Loan
for each calendar month on the same principal balance on which interest on such
Mortgage Loan accrues for such calendar month (the "Servicing Fee"). As
additional servicing compensation, the Master Servicer is entitled to retain all
assumption fees and late payment charges (but excluding any prepayment penalties
which will be distributed to the Mortgage Loan Seller), to the extent collected
from mortgagors, together with any interest or other income earned on funds held
in the Certificate Account and any escrow accounts. The Master Servicer is
obligated to offset any Prepayment Interest Shortfall on any Distribution Date
(payments made by the Master Servicer in satisfaction of such obligation,
"Compensating Interest") to the extent of its aggregate Servicing Fee for such
Distribution Date. The Master Servicer is obligated to pay certain insurance
premiums and certain ongoing expenses associated with the Mortgage Pool and
incurred by the Master Servicer in connection with its responsibilities under
the Agreement and is entitled to reimbursement therefor as provided in the
Agreement. See "Description of the Certificates--Retained Interest; Servicing
Compensation and Payment of Expenses" in the Prospectus for information
regarding expenses payable by the Master Servicer and "Certain Federal Income
Tax Consequences" herein regarding certain taxes payable by the Master Servicer.
VOTING RIGHTS
At all times, 99% of all Voting Rights will be allocated among the holders
of the Class A Certificates and the Subordinate Certificates in proportion to
the then outstanding Certificate Principal Balances of their respective
Certificates and 1% of all Voting Rights will be allocated among the holders of
the Residual Certificates in proportion to the percentage interests in such
classes evidenced by their respective Certificates.
TERMINATION
The circumstances under which the obligations created by the Agreement will
terminate in respect of the Certificates are described in "Description of the
Certificates--Termination" in the Prospectus. The majority holder of the Class
CE Certificates (or if such holder does not exercise such option, the Master
Servicer) will have the right to purchase all remaining Mortgage Loans and any
properties acquired in respect thereof and thereby effect early retirement of
the Certificates on any Distribution Date following the Due Period during which
the aggregate principal balance of the Mortgage Loans and such properties at the
time of purchase is reduced to less than 10% of the aggregate principal balance
of the Mortgage Loans as of the Cut-off Date. In the event the majority holder
of the Class CE Certificates exercises such option, the purchase price payable
in connection therewith generally will be equal to par, and in the event the
Master Servicer exercise such option, the purchase price payable in connection
therewith generally will be equal to the greater of par or the fair market value
of the Mortgage Loans and such properties, in each case plus accrued interest
for each Mortgage Loan at the related Mortgage Rate to but not including the
first day of the month in which such repurchase price is distributed, together
with any amounts due to the Master Servicer for servicing compensation at the
Servicing Fee Rate and any unreimbursed Servicing Advances. In the event the
majority holder of the Class CE Certificates or the Master Servicer exercise
such option, the portion of the purchase price allocable to the Offered
Certificates of each class will be, to the extent of available funds, (i) 100%
of the then outstanding Certificate Principal Balance thereof, plus (ii) one
month's interest on the then outstanding Certificate Principal Balance thereof
at the then applicable Pass-Through Rate for such class, plus (iii) any
previously accrued but unpaid interest thereon. The holders of the Residual
Certificates shall pledge any amount received in a termination in excess of par
to the holders of the Class CE Certificates. In no event will the trust created
by the Agreement continue beyond the expiration of 21 years from the death of
the survivor of the persons named in the Agreement. See "Description of the
Certificates--Termination" in the Prospectus.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Three separate elections will be made to treat designated portions of the
Trust Fund as real estate mortgage investment conduits ("REMIC I", "REMIC II"
and "REMIC III", respectively, and each a "REMIC") for federal income tax
purposes. Upon the issuance of the Offered Certificates, Thacher Proffitt &
Wood, counsel to the Depositor, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the Agreement, for federal
income tax purposes, each of REMIC I, REMIC II and REMIC III will qualify as a
REMIC under Sections 860A through 860G of the Internal Revenue Code of 1986 (the
"Code").
For federal income tax purposes, (i) the Class R-I Certificates will be the
sole class of "residual interests" in REMIC I, (ii) separate non-certificated
regular interests in REMIC I will be issued and will be the "regular interests"
in REMIC I, (iii) the Class R-II Certificates will be the sole class of
"residual interests" in REMIC II, (iv) separate non-certificated regular
interests in REMIC II will be issued and will be the "regular interests" in
REMIC II, (v) the Class R-III Certificates will be the sole class of "residual
interests" in REMIC III, and (vi) the Class A Certificates, the Mezzanine
Certificates and the Class CE Certificates will be the "regular interests" in,
and will be treated as debt instruments of, REMIC III. See "Certain Federal
Income Tax Consequences--REMIC--Classification of REMICs" in the Prospectus.
For federal income tax reporting purposes, the Class A Certificates and the
Mezzanine Certificates will not, be treated as having been issued with original
issue discount. The prepayment assumption that will be used in determining the
rate of accrual of original issue discount, premium and market discount, if any,
for federal income tax purposes will be based on the assumption that subsequent
to the date of any determination the Mortgage Loans will prepay at a constant
rate of 28% CPR. No representation is made that the Mortgage Loans will prepay
at such rate or at any other rate. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers of
the Class A Certificates and the Mezzanine Certificates should be aware that the
OID Regulations do not adequately address certain issues relevant to, or are not
applicable to, securities such as the Class A Certificates and the Mezzanine
Certificates. In addition, there is considerable uncertainty concerning the
application of the OID Regulations to REMIC Regular Certificates that provide
for payments based on an adjustable rate such as the Class A Certificates and
the Mezzanine Certificates. Because of the uncertainty concerning the
application of Section 1272(a)(6) of the Code to such Certificates and because
the rules of the OID Regulations relating to debt instruments having an
adjustable rate of interest are limited in their application in ways that could
preclude their application to such Certificates even in the absence of Section
1272(a)(6) of the Code, the IRS could assert that the Class A Certificates and
the Mezzanine Certificates should be treated as issued with original issue
discount or should be governed by the rules applicable to debt instruments
having contingent payments or by some other method not yet set forth in
regulations. Prospective purchasers of the Class A Certificates and the
Mezzanine Certificates are advised to consult their tax advisors concerning the
tax treatment of such Certificates.
It appears that a reasonable method of reporting original issue discount
with respect to the Class A Certificates and the Mezzanine Certificates, if such
Certificates are required to be treated as issued with original issue discount,
generally would be to report all income with respect to such Certificates as
original issue discount for each period, computing such original issue discount
(i) by assuming that the value of the applicable Index will remain constant for
purposes of determining the original yield to maturity of, and projecting future
distributions on such Certificates, thereby treating such Certificates as fixed
rate instruments to which the original issue discount computation rules
described in the Prospectus can be applied, and (ii) by accounting for any
positive or negative variation in the actual value of the applicable Index in
any period from its assumed value as a current adjustment to original issue
discount with respect to such period. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus.
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The Class A Certificates may be treated for federal income tax purposes as
having been issued at a premium. Whether any holder of a Class A Certificate
will be treated as holding a Certificate with amortizable bond premium will
depend on such Certificateholder's purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
Certificateholder. Holders of the Class A Certificates should consult their own
tax advisors regarding the possibility of making an election to amortize such
premium. See "Certain Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Regular Certificates--Premium" in the Prospectus.
The Class A Certificates and the Mezzanine Certificates will be treated as
assets described in Section 7701(a)(19)(C) of the Code and "real estate assets"
under Section 856(c)(4)(A) of the Code, generally in the same proportion that
the assets in the Trust Fund would be so treated. In addition, interest on the
Class A Certificates and the Mezzanine Certificates will be treated as "interest
on obligations secured by mortgages on real property" under Section 856(c)(3)(B)
of the Code, generally to the extent that the Class A Certificates and the
Mezzanine Certificates are treated as "real estate assets" under Section
856(c)(4)(A) of the Code. The Class A Certificates and the Mezzanine
Certificates will also be treated as "qualified mortgages" under Section
860G(a)(3) of the Code. See "Certain Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Certificates" in
the Prospectus.
It is not anticipated that REMIC I, REMIC II or REMIC III will engage in
any transactions that would subject it to the prohibited transactions tax as
defined in Section 860F(a)(2) of the Code, the contributions tax as defined in
Section 860G(d) of the Code or the tax on net income from foreclosure property
as defined in Section 860G(c) of the Code. However, in the event that any such
tax is imposed on REMIC I, REMIC II or REMIC III, such tax will be borne (i) by
the Trustee, if the Trustee has breached its obligations with respect to REMIC
compliance under the Agreement, (ii) by the Master Servicer, if the Master
Servicer has breached its obligations with respect to REMIC compliance under the
Agreement and (iii) otherwise by the Trust Fund, with a resulting reduction in
amounts otherwise distributable to holders of the related Offered Certificates.
See "Description of the Certificates--General" and "Certain Federal Income Tax
Consequences--REMICs--Prohibited Transactions and Other Possible REMIC Taxes" in
the Prospectus.
The responsibility for filing annual federal information returns and other
reports will be borne by the Trustee or the Master Servicer. See "Certain
Federal Income Tax Consequences--REMICs-- Reporting and Other Administrative
Matters" in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO RESIDUAL CERTIFICATES
The IRS has issued regulations under the provisions of the Code related to
REMICs (the "REMIC Regulations") that significantly affect holders of the
Residual Certificates. The REMIC Regulations will impose restrictions on the
transfer or acquisition of certain residual interests, including the Residual
Certificates. In addition, the REMIC Regulations contain restrictions that apply
to the transfer of "noneconomic" residual interests to United States persons.
The REMIC Regulations also provide that transfers of a Residual Certificate to a
non-United States person will be disregarded for tax purposes in certain cases.
Transfers of the Residual Certificates to such persons are, however, prohibited
under the Agreement. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Noneconomic REMIC Residual Certificates" in the Prospectus and
"ERISA Considerations" and "Description of the Certificates--Restrictions on
Transfer of the Residual Certificates" herein for additional restrictions on
transfer of the Residual Certificates.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, unless "no significant purpose of the
transfer was to impede the assessment or collection of tax". Based on the REMIC
Regulations, the Residual Certificates will constitute noneconomic residual
interests during some or all of their terms for purposes of the REMIC
Regulations and, accordingly, unless no significant purpose of a transfer is to
impede the
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assessment or collection of tax, transfers of the Residual Certificates may be
disregarded and purported transferors may remain liable for any taxes due with
respect to the income on the Residual Certificates. All transfers of the
Residual Certificates will be subject to certain restrictions under the terms of
the Agreement that are intended to reduce the possibility of any such transfer
being disregarded to the extent that the Residual Certificates constitute
noneconomic residual interests.
The holders of Residual Certificates, particularly the Class R-III
Certificates will be required to report taxable income and pay tax with respect
to the early accrual periods of the related REMIC's term that significantly
exceeds the amount of cash distributions received by such holders from the
related REMIC with respect to such periods. Furthermore, the tax on such income
will exceed the cash distributions with respect to such periods. Consequently,
holders of Residual Certificates, particularly Class R-III Certificates, should
have other sources of funds sufficient to pay any federal income taxes due in
the earlier years of the related REMIC as a result of their ownership of
Residual Certificates. In addition, the required inclusion of this amount of
taxable income during the related REMIC's earlier accrual periods and the
deferral of corresponding tax losses or deductions until later accrual periods
or until the ultimate sale or disposition of a Residual Certificate (or possibly
later under the "wash sale" rules of Section 1091 of the Code) may cause the
after-tax rate of return of a holder of a Residual Certificate to be zero or
negative even where such holders' pre-tax rate of return is positive. That is,
on a present value basis, the resulting tax liabilities of a holder of a
Residual Certificate will substantially exceed the sum of any tax benefits and
the amount of any cash distributions on such Residual Certificates over their
life.
An individual, trust or estate that holds (whether directly or indirectly
through certain pass-through entities) a Residual Certificate, particularly a
Class R-I Certificate or a Class R-II Certificate, may have significant
additional gross income with respect to, but may be subject to limitations on
the deductibility of, servicing and trustee's fees and other administrative
expenses properly allocable to the related REMIC in computing such holder's
regular tax liability and will not be able to deduct such fees or expenses to
any extent in computing such holder's alternative minimum tax liability. Such
expenses will be allocated for federal income tax information reporting purposes
entirely to such class of Certificates. However, it is possible that the IRS may
require all or some portion of such fees and expenses to be allocable to the
other Residual Certificates. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates--Pass
Through of Miscellaneous Itemized Deductions" in the Prospectus.
Potential investors in Residual Certificates should also be aware that
under the terms of the Agreement, the holders of the largest Percentage Interest
in the Residual Certificates shall, by their acceptance of such Certificates,
agree to irrevocably appoint the Trustee as their agent to perform all
of the duties of the tax matters person for the related REMIC.
Purchasers of the Residual Certificates are strongly advised to consult
their own tax advisors as to the economic and tax consequences of investment in
the Residual Certificates.
For further information regarding the federal income tax consequences of
investing in the Residual Certificates, see "Yield on the
Certificates--Additional Yield Considerations Applicable Solely to the Residual
Certificates" herein and "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated November 20, 1997 (the "Underwriting Agreement"), the Depositor
has agreed to sell, and Salomon Brothers Inc (the "Underwriter") has agreed to
purchase the Offered Certificates. The Underwriter is obligated to purchase all
Offered Certificates of the respective classes offered hereby if it purchases
any. The Underwriter is an affiliate of the Depositor.
Distribution of the Offered 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 Offered
Certificates, before deducting expenses payable by the Depositor, will be 100%
of the aggregate initial Certificate Principal Balance of the Offered
Certificates. In connection with the
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purchase and sale of the Offered 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 Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
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 Offered
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Offered
Certificates will be available through any other source. In addition, the
Depositor is not aware of any source through which price information about the
Offered Certificates will be generally available on an ongoing basis. The
limited nature of such information regarding the Offered Certificates may
adversely affect the liquidity of the Offered Certificates, even if a secondary
market for the Offered Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be passed
upon for the Depositor by Thacher Proffitt & Wood, New York, New York, and for
the Underwriter by Stroock & Stroock & Lavan LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Certificates that the Class A
Certificates and the Residual Certificates be rated "AAA" by Standard & Poor's
Ratings Services ("Standard & Poor's") and "AAA" by Fitch Investors Service,
L.P. ("Fitch"), that the Class M-1 Certificates be rated at least "AA" by
Standard & Poor's and "AA" by Fitch, that the Class M-2 Certificates be rated at
least "A" by Fitch and that the Class M-3 Certificates be rated at least "BBB"
by Fitch.
The ratings of Fitch and Standard & Poor's assigned to mortgage
pass-through certificates address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled. The rating process addresses structural and legal aspects associated
with the Certificates, including the nature of the underlying mortgage loans.
The ratings assigned to mortgage pass-through certificates do not represent any
assessment of the likelihood that principal prepayments will be made by the
mortgagors or the degree to which such prepayments will differ from that
originally anticipated. The ratings do not address the possibility that
Certificateholders might suffer a lower than anticipated yield due to non-credit
events. In addition, the ratings on the Residual Certificates do not address the
likelihood of receipt by the holders of the Residual Certificates of any amounts
in excess of the initial Certificate Principal Balances thereof and interest
thereon.
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
Offered 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 Offered Certificates.
The Depositor has not requested that any rating agency rate the Offered
Certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the Offered Certificates, or, if it
does, what rating would be assigned by any such other rating agency. A rating on
the Offered Certificates by another rating agency, if assigned at all, may be
lower than the ratings assigned to the Offered Certificates as stated above.
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LEGAL INVESTMENT
The Class A Certificates and the Class M-1 Certificates will, and the Class
M-2 Certificates and the Class M-3 Certificates will not, constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") for so long as they are rated not lower than the second
highest rating category by a Rating Agency (as defined in the Prospectus), and,
as such, will be legal investments for certain entities to the extent provided
in SMMEA. SMMEA, however, provides for state limitation on the authority of such
entities to invest in "mortgage related securities" provided that such
restrictive legislation was enacted prior to October 3, 1991. Certain states
have enacted legislation which overrides the preemption provisions of SMMEA.
Institutions whose investment activities are subject to legal investment laws
and regulations or to review by certain regulatory authorities may be subject to
restrictions on investment in the Offered 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 whether the Offered
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 Offered 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 Offered Certificates.
See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or any other plan or arrangement
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code (each, a "Plan") or any person investing
Plan Assets of any Plan (as defined in the Prospectus under "ERISA
Considerations") should carefully review with its legal advisors whether the
purchase, sale or holding of Certificates will give rise to a prohibited
transaction under ERISA or Section 4975 of the Code.
The U.S. Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption 89-89 (the "Exemption"), as described under "ERISA
Considerations" in the Prospectus, to the Underwriter. The Exemption 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 the Underwriter, such as the Class A Certificates,
and the servicing and operation of asset pools such as the Mortgage Pool,
provided that certain conditions are satisfied. The purchase of the Class A
Certificates by, on behalf of or with the Plan Assets of any Plan may qualify
for exemptive relief under the Exemption. However, the Exemption contains a
number of conditions which must be met for the Exemption to apply (as described
in the Prospectus), including the requirement that any such Plan must be an
"accredited
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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 Class A Certificate must make its own
determination that the conditions set forth in the Exemption will be
satisfied with respect to the Class A Certificates.
Because the characteristics of the Residual Certificates will not meet the
requirements of Prohibited Transaction Class Exemption ("PTCE") 83-1 (as
described in the Prospectus) or the Exemption, the purchase, sale or holding of
the Residual Certificates by, on behalf of or with Plan Assets of any Plan may
result in prohibited transactions or the imposition of excise taxes or civil
penalties. Therefore, the Agreement provides that transfers of Residual
Certificates to a Plan, a trustee or other person acting on behalf of any Plan
or to any person using Plan Assets to effect such acquisition will not be
registered by the Trustee unless the purchaser thereof provides the Depositor,
the Trustee, the Master Servicer and any sub-servicer with either (i) an opinion
of counsel satisfactory to the Depositor, the Trustee, the Master Servicer and
any sub-servicer, which opinion will not be at the expense of the Depositor, the
Master Servicer, any subservicer, the Trustee or the Trust Fund, to the effect
that the purchase of such Certificates is permissible under applicable law, will
not constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code and will not subject the Depositor, the Master
Servicer, any subservicer, the Trustee or the Trust Fund to any obligation in
addition to those undertaken in the Agreement or (ii) a certification of facts
substantially to the effect that the purchase of Residual Certificates by or on
behalf of such Plan is permissible under applicable law, will not constitute or
result in a non-exempt prohibited transaction under ERISA or Section 4975 of the
Code, will not subject the Depositor, the Master Servicer, any subservicer or
the Trustee to any obligation in addition to those undertaken in the Agreement
and the following conditions are met: (a) the source of funds used to purchase
such Residual Certificates is an "insurance company general account" (as such
term is defined in PTCE 95-60), (b) the conditions set forth in PTCE 95-60 have
been satisfied and (c) there is no Plan with respect to which the amount of such
general account's reserves and liabilities for contracts held by or on behalf of
such Plan and all other Plans maintained by the same employer (or any
"affiliate" thereof, as defined in PTCE 95-60) or by the same employee
organization exceed 10% of the total of all reserves and liabilities of such
general account (as determined under PTCE 95-60) as of the date of the
acquisition of such Residual Certificates. The Residual Certificates will
contain a legend describing such restrictions on transfer.
Because the characteristics of the Mezzanine Certificates will also not
meet the requirements of PTCE 83-1 or the Exemption, the purchase, sale or
holding of the Mezzanine Certificates by, on behalf of or with Plan Assets of
any Plan may result in prohibited transactions or the imposition of excise taxes
or civil penalties. Therefore, the Agreement provides that any Plan, trustee or
other person acting on behalf of any Plan or any person using Plan Assets to
acquire Mezzanine Certificates will be deemed to have represented that such
acquisition is permissible under applicable law, will not constitute or result
in any non-exempt prohibited transaction under ERISA or Section 4975 of the
Code, will not subject the Depositor, the Master Servicer, any subservicer, the
Trustee or the Trust Fund to any obligation in addition to those undertaken in
the Agreement, and the following conditions are met: (i) the source of funds
used to purchase such Mezzanine Certificates is an "insurance company general
account" (as such term is defined in PTCE 95-60), (ii) the conditions set forth
in PTCE 95-60 have been satisfied and (iii) there is no Plan with respect to
which the amount of such general account's reserves and liabilities for
contracts held by or on behalf of such Plan and all other Plans maintained by
the same employer (or any "affiliate" thereof, as defined in PTCE 95-60) or by
the same employee organization exceed 10% of the total of all reserves and
liabilities of such general account (as determined under PTCE 95-60) as of the
date of the acquisition of such Mezzanine Certificates.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm (a) that the Class A Certificates constitute "certificates" for
purposes of the Exemption and (b) that the specific and general conditions of
the Exemption and the other requirements set forth in the Exemption would be
satisfied.
In addition, before purchasing a Mezzanine Certificate or Residual Certificate,
a fiduciary of a Plan should itself confirm that the conditions to such purchase
described above would be satisfied. Any Plan fiduciary that proposes to cause a
Plan to purchase a Certificate should consult with its counsel with respect to
the potential applicability to such investment of the fiduciary responsibility
and prohibited transaction provisions of ERISA and the Code to the proposed
investment. For further information regarding the ERISA considerations of
investing in the Certificates, see "ERISA Considerations" in the Prospectus.
S-68
<PAGE>
Appendix A
Principal Balances of the Mortgage Loans at Origination
Aggregate Original % of Aggregate
Number Principal Original Principal
Range ($) of Loans Balance Balance
- ----------------------- -------- ------------------- ------------------
0.01- 50,000.00 173 $ 6,236,182.00 3.42%
50,000.01- 100,000.00 550 41,317,855.00 22.65
100,000.01- 150,000.00 384 46,779,622.00 25.65
150,000.01- 200,000.00 175 30,123,831.00 16.52
200,000.01- 250,000.00 89 19,733,682.00 10.82
250,000.01- 300,000.00 48 13,221,785.00 7.25
300,000.01- 350,000.00 22 7,085,435.00 3.88
350,000.01- 400,000.00 22 8,257,000.00 4.53
400,000.01- 450,000.00 10 4,258,700.00 2.33
450,000.01- 500,000.00 11 5,375,865.00 2.95
----- ---------------- ------
Total: 1,484 $ 182,389,957.00 100.00%
===== ================ ======
Principal Balances of the Mortgage Loans as of the Cut-off Date
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Range ($) of Loans the Cut-off Date the Cut-off Date
- ----------------------- -------- ------------------- ------------------
0.01- 50,000.00 173 $ 6,221,361.02 3.41%
50,000.01- 100,000.00 550 41,276,128.16 22.66
100,000.01- 150,000.00 384 46,722,627.52 25.65
150,000.01- 200,000.00 175 30,089,190.20 16.52
200,000.01- 250,000.00 89 19,713,582.40 10.82
250,000.01- 300,000.00 48 13,208,993.68 7.25
300,000.01- 350,000.00 22 7,077,008.47 3.88
350,000.01- 400,000.00 22 8,246,317.87 4.53
400,000.01- 450,000.00 10 4,254,988.88 2.34
450,000.01- 500,000.00 11 5,367,863.60 2.95
----- ---------------- ------
Total: 1,484 $ 182,178,061.80 100.00%
===== ================ ======
A-1
<PAGE>
Gross Margin of the Mortgage Loans
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Gross Margin (%) of Loans the Cut-off Date the Cut-off Date
- ----------------------- -------- ------------------- ------------------
3.750-3.999 1 $ 157,376.80 0.09%
4.000-4.249 1 121,491.73 0.07
4.250-4.499 2 130,069.50 0.07
4.500-4.749 5 856,367.78 0.47
4.750-4.999 10 1,167,938.41 0.64
5.000-5.249 29 3,514,352.48 1.93
5.250-5.499 69 8,715,482.50 4.78
5.500-5.749 155 17,558,727.67 9.64
5.750-5.999 178 24,045,630.92 13.20
6.000-6.249 57 6,590,228.71 3.62
6.250-6.499 72 7,717,317.01 4.24
6.500-6.749 414 45,581,721.62 25.02
6.750-6.999 369 50,254,285.96 27.59
7.000-7.249 15 2,067,634.68 1.13
7.250-7.499 87 11,219,073.19 6.16
7.500-7.749 13 1,573,465.47 0.86
7.750-7.999 5 726,633.14 0.40
8.250-8.499 1 90,282.60 0.05
8.500-8.749 1 89,981.63 0.05
----- ---------------- ------
Total: 1,484 $ 182,178,061.80 100.00%
===== ================ ======
A-2
<PAGE>
Next Adjustment Dates for the Mortgage Loans
Aggregate % of Aggregate
Principal Balance Principal Balance
Month of Next Number Outstanding as of Outstanding as of
Adjustment Date of Loans the Cut-off Date the Cut-off Date
- ----------------------- -------- ------------------- ------------------
December 1997 5 $ 822,446.10 0.45%
January 1998 8 1,170,659.86 0.64
February 1998 81 11,439,141.76 6.28
March 1998 187 21,912,544.04 12.03
April 1998 182 23,843,371.35 13.09
May 1998 1 73,206.45 0.04
June 1999 2 423,066.84 0.23
July 1999 6 1,302,631.11 0.72
August 1999 222 27,398,311.51 15.04
September 1999 382 45,827,541.70 25.16
October 1999 407 47,756,891.08 26.21
November 1999 1 208,250.00 0.11
----- ---------------- ------
Total: 1,484 $ 182,178,061.80 100.00%
===== ================ ======
A-3
<PAGE>
Maximum Mortgage Rates of the Mortgage Loans
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Maximum Mortgage Rate (%) of Loans the Cut-off Date the Cut-off Date
- ------------------------- -------- ------------------- ------------------
11.500-11.999 1 $ 29,720.32 0.02%
12.000-12.499 3 269,544.20 0.15
12.500-12.999 10 1,662,837.04 0.91
13.000-13.499 23 3,973,426.57 2.18
13.500-13.999 77 12,233,412.45 6.72
14.000-14.499 78 11,142,360.29 6.12
14.500-14.999 281 39,444,025.24 21.65
15.000-15.499 182 23,788,127.04 13.06
15.500-15.999 401 50,025,053.72 27.46
16.000-16.499 140 14,811,166.49 8.13
16.500-16.999 151 14,290,552.22 7.84
17.000-17.499 51 4,529,160.31 2.49
17.500-17.999 50 3,873,656.63 2.13
18.000-18.499 10 701,351.78 0.38
18.500-18.999 19 1,070,794.17 0.59
19.000-19.499 3 144,945.00 0.08
19.500-19.999 3 159,193.33 0.09
20.000-20.499 1 28,735.00 0.02
----- ---------------- ------
Total: 1,484 $ 182,178,061.80 100.00%
===== ================ ======
A-4
<PAGE>
Minimum Mortgage Rates of the Mortgage Loans
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Minimum Mortgage Rate (%) of Loans the Cut-off Date the Cut-off Date
- ------------------------- -------- ------------------- ------------------
5.500- 5.999 1 $ 29,720.32 0.02%
6.000- 6.499 3 269,544.20 0.15
6.500- 6.999 10 1,662,837.04 0.91
7.000- 7.499 23 3,973,426.57 2.18
7.500- 7.999 76 12,172,248.85 6.68
8.000- 8.499 78 11,142,360.29 6.12
8.500- 8.999 282 39,505,188.84 21.68
9.000- 9.499 182 23,788,127.04 13.06
9.500- 9.999 401 50,025,053.72 27.46
10.000-10.499 143 15,116,877.99 8.30
10.500-10.999 152 14,374,458.83 7.89
11.000-11.499 49 4,644,707.81 2.55
11.500-11.999 49 3,498,851.68 1.92
12.000-12.499 9 570,991.12 0.31
12.500-12.999 19 1,070,794.17 0.59
13.000-13.499 3 144,945.00 0.08
13.500-13.999 3 159,193.33 0.09
14.000-14.499 1 28,735.00 0.02
----- ---------------- ------
Total: 1,484 $ 182,178,061.80 100.00%
===== ================ ======
Purpose of the Mortgage Loans
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Loan Purpose of Loans the Cut-off Date the Cut-off Date
- ------------------------- -------- ------------------- ------------------
Purchase 512 $ 64,691,002.77 35.51%
Equity-out Refinance 656 75,364,943.64 41.37
Refinance 316 42,122,115.39 23.12
----- ---------------- ------
Total: 1,484 $ 182,178,061.80 100.00%
===== ================ ======
A-5
<PAGE>
<TABLE>
<CAPTION>
Loan Program of the Mortgage Loans
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Loan Program of Loans the Cut-off Date the Cut-off Date
- ------------------------------------- -------- ------------------- ------------------
<S> <C> <C> <C>
Full Documentation Program 884 $ 101,319,868.94 55.62%
Fast Trac Program 155 27,425,781.09 15.05
Stated Income Documentation Program 422 51,986,883.44 28.54
INSTA Credit Full Documentation or
INSTA Credit Fast Trac 23 1,445,528.33 0.79
----- ---------------- ------
Total: 1,484 $ 182,178,061.80 100.00%
===== ================ ======
</TABLE>
Risk Categories of the Mortgage Loans
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Risk Categories of Loans the Cut-off Date the Cut-off Date
- ------------------------- -------- ------------------- ------------------
A- 810 $ 112,442,564.78 61.72%
B 134 14,210,107.57 7.80
B+ 164 19,150,221.27 10.51
B- 108 10,632,740.68 5.84
C 204 20,694,028.84 11.36
C- 64 5,048,398.66 2.77
----- ---------------- ------
Total: 1,484 $ 182,178,061.80 100.00%
===== ================ ======
A-6
<PAGE>
Geographic Distribution of the Mortgaged Properties
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Location of Loans the Cut-off Date the Cut-off Date
- ------------------------- -------- ------------------- ------------------
Alabama 5 $ 738,470.92 0.41%
Arizona 26 2,955,598.93 1.62
Arkansas 1 31,490.05 0.02
California 397 61,604,468.25 33.82
Colorado 161 20,291,656.49 11.14
District of Columbia 1 106,090.07 0.06
Florida 68 7,907,431.22 4.34
Georgia 21 3,999,637.50 2.20
Hawaii 8 1,644,226.96 0.90
Idaho 19 1,553,833.29 0.85
Illinois 76 8,412,840.33 4.62
Indiana 7 325,490.74 0.18
Iowa 5 387,648.13 0.21
Kansas 7 389,654.59 0.21
Kentucky 4 253,995.56 0.14
Louisiana 7 347,306.18 0.19
Maine 2 87,928.18 0.05
Maryland 1 84,897.77 0.05
Massachusetts 16 1,946,057.71 1.07
Michigan 142 12,516,029.14 6.87
Minnesota 61 5,793,294.76 3.18
Missouri 7 668,065.85 0.37
Montana 11 1,221,145.40 0.67
Nebraska 3 194,229.20 0.11
Nevada 21 2,124,503.52 1.17
New Hampshire 4 469,147.54 0.26
New Jersey 9 1,499,978.78 0.82
New Mexico 8 668,685.96 0.37
New York 13 1,542,058.22 0.85
North Carolina 5 459,390.51 0.25
Ohio 18 1,156,979.69 0.64
Oklahoma 12 953,637.70 0.52
Oregon 98 12,044,616.06 6.61
Pennsylvania 29 1,872,961.33 1.03
Rhode Island 3 203,806.27 0.11
South Carolina 12 1,683,493.73 0.92
Tennessee 15 1,563,896.01 0.86
Texas 58 6,950,736.70 3.82
Utah 60 8,385,340.40 4.60
Washington 54 6,180,977.09 3.39
Wisconsin 3 283,623.31 0.16
Wyoming 6 672,741.76 0.37
----- ---------------- ------
Total: 1,484 $ 182,178,061.80 100.00%
===== ================ ======
A-7
<PAGE>
Mortgage Rates of the Mortgage Loans as of the Cut-off Date
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Mortgage Rate (%) of Loans the Cut-off Date the Cut-off Date
- ------------------------- -------- ------------------- ------------------
5.500- 5.999 1 $ 29,720.32 0.02%
6.000- 6.499 3 269,544.20 0.15
6.500- 6.999 10 1,662,837.04 0.91
7.000- 7.499 23 3,973,426.57 2.18
7.500- 7.999 76 12,172,248.85 6.68
8.000- 8.499 78 11,142,360.29 6.12
8.500- 8.999 281 39,446,981.09 21.65
9.000- 9.499 182 23,788,127.04 13.06
9.500- 9.999 402 50,083,261.47 27.49
10.000-10.499 143 15,116,877.99 8.30
10.500-10.999 152 14,374,458.83 7.89
11.000-11.499 49 4,644,707.81 2.55
11.500-11.999 49 3,498,851.68 1.92
12.000-12.499 9 570,991.12 0.31
12.500-12.999 19 1,070,794.17 0.59
13.000-13.499 3 144,945.00 0.08
13.500-13.999 3 159,193.33 0.09
14.000-14.499 1 28,735.00 0.02
----- ---------------- ------
Total: 1,484 $ 182,178,061.80 100.00%
===== ================ ======
A-8
<PAGE>
Original Loan-to-Value Ratios of the Mortgaged Properties
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Loan-to-Value Ratio (%) of Loans the Cut-off Date the Cut-off Date
- --------------------------- -------- ------------------- ------------------
Less than or equal to 25.00 7 $ 283,016.13 0.16%
25.01- 30.00 3 121,885.68 0.07
30.01- 35.00 4 204,672.81 0.11
35.01- 40.00 3 532,391.33 0.29
40.01- 45.00 12 716,666.10 0.39
45.01- 50.00 34 2,642,280.94 1.45
50.01- 55.00 30 3,002,892.54 1.65
55.01- 60.00 58 5,036,510.57 2.76
60.01- 65.00 73 6,791,522.37 3.73
65.01- 70.00 126 13,271,819.87 7.29
70.01- 75.00 264 29,721,607.03 16.31
75.01- 80.00 512 68,262,619.92 37.47
80.01- 85.00 357 51,267,821.97 28.14
85.01- 90.00 1 322,354.54 0.18
----- ---------------- ------
Total: 1,484 $ 182,178,061.80 100.00%
===== ================ ======
Mortgaged Property Types
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Property Type of Loans the Cut-off Date the Cut-off Date
- ------------------------- -------- ------------------- ------------------
Single Family 1,171 $ 140,795,091.97 77.28%
Two to Four Family 58 6,932,307.46 3.81
Condo 118 12,480,129.84 6.85
Town House 1 198,681.45 0.11
Planned Unit Development 111 19,655,974.13 10.79
Manufactured Housing 25 2,115,876.95 1.16
----- ---------------- ------
Total: 1,484 $ 182,178,061.80 100.00%
===== ================ ======
A-9
<PAGE>
Mortgaged Property Occupancy Status
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Occupancy Status of Loans the Cut-off Date the Cut-off Date
- ------------------------- -------- ------------------- ------------------
Owner Occupied 1,339 $ 169,568,012.35 93.08%
Non Owner Occupied 145 12,610,049.45 6.92
----- ---------------- ------
Total: 1,484 $ 182,178,061.80 100.00%
===== ================ ======
The occupancy status of a Mortgaged property is as represented by a mortgagor in
its loan application.
Mortgaged Rates of the Mortgage Loans at Origination
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Mortgage Rate (%) of Loans the Cut-off Date the Cut-off Date
- ------------------------- -------- ------------------- ------------------
5.500- 5.999 1 $ 29,720.32 0.02%
6.000- 6.499 3 269,544.20 0.15
6.500- 6.999 10 1,662,837.04 0.91
7.000- 7.499 23 3,973,426.57 2.18
7.500- 7.999 76 12,172,248.85 6.68
8.000- 8.499 78 11,142,360.29 6.12
8.500- 8.999 282 39,505,188.84 21.68
9.000- 9.499 182 23,788,127.04 13.06
9.500- 9.999 401 50,025,053.72 27.46
10.000-10.499 143 15,116,877.99 8.30
10.500-10.999 152 14,374,458.83 7.89
11.000-11.499 49 4,644,707.81 2.55
11.500-11.999 49 3,498,851.68 1.92
12.000-12.499 9 570,991.12 0.31
12.500-12.999 19 1,070,794.17 0.59
13.000-13.499 3 144,945.00 0.08
13.500-13.999 3 159,193.33 0.09
14.000-14.499 1 28,735.00 0.02
----- ---------------- ------
Total: 1,484 $ 182,178,061.80 100.00%
===== ================ ======
A-10
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Salomon
Brothers Mortgage Securities VII, Inc., Asset-Backed Floating Rate Certificates,
Series 1997-LB5: Class A, Class M-1, Class M-2 and Class M-3 Certificates (the
"Global Securities") will be available only in book-entry form. Investors in the
Global Securities may hold such Global Securities through any of DTC, Cedel or
Euroclear. The Global Securities will be traceable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedel and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their Relevant Depositary
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be
made on the desired value date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
TRADING BETWEEN DTC, SELLER AND CEDEL OR EUROCLEAR PARTICIPANTS. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Participant or a Euroclear Participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st
I-1
<PAGE>
of the month, payment will include interest accrued to and excluding the first
day of the following month. Payment will then be made by the Relevant Depositary
to the DTC Participant's account against delivery of the Global Securities.
After settlement has been completed, the Global Securities will be credited to
the respective clearing system and by the clearing system, in accordance with
its usual procedures, to the Cedel Participant's or Euroclear Participant's
account. The securities credit will appear the next day (European time) and the
cash debt will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(I.E., the trade fails), the Cedel or Euroclear cash debt will be valued instead
as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their account one day later. As an alternative, if
Cedel or Euroclear has extended a line of credit to them, Cedel Participants or
Euroclear Participants can elect not to preposition funds and allow that credit
line to be drawn upon to finance settlement. Under this procedure, Cedel
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges, although
the result will depend on each Cedel Participant's or Euroclear Participant's
particular cost of funds. Since the settlement is taking place during New York
business hours, DTC Participants can employ their usual procedures for crediting
Global Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist to 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of Cedel Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the
Cedel Participant or Euroclear Participant.
I-2
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons (as defined below), unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between such beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate: Exemption for
Non-U.S. Persons (Form W-8). Beneficial Holders of Global Securities that are
Non-U.S. Persons (as defined below) can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form 1001 (Holdership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8. Form
1001 may be filed by Certificate Holders or their agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year. The term "U.S.
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 (except, in the case of a
partnership, to the extent provided in regulations), 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
Persons have the authority to control all substantial decisions of the trust.
The term "Non-U.S. Person" means any person who is not a U.S. Person. This
summary does not deal with all aspects of U.S. Federal income tax withholding
that may be relevant to foreign holders of the Global Securities. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
I-3
<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"), (c) pass-through or participation
certificates or other mortgage-backed securities issued or guaranteed by private
entities ("Private Mortgage- Backed Securities") or (d) funding agreements
secured by Mortgage Loans, Agency Securities or Private Mortgage-Backed
Securities (each, a "Funding Agreement"), 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, Private Mortgage-Backed Securities or Funding
Agreements 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, and currency
or interest rate exchange agreements and other financial assets, or any
combination thereof (with respect to any series, collectively, "Cash Flow
Agreements"). 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 November 20, 1997.
<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
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
Available Information....................................................................................... 4
Reports to Certificateholders............................................................................... 4
Incorporation of Certain Information by Reference........................................................... 4
Summary of Prospectus....................................................................................... 5
The Trust Funds............................................................................................. 15
The Mortgage Loans..................................................................................... 15
Agency Securities...................................................................................... 20
Private Mortgage-Backed Securities..................................................................... 25
Funding Agreements..................................................................................... 27
Use of Proceeds............................................................................................. 28
Yield Considerations........................................................................................ 28
Maturity and Prepayment Considerations...................................................................... 29
The Depositor............................................................................................... 31
Mortgage Loan Program....................................................................................... 31
Underwriting Standards................................................................................. 31
Qualifications of Originators and Mortgage Loan Sellers................................................ 33
Representations by or on behalf of Mortgage Loan Sellers; Repurchases.................................. 33
Description of the Certificates............................................................................. 35
General................................................................................................ 35
Assignment of Trust Fund Assets........................................................................ 37
Deposits to Certificate Account........................................................................ 40
Payments on Mortgage Loans............................................................................. 41
Payments on Agency Securities and Private Mortgage-Backed Securities................................... 43
Distributions.......................................................................................... 43
Available Distribution Amount.......................................................................... 43
Interest on the Certificates........................................................................... 44
Principal of the Certificates.......................................................................... 45
Pre-Funding Account.................................................................................... 45
Allocation of Losses................................................................................... 46
Advances in Respect of Delinquencies................................................................... 46
Reports to Certificateholders.......................................................................... 47
Collection and Other Servicing Procedures.............................................................. 48
Sub-Servicing.......................................................................................... 50
Realization Upon Defaulted Mortgage Loans.............................................................. 50
Retained Interest; Servicing or Administration Compensation and Payment
of Expenses.......................................................................................... 52
Evidence as to Compliance.............................................................................. 53
Certain Matters Regarding the Master Servicer and the Depositor........................................ 53
Events of Default...................................................................................... 54
Rights Upon Event of Default........................................................................... 54
Amendment.............................................................................................. 55
Termination............................................................................................ 55
Optional Purchase of Defaulted Mortgage Loans.......................................................... 56
Duties of the Trustee.................................................................................. 56
The Trustee............................................................................................ 57
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
Description of Credit Support............................................................................... 57
Subordination.......................................................................................... 57
Letter of Credit....................................................................................... 59
Mortgage Pool Insurance Policy......................................................................... 60
Special Hazard Insurance Policy........................................................................ 62
Bankruptcy Bond........................................................................................ 63
Certificate Guarantee Insurance........................................................................ 64
Reserve Fund........................................................................................... 64
Cash Flow Agreements................................................................................... 64
Description of Primary Insurance Policies................................................................... 64
Primary Mortgage Insurance Policies.................................................................... 65
Primary Hazard Insurance Policies...................................................................... 65
FHA Insurance.......................................................................................... 66
VA Guarantees.......................................................................................... 67
Certain Legal Aspects of Mortgage Loans..................................................................... 67
General................................................................................................ 68
Single-Family Loans and Multifamily Loans.............................................................. 68
Leases and Rents....................................................................................... 69
Cooperative Loans...................................................................................... 69
Contracts.............................................................................................. 70
Foreclosure on Mortgages............................................................................... 72
Foreclosure on Cooperative Shares...................................................................... 73
Repossession with respect to Contracts................................................................. 74
Louisiana Law.......................................................................................... 75
Rights of Redemption with respect to Single-Family Properties and
Multifamily Properties............................................................................. 76
Notice of Sale; Redemption Rights with respect to Manufactured Homes................................... 76
Anti-Deficiency Legislation and Other Limitations on Lenders........................................... 76
Junior Mortgages....................................................................................... 78
Consumer Protection Laws with respect to Contracts..................................................... 78
Other Limitations...................................................................................... 79
Enforceability of Certain Provisions................................................................... 79
Subordinate Financing.................................................................................. 81
Applicability of Usury Laws............................................................................ 81
Alternative Mortgage Instruments....................................................................... 82
Formaldehyde Litigation with respect to Contracts...................................................... 83
Soldiers' and Sailors' Civil Relief Act of 1940........................................................ 83
Environmental Legislation.............................................................................. 84
Forfeitures in Drug and RICO Proceedings............................................................... 85
Negative Amortization Loans............................................................................ 85
Certain Federal Income Tax Consequences..................................................................... 85
General................................................................................................ 85
REMICs................................................................................................. 86
Grantor Trust Funds.................................................................................... 103
Partnership Trust Funds................................................................................ 114
State and Other Tax Consequences............................................................................ 120
ERISA Considerations........................................................................................ 120
Legal Investment............................................................................................ 126
Methods of Distribution..................................................................................... 127
Legal Matters............................................................................................... 128
Financial Information....................................................................................... 128
Index of Principal Definitions.............................................................................. 129
</TABLE>
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, Seven World Trade Center, New York, New York 10048. Copies of such
material can also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates
and electronically through the Commission's Electronic Data Gathering, Analysis
and Retrieval System at the Commission's Web site (http:\\www.sec.gov). 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 8200 Jones Branch
Drive, Mail Stop 319, McLean, Virginia 22102 (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.
4
<PAGE>
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, Private Mortgage-Backed
Securities or Funding Agreements, 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
Pass-Through Rate, the method for
determining the Pass-Through 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
5
<PAGE>
various pool insurance policies, letters
of credit, reserve funds or other types of
credit support, or any combination of the
foregoing, as described herein and in the
related Prospectus Supplement. See
"Description of Credit Support".
A series may include one or more classes
of Certificates entitled (i) to principal
distributions, with disproportionate,
nominal or no interest distributions, or
(ii) to interest distributions, with
disproportionate, nominal or no principal
distributions ("Strip Certificates"). In
addition, a series may include two or more
classes of Certificates which differ as to
timing, sequential order, priority of
payment, pass-through rate or amount of
distributions of principal or interest or
both, or as to which distributions of
principal or interest or both on any class
may be made upon the occurrence of
specified events, in accordance with a
schedule or formula, or on the basis of
collections from designated portions of
the Mortgage Pool, which series may
include one or more classes of
Certificates ("Accrual Certificates"), as
to which certain accrued interest will not
be distributed but rather will be added to
the principal balance thereof on each
Distribution Date, as hereinafter defined,
in the manner described in the related
Prospectus Supplement.
If so provided in the related Prospectus
Supplement, a series of Certificates may
include one or more classes of
Certificates (collectively, the "Senior
Certificates") which are senior to one or
more classes of Certificates
(collectively, the "Subordinate
Certificates") in respect of certain
distributions of principal and interest
allocations of losses on Mortgage Loans.
In addition, certain classes of Senior (or
Subordinate) Certificates may be senior to
other classes of Senior (or Subordinate)
Certificates in respect of such
distribution or losses.
With respect to each series, one or more
elections may be made to treat the related
Trust Fund or a designated portion thereof
as a "real estate mortgage investment
conduit" or "REMIC" as defined in the
Internal Revenue Code of 1986 (the
"Code"). If any such election is made with
respect to a series, one of the classes of
Certificates comprising such series will
be designated as evidencing all "residual
interests" in the related REMIC as defined
in the Code.
The Certificates will not represent an
interest in or obligation of the Depositor
or any affiliate thereof except as set
forth herein, nor will the Certificates or
any Mortgage Loans be insured or
guaranteed by any governmental agency or
instrumentality. Although payment of
principal
6
<PAGE>
and interest on Agency Securities will be
guaranteed as described herein and in the
related Prospectus Supplement by GNMA,
FNMA or FHLMC, the Certificates of any
series including Agency Securities will
not be so guaranteed.
The Trust Funds..................... Each Trust Fund will consist primarily of
(a) a pool (a "Mortgage Pool") of one- to
four-family residential mortgage loans,
multifamily residential mortgage loans,
cooperative apartment loans or
manufactured housing conditional sales
contracts and installment loan agreements
(collectively, the "Mortgage Loans"), or
beneficial interests therein, or real
property acquired upon foreclosure or
comparable conversion of such Mortgage
Loans, (b) Agency Securities, (c) Private
Mortgage-Backed Securities or (d) Funding
Agreements, 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
7
<PAGE>
index ("ARM Loans"), as described in the
related Prospectus Supplement;
(3) ARM Loans that provide for an
election, at the borrower's option, to
convert the adjustable Interest Rate to a
fixed interest rate, as described in the
related Prospectus Supplement;
(4) ARM Loans that provide for negative
amortization or accelerated amortization
resulting from delays in or limitations on
the payment adjustments necessary to
amortize fully the outstanding principal
balance of the loan at its then applicable
Interest Rate over its remaining term;
(5) Fully amortizing Mortgage Loans with a
fixed Interest Rate and level monthly
payments, or payments of interest only,
during the early years of the term,
followed by periodically increasing
monthly payments of principal and interest
for the duration of the term or for a
specified number of years, as described in
the related Prospectus Supplement;
(6) Fixed Interest Rate Mortgage Loans
providing for level payments of principal
and interest on the basis of an assumed
amortization schedule and a balloon
payment at the end of a specified term;
and
(7) Another type of Mortgage Loan
described in the related Prospectus
Supplement.
All of the Mortgage Loans will be covered
by standard hazard insurance policies
insuring against losses due to fire and
various other causes. Certain of the
Mortgage Loans will be covered by primary
mortgage insurance policies to the extent
provided herein and in the related
Prospectus Supplement and if so provided
in the related Prospectus Supplement,
certain of the Mortgage Loans will be
insured or guaranteed by the Federal
Housing Administration (the "FHA") or the
United States Department of Veterans
Affairs (the "VA"). See "Description of
Primary Insurance Policies".
B. Agency Securities.............. The Agency Securities evidenced by a
series of Certificates will consist of (i)
Mortgage Participation Certificates issued
and guaranteed as to timely payment of
interest and, unless otherwise specified
in the related Prospectus Supplement,
ultimate payment of principal by the
Federal Home Loan Mortgage Corporation
("FHLMC Certificates"), (ii) Guaranteed
Mortgage Pass-Through 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
8
<PAGE>
National Mortgage Association ("GNMA
Certificates"), (iv) stripped
mortgage-backed securities representing an
undivided interest in all or a part of
either the principal distributions (but
not the interest distributions) or the
interest distributions (but not the
principal distributions) or in some
specified portion of the principal and
interest distributions (but not all of
such distributions) on certain FHLMC, FNMA
or GNMA Certificates and, unless otherwise
specified in the Prospectus Supplement,
guaranteed to the same extent as the
underlying securities, (v) another type of
guaranteed pass-through certificate issued
or guaranteed by GNMA, FNMA or FHLMC and
described in the related Prospectus
Supplement or (vi) a combination of such
Agency Securities. All GNMA Certificates
will be backed by the full faith and
credit of the United States. No FHLMC or
FNMA Certificates will be backed, directly
or indirectly, by the full faith and
credit of the United States.
The Agency Securities may consist of
pass-through securities issued under
FHLMC's Cash or Guarantor Program, the
GNMA I Program, the GNMA II Program or
another program specified in the
Prospectus Supplement. The payment
characteristics of the Mortgage Loans
underlying the Agency Securities will be
described in the related Prospectus
Supplement.
C. Private Mortgage-Backed
Securities.................. Private Mortgage-Backed Securities may
include (a) mortgage participations or
pass-through certificates representing
beneficial interests in certain mortgage
loans or (b) collateralized mortgage
obligations secured by such mortgage
loans. Although individual mortgage loans
underlying a Private Mortgage-Backed
Security may be insured or guaranteed by
the United States or an agency or
instrumentality thereof, they need not be,
and the Private Mortgage-Backed Securities
themselves will not be so insured or
guaranteed. See "The Trust Funds-Private
Mortgage-Backed Securities" herein.
D. Funding Agreements............. Funding Agreements are obligations of a
Finance Company (as defined herein) which
are secured by Mortgage Loans, Agency
Securities or Private Mortgage- Backed
Securities. See "The Trust Funds-Funding
Agreements" herein.
Pre-Funding Account................. If so specified in the related Prospectus
Supplement, a portion of the proceeds of
the sale of one or more Classes of
Certificates of a series may be deposited
in a segregated account to be applied to
acquire additional Mortgage Loans from the
Mortgage Loan Seller, subject to the
limitations set forth herein under
"Description of the
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Certificates--Pre-Funding Account." Monies
on deposit in the Pre-Funding Account and
not applied to acquire such additional
Mortgage Loans within the time set forth
in the related Agreement (as defined
herein) may be treated as principal and
applied in the manner described in the
related Prospectus Supplement.
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 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"), and
currency or interest rate exchange
agreements and other financial assets, or
any combination thereof (with respect to
any series, collectively, "Cash Flow
Agreements"). 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
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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 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
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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)(4)(A) of the
Code and interest income therefrom will be
treated as "interest on obligations
secured by mortgages on real property" for
purposes of Section 856(c)(3)(B) of the
Code. In addition, REMIC Regular
Certificates will be "obligation[s]. .
.which. . .[are] principally secured by an
interest in real property" within the
meaning of Section 860G(a)(3)(C) of the
Code. Moreover, if 95% or more of the
assets and the income of the Trust Fund
qualify for any of the foregoing
treatments, the REMIC Regular Certificates
and (with the exception of Section
860G(a)(3)(C) of the Code) REMIC Residual
Certificates will qualify for the
foregoing treatments in their entirety.
REMIC Residual Certificates generally will
be treated as representing an interest in
qualifying assets and income to the same
extent described above for institutions
subject to Sections 7701(a)(19)(C),
856(c)(4)(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.
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<PAGE>
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)(4)(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)(4)(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 Section
7701(a)(19)(C) of the Code, but will
represent qualifying assets and income
under Sections 856(c)(4)(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
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<PAGE>
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 bank collective investment
funds and insurance company general and
separate accounts in which such plans,
accounts, annuities or arrangements are
invested, that are subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), or Section 4975 of the
Code (each, a "Plan") 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 (the
"Exemption"), 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,
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 Trust Funds,
provided that certain conditions are
satisfied. If the conditions of the
Exemption will not be satisfied, the
Certificates may not be acquired by or on
behalf of, or with the assets of, a Plan
unless the party acquiring such
Certificates provides the Depositor, the
Trustee and the Master Servicer with an
opinion of counsel or a certification in
lieu of such opinion of counsel as
described herein. See "ERISA
Considerations" herein.
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<PAGE>
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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<PAGE>
(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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<PAGE>
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, Private
Mortgage-Backed Securities or Funding Agreements 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, Private Mortgage-Backed Securities or Funding
Agreements, (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, FHA-insured loans or VA- guaranteed loans as specified in
the related Prospectus Supplement.
MULTIFAMILY LOANS
The Multifamily Loans will be evidenced by Mortgage Notes secured by
Mortgages creating a first lien on the Multifamily Properties. The Multifamily
Properties will consist of rental apartments or projects (including apartment
buildings owned by cooperative housing cooperatives) containing five or more
dwelling units. Multifamily Properties may include high-rise, mid-rise and
garden
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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
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
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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 one- to 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 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
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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 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
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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 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.
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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 privately-managed 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.
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
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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 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
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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 Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
UNDERLYING LOANS
The mortgage loans underlying the Private Mortgage-Backed Securities may
consist of fixed rate, level payment, fully amortizing loans or graduated
payment mortgage loans, buy-down loans, adjustable rate mortgage loans, or loans
having balloon or other special payment features. Such Mortgage Loans may be
secured by single family property, multifamily property, manufactured homes or
by an assignment of the proprietary lease or occupancy agreement relating to a
specific dwelling within a Cooperative and the related shares issued by such
Cooperative. Except as otherwise specified in the related Prospectus Supplement,
(i) no mortgage loan will have had a Loan-to-Value Ratio at origination in
excess of 95%, (ii) each single family loan secured by a mortgaged property
having a loan-to-value ratio in excess of 80% at origination will be covered by
a primary mortgage insurance policy, (iii) each mortgage loan will have had an
original term to stated maturity of not less than 5 years and not more than 40
years, (iv) no mortgage loan that was more than 30 days delinquent as to the
payment of principal or interest will have been eligible for inclusion in the
assets under the related PMBS Agreement, (v) each mortgage loan (other than a
cooperative loan) will be required to be covered by a standard hazard insurance
policy (which may be a blanket policy) and (vi) each mortgage loan (other than a
cooperative loan or a Contract secured by a manufactured home) will be covered
by a title insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE MORTGAGE-BACKED SECURITIES
Credit support in the form of reserve funds, subordination of other private
mortgage-backed securities issued under the PMBS Agreement, letters of credit,
insurance policies or other types of credit support may be provided with respect
to the mortgage loans underlying the Private Mortgage-Backed Securities or with
respect to the Private Mortgage-Backed Securities themselves.
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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
Mortgage-Backed 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.
FUNDING AGREEMENTS
If specified in the Prospectus Supplement for a series, the Depositor may
enter into a funding agreement with a limited-purpose subsidiary or affiliate of
a Mortgage Loan Seller (a "Finance Company") pursuant to which (i) the Depositor
will lend the net proceeds of the sale of the Certificates to such Finance
Company, (ii) the Finance Company will pledge Trust Fund Assets owned by it to
secure the loan from the Depositor, and (iii) the Depositor will assign the
Funding Agreement, as so secured, to the Trust Fund for a series (a "Funding
Agreement"). No Finance Company will be authorized to engage in any business
activities other than the financing and sale of Trust Fund Assets.
Pursuant to a Funding Agreement (i) the Depositor will lend a Finance
Company the proceeds from the sale of a series of Certificates and such Finance
Company will pledge to the Depositor as security therefor Trust Fund Assets
having an aggregate unpaid principal balance as of any date of determination
equal to at least the amount of the loan, and (ii) the Finance Company will
agree to repay such loan by causing payments on the Trust Fund Assets to be made
to the Trustee as assignee of the Depositor in such amounts as are necessary
(together with payments from the related Reserve Fund or other funds or
accounts) to pay accrued interest on such loan and to amortize the entire
principal amount of such loan. A Finance Company is not obligated to provide
additional collateral to secure the loan pursuant to a Funding Agreement
subsequent to the issuance of the Certificates of the series by the Trust Fund.
Unless the Depositor, the Master Servicer or other entity designated in the
Prospectus Supplement exercises its option to terminate the Trust Fund and
retire the Certificates of a series, or a Finance Company defaults under its
Funding Agreement, such Finance Company's loan may not be prepaid other than as
a result of prepayments on the pledged Trust Fund Assets. If the Finance
Company, nevertheless, were to attempt to prepay its loan, the loan would not be
deemed prepaid in full unless the Finance Company paid the Depositor an amount
sufficient to enable the Depositor to purchase other Trust Fund Assets
comparable in yield and maturity to the Finance Company's Trust Fund Assets
pledged under the Funding Agreement. The Trustee then could either (i) purchase
such other Trust Fund Assets and substitute them for the Trust Fund Assets
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pledged by the Finance Company, to the extent that such purchase and
substitution did not adversely affect the tax treatment of the related series,
or (ii) deposit the amount of the Finance Company's prepayment in the
Certificate Account.
In the event of a default under a Funding Agreement, the Trustee will have
recourse to the related Finance Company for the benefit of the holders of the
Certificates, including the right to foreclose upon the Trust Fund Assets
securing that Funding Agreement. The participating Finance Companies will be
limited-purpose finance entities and, therefore, it is unlikely that a
defaulting Finance Company will have any significant assets except those pledged
to the Trust Fund for the series and those that secure other mortgage-backed
securities and collateralized mortgage obligations. The Trustee has no recourse
to assets pledged to secure other securities except to the limited extent that
funds generated by such assets exceed the amount required to pay those
securities and are released from the lien securing such other securities and
returned to a Finance Company. For that reason, prospective purchasers of
Certificates should make their investment decisions on the basis that the
Certificates of a series have rights solely with respect to the assets
transferred to the Trust Fund for that series of Certificates.
In the event of a default under a Funding Agreement and the sale by the
Trustee of the Trust Fund Assets securing the obligations of the Finance Company
under the Funding Agreement, the Trustee may distribute principal in an amount
equal to the unpaid principal balance of the Trust Fund Assets so liquidated
ratably among all classes of Certificates within the series, or in such other
manner as may be specified in the related Prospectus Supplement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor to the purchase of Trust Fund Assets or will be used by
the Depositor for general corporate purposes. The Depositor expects that it will
make additional sales of securities similar to the Certificates from time to
time, but the timing and amount of offerings of Certificates will depend on a
number of factors, including the volume of Trust Fund Assets acquired by the
Depositor, prevailing interest rates, availability of funds and general market
conditions.
YIELD CONSIDERATIONS
Unless otherwise provided in the related Prospectus Supplement, each
monthly interest payment on a Trust Fund Asset is calculated as one-twelfth of
the applicable Interest Rate multiplied by the unpaid principal balance thereof.
Interest to be distributed on each Distribution Date to the holders of the
various classes of Certificates (other than certain classes of Strip
Certificates) of each series will be similarly calculated for the applicable
period, as one-twelfth of the applicable Pass-Through Rate multiplied by the
outstanding Certificate Principal Balance thereof, except as provided below with
respect to prepayments. In the case of Strip Certificates with no or, in certain
cases, a nominal Certificate Principal Balance, such distributions of interest
will be in an amount (as to any Distribution Date, "Stripped Interest")
described in the related Prospectus Supplement.
The effective yield to Certificateholders will be lower than the yield
otherwise produced by the applicable Pass-Through Rate (or, as to a Strip
Certificate, the distributions of Stripped Interest thereon) and purchase price,
because although interest accrued on each Trust Fund Asset during each month is
due and payable on the first day of the following month (unless otherwise
provided in the related Prospectus Supplement), the distribution of interest on
the Certificates will not be made until the Distribution Date occurring in the
month following the month of accrual of interest in the case of Mortgage Loans,
and in later months in the case of Agency Securities, Private
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Mortgage-Backed Securities or Funding Agreements 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,
Private Mortgage-Backed Securities and Funding Agreements may be prepaid without
penalty in full or in part at any time. If so provided in the related Prospectus
Supplement, certain of the Mortgage Loans may contain provisions prohibiting
prepayment for a specified period after the origination date (a "Lockout
Period"), prohibiting partial prepayments entirely or prohibiting prepayment in
full or in part without a prepayment penalty.
The prepayment experience on the mortgage loans underlying or comprising
the Trust Fund Assets in a Trust Fund will affect the weighted average life of
the related series of Certificates. Weighted average life refers to the average
amount of time that will elapse from the date of issuance of a security until
each dollar of principal of such security will be repaid to the investor. The
weighted average life of the Certificates of a series will be influenced by the
rate at which principal on the mortgage loans underlying or comprising the Trust
Fund Assets included in the related Trust Fund is paid, which payments may be in
the form of scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes prepayments, in whole or in part,
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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,
mortgage loans underlying Private Mortgage-Backed Securities or mortgage loans
secured by Funding Agreements 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. In addition, if the
applicable Agreement for a series of Certificates provides for a Pre-Funding
Account or other means of funding the transfer of additional Mortgage Loans to
the related Trust Fund, as described under "Description of the
Certificates--Pre-Funding Account" herein, and the Trust Fund is unable to
acquire such additional Mortgage Loans within any applicable time limit, the
amounts set aside for such purpose may be applied as principal payments on one
or more classes of Certificates of such series.
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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 income
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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
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evidencing an interest in such Mortgage Loan. Unless otherwise specified in the
related Prospectus Supplement, in the event of a breach of any such
representation or warranty, the Mortgage Loan Seller will be obligated to cure
such breach or repurchase or replace the affected Mortgage Loan as described
below. Since the representations and warranties made by or on behalf of such
Mortgage Loan Seller do not address events that may occur following the sale of
a Mortgage Loan by such Mortgage Loan Seller, it will have a cure, repurchase or
substitution obligation in connection with a breach of such a representation and
warranty only if the relevant event that causes such breach occurs prior to the
date of such sale. A Mortgage Loan Seller would have no such obligations if the
relevant event that causes such breach occurs after the date of such sale.
However, the Depositor will not include any Mortgage Loan in the Trust Fund for
any series of Certificates if anything has come to the Depositor's attention
that would cause it to believe that the representations and warranties made in
respect of such Mortgage Loan will not be accurate and complete in all material
respects as of the date of initial issuance of the related series of
Certificates.
The only representations and warranties to be made for the benefit of
holders of Certificates in respect of any Mortgage Loan relating to the period
commencing on the date of sale of such Mortgage Loan by the Mortgage Loan Seller
to or on behalf of the Depositor will be certain limited representations of the
Depositor and of the Master Servicer described 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
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provided in the related Prospectus Supplement, each Trust Fund will consist of
(i) such Trust Fund Assets, or interests therein, exclusive of any portion of
interest payments (the "Retained Interest") on a Trust Fund Asset retained by
the Depositor or any previous owner thereof, as from time to time are subject to
the Agreement; (ii) such assets as from time to time are identified as deposited
in the Certificate Account or any other account maintained for the benefit of
the Certificateholders; (iii) with respect to Trust Funds that include Mortgage
Loans, (a) property acquired on behalf of Certificateholders by foreclosure,
deed in lieu of foreclosure or repossession and any revenues received thereon;
(b) the rights of the Depositor under any hazard insurance policies, FHA
insurance policies, VA guarantees and primary mortgage insurance policies, as
described under "Description of Primary Insurance Policies"; (c) the rights of
the Depositor under the agreement or agreements pursuant to which it acquired
the Mortgage Loans in such Trust Fund; and (d) the rights of the Trustee in any
cash advance reserve fund or surety bond as described under "Advances in respect
of Delinquencies" and (iv) any letter of credit, mortgage pool insurance policy,
special hazard insurance policy, bankruptcy bond, reserve fund or other type of
credit support provided with respect to the related series, as described under
"Description of Credit Support". Subject to any limitations described in the
related Prospectus Supplement, the Certificates will be transferable and
exchangeable for like Certificates of the same class and series in authorized
denominations at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. No service charge will be made for any
registration of exchange or transfer of Certificates, but the Depositor or the
Trustee or any agent thereof may require payment of a sum sufficient to cover
any tax or other governmental charge. (Section 5.02)
Each series of Certificates may consist of either (i) a single class of
Certificates evidencing the entire beneficial ownership of the related Trust
Fund; (ii) two or more classes of Certificates evidencing the entire beneficial
ownership of the related Trust Fund, one or more classes of which ("Senior
Certificates") will be senior in right of payment to one or more of the other
classes ("Subordinate Certificates") to the extent described in the related
Prospectus Supplement (any such series, a "Senior/Subordinate Series"); or (iii)
other types of classes of Certificates, as described in the related Prospectus
Supplement. A series may include one or more classes of Certificates entitled to
(i) principal distributions, with disproportionate, nominal or no interest
distributions or (ii) interest distributions, with disproportionate, nominal or
no principal distributions ("Strip Certificates"). If so specified in the
related Prospectus Supplement, partial or full protection against certain
Mortgage Loan defaults and losses may be provided to a series of Certificates or
to one or more classes of Certificates in such series in the form of
subordination of one or more other classes of Certificates in such series or by
one or more other types of credit support, such as a letter of credit, reserve
fund, insurance policy or a combination thereof (any such coverage, "Credit
Support"). See "Description of Credit Support".
Each class of Certificates (other than certain Strip Certificates) will
have a Certificate Principal Balance and, unless otherwise provided in the
related Prospectus Supplement, will be entitled to payments of interest thereon
based on a specified Pass-Through Rate. See "Interest on the Certificates" and
"Principal of the Certificates" below. The specific percentage ownership
interest of each class of Certificates and the minimum denomination for each
Certificate will be set forth in the related Prospectus Supplement.
As to each series, one or more elections may be made to treat the related
Trust Fund or designated portions thereof as a "real estate mortgage investment
conduit" or "REMIC" as defined in the Internal Revenue Code of 1986 (the
"Code"). The related Prospectus Supplement will specify whether a REMIC election
is to be made and the terms and conditions applicable to the making of a REMIC
election, as well as any material federal income tax consequences to
Certificateholders not otherwise described herein. If such an election is made
with respect to a series, one of the classes of Certificates comprising such
series will be designated as evidencing all "residual interests" in the related
REMIC as defined under the Code. All other classes of Certificates in such a
series will constitute "regular interests" in the related REMIC as defined in
the Code. As to each
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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
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a Trust Fund for which a REMIC election is to be made, such substitution is
effected within two years of the date of initial issuance of the Certificates
(plus permissible extensions) or (ii) with respect to a Trust Fund for which no
REMIC election is to be made, such substitution is effected within 120 days of
the date of initial issuance of the Certificates. Except as otherwise provided
in the related Prospectus Supplement, any Substitute Mortgage Loan will, on the
date of substitution, (i) have an outstanding principal balance, after deduction
of all scheduled payments due in the month of substitution, not in excess of
(and not more than $10,000 less than) the outstanding principal balance, after
deduction of all unpaid scheduled payments due as of the date of substitution,
of the Deleted Mortgage Loan, (ii) have an Interest Rate not less than (and not
more than 1% greater than) the Interest Rate of the Deleted Mortgage Loan, (iii)
have a Net Interest Rate equal to the Net 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
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to the Certificateholders or the Trustee for any breach of the above described
representations. (Section 2.03)
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Certificateholders, the Master Servicer will be obligated to cure the breach in
all material respects. (Section 2.05)
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.
ASSIGNMENT OF FUNDING AGREEMENTS
The Depositor will cause Funding Agreements to be registered in the name of
the Trustee. The Trustee (or the custodian) will have possession of any Funding
Agreement. Unless otherwise specified in the related Prospectus Supplement, the
Trustee will be in possession of or be assignee of record of any underlying
assets for Funding Agreements. See "The Trust Funds--Funding Agreements" herein.
Each Funding Agreement 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 underlying asset secured by the
Funding Agreements.
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").
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(Section 3.12) A Certificate Account may be maintained as an interest bearing or
a non-interest bearing account, or the funds held therein may be invested
pending each succeeding Distribution Date in Permitted Investments. Unless
otherwise provided in the related Prospectus Supplement, any interest or other
income earned on funds in the Certificate Account will be paid to the Master
Servicer or the Trustee or their designee as additional compensation. The
Certificate Account may be maintained with an institution that is an affiliate
of the Master Servicer or the Trustee, provided that such institution meets the
standards set forth above. If permitted by the Rating Agency or Agencies and so
specified in the related Prospectus Supplement, a Certificate Account may
contain funds relating to more than one series of pass-through certificates and
may, if applicable, contain other funds respecting payments on mortgage loans
belonging to the Master Servicer or serviced or master serviced by it on behalf
of others. (Article I; Section 3.10)
Each Sub-Servicer servicing a Mortgage Loan pursuant to a Sub-Servicing
Agreement will establish and maintain one or more separate accounts which may be
interest bearing and which will comply with the standards with respect to
Certificate Accounts set forth above or such other standards as may be
acceptable to the Master Servicer (collectively, the "Sub-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
Sub-Servicer, 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";
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(vi) if applicable, all amounts required to be transferred to the
Certificate Account from a reserve fund, as described below under
"Description of Credit Support--Reserve Funds";
(vii) any Buydown Funds (and, if applicable, investment earnings
thereon) required to be deposited in the Certificate Account as described
below;
(viii) all proceeds of any Mortgage Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any Sub-Servicer or any
Mortgage Loan Seller as described under "Mortgage Loan
Program-Representations by or on behalf of Mortgage Loan Sellers;
Repurchases" or "--Assignment of Trust Fund Assets" above, exclusive of the
Retained Interest, if any, in respect of such Mortgage Loan, and all
proceeds of any Mortgage Loan repurchased as described under "Termination"
below;
(ix) all payments required to be deposited in the Certificate Account
with respect to any deductible clause in any blanket insurance policy
described under "Description of Primary Insurance Policies--Primary Hazard
Insurance Policies"; and
(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
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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)
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 Mortgage-Backed 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:
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(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),
(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 Pass-Through 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".
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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. 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.
PRE-FUNDING ACCOUNT
If so specified in the related Prospectus Supplement, the related Agreement
may provide for the transfer by the Mortgage Loan Seller of additional Mortgage
Loans to the related Trust Fund after the Closing Date. Such additional Mortgage
Loans will be required to conform to the requirements set forth in the related
Agreement or other agreement providing for such transfer, and will generally be
underwritten to the same standards as the Mortgage Loans initially included in
the Trust Fund. As specified in the related Prospectus Supplement, such transfer
may be funded by the establishment of a Pre-Funding Account (a "Pre-Funding
Account"). If a Pre-Funding Account is established, all or a portion of the
proceeds of the sale of one or more classes of Certificates of the related
series will be deposited in such account to be released as additional Mortgage
Loans are transferred. A Pre-Funding Account will be required to be maintained
as an eligible account under the related agreement, all amounts therein will be
required to be invested in Permitted Investments and the amount held therein
shall at no time exceed 25% of the aggregate outstanding principal balance of
the Certificates. The related Agreement or other agreement providing for the
transfer of additional Mortgage Loans will generally provide that all such
transfers must be made within 3 months after the Closing Date, and that amounts
set aside to fund such transfers (whether in a Pre-Funding Account or otherwise)
and not so applied within the required period of time will be deemed to be
principal prepayments and applied in the manner set forth in such Prospectus
Supplement.
The Depositor will be required to provide data regarding the additional
Mortgage Loans to the Rating Agencies and the certificate insurer, if any,
sufficiently in advance of the scheduled transfer to permit review by such
parties. Transfer of the additional Mortgage Loans will be further conditioned
upon confirmation by the Rating Agencies that the addition of such Mortgage
Loans to the Trust Fund will not result in the downgrading of the Certificates
or, in the case of a series guaranteed or supported by a certificate insurer,
will not adversely affect the capital requirements
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of such certificate insurer. Finally, a legal opinion to the effect that the
conditions to the transfer of the additional Mortgage Loans have been satisfied.
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 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
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(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;
(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;
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(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 Pass-Through 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
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 180 days. (Section 3.07)
In certain instances in which a Mortgage Loan is in default (or if default
is reasonably foreseeable), and if determined by the Master Servicer to be in
the best interests of the related
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Certificateholders, the Master Servicer may permit certain modifications of the
Mortgage Loan rather than proceeding with foreclosure. In making such
determination, the estimated Realized Loss that might result if such Mortgage
Loan were liquidated would be taken into account. Such modifications may have
the effect of reducing the Mortgage Rate, forgiving the payment of principal or
interest or extending the final maturity date of the Mortgage Loan. Any such
modified Mortgage Loan may remain in the related Trust Fund, and the reduction
in collections resulting from such modification may result in reduced
distributions of interest (or other amounts) on, or may extend the final
maturity of, one or more classes of the related Certificates.
In connection with any significant partial prepayment of a Mortgage Loan,
the Master Servicer, to the extent not inconsistent with the terms of the
Mortgage Note and local law and practice, may permit the Mortgage Loan to be
reamortized such that the monthly payment is recalculated as an amount that will
fully amortize the remaining principal amount thereof by the original maturity
date based on the original Mortgage Rate, provided that such reamortization
shall not be permitted if it would constitute a modification of the Mortgage
Loan for federal income tax purposes.
In any case in which property securing a Mortgage Loan, other than an ARM
Loan (as described below) or 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. The original Mortgagor may
be released from liability on a Mortgage Loan if the Master Servicer shall have
determined in good faith that such release will not adversely affect the
collectability of the Mortgage Loan. An ARM Loan may be assumed if such ARM Loan
is by its terms assumable and if, in the reasonable judgment of the Master
Servicer, the proposed transferee of the related Mortgaged Property establishes
its ability to repay the loan and the security for such ARM Loan would not be
impaired by the assumption. If a Mortgagor transfers the Mortgaged Property
subject to an ARM Loan without consent, such ARM Loan may be declared due and
payable. 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
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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, 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 "Sub- Servicing 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
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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 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
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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 Loans-Foreclosure 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.
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
Sub-Servicers 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
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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 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
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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 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
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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 (or such other amount as
may be provided in the related Prospectus Supplement) 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 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
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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 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)
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer has the option to purchase from the Trust Fund any Mortgage Loan 90
days or more delinquent at a purchase price generally equal to the outstanding
principal balance of such Mortgage Loan as of the date of purchase, plus all
accrued and unpaid interest on such principal balance computed at the Interest
Rate.
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)
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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 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.
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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.
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
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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 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.
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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 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
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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 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.
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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 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
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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 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".
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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 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.
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include certain other agreements, such
as interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements designed to reduce the
effects of interest rate or currency exchange rate fluctuations on the Trust
Fund Assets on one or more classes of Certificates. The principal terms of any
such guaranteed investment contract or other agreement (any such agreement a
"Cash Flow Agreement"), and the identity of the Cash Flow Agreement obligor,
will be described in the Prospectus Supplement for a series of Offered
Certificates.
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.
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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 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
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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.
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
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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 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 in part 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".
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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 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.
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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 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 tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant- stockholder's pro rata
share of the Cooperative's payments for its blanket mortgage, real property
taxes, maintenance expenses and other capital or ordinary expenses. An ownership
interest in a
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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
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of Cooperative shares. See "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 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.
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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 re-register a Manufactured Home;
accordingly, the Depositor must surrender possession if it holds the certificate
of title to such Manufactured Home or, in the case of Manufactured Homes
registered in states that provide for notation of lien, the Depositor would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the Depositor would have the
opportunity to re- perfect its security interest in the Manufactured Home in the
state of relocation. In states that do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under each related Agreement, the Master Servicer will be obligated to
take such steps, at the Master Servicer's expense, as are necessary to maintain
perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Depositor will obtain the representation of the Mortgage Loan Seller that it has
no knowledge of any such liens with respect to any Manufactured Home securing a
Contract. However, such liens could arise at any time during the term of a
Contract. No notice will be given to the Trustee or Certificateholders in the
event such a lien arises.
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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 and in the mortgaged
property. It is regulated by statutes and rules and subject throughout to the
court's equitable powers. Generally, a mortgagor is bound by the terms of the
mortgage note and the mortgage as made and cannot be relieved from its own
default. However, since a foreclosure action is equitable in nature and is
addressed to a court of equity, the court may relieve a mortgagor of a default
and deny the mortgagee foreclosure on proof that the mortgagor's default was
neither willful nor in bad faith and that the mortgagee's action was such as to
establish a waiver, or fraud, bad faith, oppressive or unconscionable conduct as
to warrant a court of equity to refuse affirmative relief to the mortgagee.
Under certain circumstances a court of equity may relieve the mortgagor from an
entirely technical default where such default was not willful.
A foreclosure action or sale pursuant to a power of sale is subject to most
of the delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring up to several years to complete. Moreover,
recent judicial decisions suggest that a non-collusive, regularly conducted
foreclosure sale or sale pursuant to a power of sale may be challenged as a
fraudulent conveyance, regardless of the parties' intent, if a court determines
that the sale was for less than fair consideration and such sale occurred while
the mortgagor was insolvent and within one year (or within the state statute of
limitations if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law) of the filing of bankruptcy. Similarly, a suit
against the debtor on the mortgage note may take several years.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is a public sale.
However, because of the difficulty potential third party purchasers at the sale
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee for an amount equal to the principal amount of the mortgage or deed of
trust plus accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burdens of ownership, including obtaining
casualty insurance, paying taxes and making such repairs at its own expense as
are necessary to render the property suitable for sale. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss may be reduced by the receipt of
any mortgage insurance proceeds.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or
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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 in a
senior mortgage, 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.
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.
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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 tenant-stockholders.
Under the laws applicable in most states, foreclosure on the Cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to those shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner.
Whether a foreclosure sale has been conducted in a "commercially reasonable"
manner will depend on the facts in each case. In determining commercial
reasonableness, a court will look to the notice given the debtor and the method,
manner, time, place and terms of the foreclosure. Generally, a sale conducted
according to the usual practice of banks selling similar collateral will be
considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti- Deficiency Legislation and
Other Limitations on Lenders" below.
REPOSSESSION WITH RESPECT TO CONTRACTS
Repossession of manufactured housing is governed by state law. A few states
have enacted legislation that requires that the debtor be given an opportunity
to cure its default (typically 30 days to bring the account current) before
repossession can commence. So long as a manufactured home has not become so
attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such 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 court- issued 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
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must then be repossessed in accordance with that order. Whether the method
employed is self- help, voluntary repossession or judicial repossession,
the repossession can be accomplished either by an actual physical removal
of the manufactured home to a secure location for refurbishment and resale
or by removing the occupants and their belongings from the manufactured
home and maintaining possession of the manufactured home on the location
where the occupants were residing. Various factors may affect whether the
manufactured home is physically removed or left on location, such as the
nature and term of the lease of the site on which it is located and the
condition of the unit. In many cases, leaving the manufactured home on
location is preferable, in the event that the home is already set up,
because the expenses of retaking and redelivery will be saved. However, in
those cases where the home is left on location, expenses for site rentals
will usually be incurred.
(ii) Once repossession has been achieved, preparation for the
subsequent disposition of the manufactured home can commence. The
disposition may be by public or private sale provided the method, manner,
time, place and terms of the sale are commercially reasonable.
(iii) Sale proceeds are to be applied first to repossession expenses
(expenses incurred in retaking, storage, preparing for sale to include
refurbishing costs and selling) and then to satisfaction of the
indebtedness. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale do not cover the full
amount of the indebtedness, the remainder may be sought from the debtor in
the form of a deficiency judgment in those states that do not prohibit or
limit such judgments. The deficiency judgment is a personal judgment
against the debtor for the shortfall. Occasionally, after resale of a
manufactured home and payment of all expenses and indebtedness, there is a
surplus of funds. In that case, the UCC requires the party suing for the
deficiency judgment to remit the surplus to the debtor. Because the
defaulting owner of a manufactured home generally has very little capital
or income available following repossession, a deficiency judgment may not
be sought in many cases or, if obtained, will be settled at a significant
discount in light of the defaulting owner's strained financial condition.
LOUISIANA LAW
Any contract secured by a manufactured home located in Louisiana will be
governed by Louisiana law rather than Article 9 of the UCC. Louisiana laws
provide similar mechanisms for perfection and enforcement of security interests
in manufactured housing used as collateral for an installment sale contract or
installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently affixed
to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records 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
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lender obtained an appraisal of the manufactured home prior to the sale and the
property was sold for at least two-thirds of its appraised value.
RIGHTS OF REDEMPTION WITH RESPECT TO SINGLE-FAMILY PROPERTIES AND MULTIFAMILY
PROPERTIES
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and certain foreclosed junior lienors are
given a statutory period in which to redeem the property from the foreclosure
sale. The right of redemption should be distinguished from the equity of
redemption, which is a nonstatutory right that must be exercised prior to the
foreclosure sale. In some states, redemption may occur only upon payment of the
entire principal balance of the loan, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The right of redemption would defeat the title of any purchaser
acquired at a public sale. Consequently, the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership and maintenance of the property until the redemption period has
expired. In some states, there is no right to redeem property after a trustee's
sale under a deed of trust.
NOTICE OF SALE; REDEMPTION RIGHTS WITH RESPECT TO MANUFACTURED HOMES
While state laws do not usually require notice to be given to debtors prior
to repossession, many states do require delivery of a notice of default and of
the debtor's right to cure defaults before repossession. The law in most states
also requires that the debtor be given notice of sale prior to the resale of the
home so that the owner may redeem at or before resale. In addition, the sale
must comply with the requirements of the UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against 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
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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 Bankruptcy Reform Act of 1994 established the National Bankruptcy
Review Commission ("NBRC") for purposes of analyzing the nation's bankruptcy
laws and making recommendations to Congress for legislative changes to the
bankruptcy laws. A similar commission was involved in developing the Bankruptcy
Code. The NBRC delivered its report to Congress, the President of the United
States and the Chief Justice of the Supreme Court on October 20, 1997. Among
other topics, high leverage loans were addressed in the NBRC's report. Despite
certain ambiguities, the NBRC's report appears to recommend that Congress amend
Bankruptcy Code section 1322(b)(2) by treating a claim secured only by a junior
security interest in a debtor's principal residence as protected only to the
extent that the claim was secured when the security interest was made if the
value of the property securing the junior security interest is less than such
amount. However, the express language of the report implies that a claim secured
only by a junior security interest in a debtor's principal residence may not be
modified to reduce such claim below the appraised value of the property at the
time the security interest was made. A strong dissent by certain members of the
NBRC recommends that the protections of Bankruptcy Code section 1322(b)(2) be
extended to creditors principally secured by the debtor's principal residence.
Additionally, the NBRC's report recommends that a creditor's secured claim in
real property should be determined by the property's fair market value, less
hypothetical costs of sale. The standard advocated by this recommendation would
not apply to mortgages on the primary residence of a Chapter 11 or 13 debtor who
retains the residence if such mortgages are protected from modification such as
those senior mortgages not subject to modification pursuant to Bankruptcy Code
Sections 1322(b)(2) and 1123(b)(5). The final NBRC report may ultimately lead to
substantive changes to the existing Bankruptcy Code, such as reducing
outstanding loan balances to the appraised value of a debtor's principal
residence at the time the security interest in the property was taken, which
could affect the Mortgage Loans and the enforcement of rights therein.
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.
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
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(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 Servicer as
additional servicing compensation, and any inability to collect these amounts
will not affect payments to Certificateholders.
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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 to certain exceptions, preempts
state constitutional, statutory and case law that prohibits the enforcement of
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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 applicable state law. In
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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. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a
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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 applicable state law. All of the ARM
Loans that were originated by federally chartered lenders or that were
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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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ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility. What constitutes sufficient participation in the management of a
property securing a loan or the business of a borrower to render the exemption
unavailable to a lender has been a matter of interpretation by the courts.
CERCLA has been interpreted to impose liability on a secured party, even absent
foreclosure, where the party participated in the financial management of the
borrower's business to a degree indicating a capacity to influence waste
disposal decisions. However, court interpretations of the secured creditor
exemption have been inconsistent. In addition, when lenders foreclose and
thereupon become owners of collateral property, courts are inconsistent as to
whether such ownership renders the secured creditor exemption unavailable. Other
federal and state laws in certain circumstances may impose liability on a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property on which
contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. Such cleanup costs may be substantial. It is possible that
such cleanup costs could become a liability of a Trust Fund and reduce the
amounts otherwise distributable to the holders of the related series of
Certificates. Moreover, certain federal statutes and certain states by statute
impose a lien for any cleanup costs incurred by such state on the property that
is the subject of such cleanup costs (an "environmental lien"). All subsequent
liens on such property generally are subordinated to such an environmental lien
and, in some states, even prior recorded liens are subordinated to environmental
liens. In the latter states, the security interest of the Trust in a related
parcel of real property that is subject to such an environmental lien could be
adversely affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged property
prior to the origination of the mortgage loan or prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Accordingly, the Master Servicer has
not made and will not make such evaluations prior to the origination of the
Mortgage Loans. Neither the Master Servicer nor any replacement Servicer will be
required by any Agreement to undertake any such evaluations prior to foreclosure
or accepting a deed-in-lieu of foreclosure. The Master Servicer does not make
any representations or warranties or assume any liability with respect to the
absence or effect of contaminants on any related real property or any casualty
resulting from the presence or effect of contaminants. However, the Master
Servicer will not be obligated to foreclose on related real property or accept a
deed-in-lieu of foreclosure if it knows or reasonably believes that there are
material contaminated conditions on such property. A failure so to foreclose may
reduce the amounts otherwise available to Certificateholders of the related
Series.
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FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property", including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchase with the proceeds of, illegal drug or RICO
activities.
NEGATIVE AMORTIZATION LOANS
A recent case decided by the United States Court of Appeals, First Circuit,
held that state restrictions on the compounding of interest are not preempted by
the provisions of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("DIDMC") and as a result, a mortgage loan that provided for
negative amortization violated New Hampshire's requirement that first mortgage
loans provide for computation of interest on a simple interest basis. The
holding was limited to the effect of DIDMC on state laws regarding the
compounding of interest and the court did not address the applicability of the
Alternative Mortgage Transaction Parity Act of 1982, which authorizes lender to
make residential mortgage loans that provide for negative amortization. The
First Circuit's decision is binding authority only on Federal District Courts in
Maine, New Hampshire, Massachusetts, Rhode Island and Puerto Rico.
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.
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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, Private
Mortgage-Backed Securities and Funding Agreements.
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.
REMICS
CLASSIFICATION OF REMICS
Upon the issuance of each series of REMIC Certificates, Thacher Proffitt &
Wood, counsel to the Depositor, 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)(4)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
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
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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)(4)(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 considered part of the Mortgage Loans for purposes of Section
856(c)(4)(A) of the Code. Furthermore, foreclosure property will qualify as
"real estate assets" under Section 856(c)(4)(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, counsel to the Depositor,
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)(4)(A) of the Code, and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on 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.
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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 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
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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
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
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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 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
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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 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.
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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 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
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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.
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," 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.
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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.
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
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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.
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
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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 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 alternative
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.
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NONECONOMIC REMIC RESIDUAL CERTIFICATES
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If such transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on such "noneconomic" REMIC Residual Certificate. The REMIC Regulations
provide that a REMIC Residual Certificate is noneconomic unless, based on the
Prepayment Assumption and on any required or permitted clean up calls, or
required liquidation provided for in the REMIC's organizational documents, (1)
the present value of the expected future distributions (discounted using the
"applicable Federal rate" for obligations whose term ends on the close of the
last quarter in which excess inclusions are expected to accrue with respect to
the REMIC Residual Certificate, which rate is computed and published monthly by
the IRS) on the REMIC Residual Certificate equals at least the present value of
the expected tax on the anticipated excess inclusions, and (2) the transferor
reasonably expects that the transferee will receive distributions with respect
to the REMIC Residual Certificate at or after the time the taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy the accrued
taxes. Accordingly, all transfers of REMIC Residual Certificates that may
constitute noneconomic residual interests will be subject to certain
restrictions under the terms of the related Pooling and Servicing Agreement that
are intended to reduce the possibility of any such transfer being disregarded.
Such restrictions will require each party to a transfer to provide an affidavit
that no purpose of such transfer is to impede the assessment or collection of
tax, including certain representations as to the financial condition of the
prospective transferee, as to which the transferor is also required to make a
reasonable investigation to determine such transferee's historic payment of its
debts and ability to continue to pay its debts as they come due in the future.
Prior to purchasing a REMIC Residual Certificate, prospective purchasers should
consider the possibility that a purported transfer of such REMIC Residual
Certificate by such a purchaser to another purchaser at some future date may be
disregarded in accordance with the above-described rules which would result in
the retention of tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
MARK-TO-MARKET RULES
On December 24, 1996, the IRS released final 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 REMIC Residual Certificate issued after January 4, 1995 is not
treated as a security and thus may not be marked to market. Prospective
purchasers of a REMIC Residual Certificate should consult their tax advisors
regarding the possible application of the mark-to-market requirement to REMIC
Residual Certificates.
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POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS
Fees and expenses of a REMIC generally will be allocated to the holders of
the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of such fees and expenses should be allocated to
the holders of the related REMIC Regular Certificates. Unless otherwise stated
in the related Prospectus Supplement, such fees and expenses will be allocated
to holders of the related REMIC Residual Certificates in their entirety and not
to the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate two percent of a taxpayer's adjusted gross
income. In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by REMIC Certificateholders that
are subject to the limitations of either Section 67 or Section 68 of the Code
may be substantial. Furthermore, in determining the alternative minimum taxable
income of such a holder of a REMIC Certificate that is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should carefully
consult with their own tax advisors prior to making an investment in such
Certificates.
SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the selling Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Certificate. The adjusted basis of
a REMIC Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to such REMIC Regular Certificate (including
original issue 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.
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
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a maturity comparable to that of the Certificate based on the application of the
Prepayment Assumption to such Certificate, which rate is computed and published
monthly by the IRS), determined as of the date of purchase of such REMIC Regular
Certificate, over (ii) the amount of ordinary income actually includible in the
seller's income prior to such sale. In addition, gain recognized on the sale of
a REMIC Regular Certificate by a seller who purchased such REMIC Regular
Certificate at a market discount will be taxable as ordinary income in an amount
not exceeding the portion of such discount that accrued during the period such
REMIC Certificate was held by such holder, reduced by any market discount
included in income under the rules described above under "--Taxation of Owners
of REMIC Regular Certificates--Market Discount" and "--Premium."
REMIC Certificates will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six 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
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of the contributed property (a "Contributions Tax"). Each Pooling and Servicing
Agreement will include provisions designed to prevent the acceptance of any
contributions that would be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property," determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer or Trustee in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling and Servicing Agreement and in respect of
compliance with applicable laws and regulations. Any such tax not borne by the
Master Servicer or the Trustee will be charged against the related Trust Fund
resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) of the total anticipated excess inclusions
with respect to such REMIC Residual Certificate for periods after the transfer
and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be 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
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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 taxable
years beginning after December 31, 1997, notwithstanding the preceding two
sentences, in the case of a REMIC Residual Certificate held by an "electing
large partnership," all interests in such partnership shall be treated as held
by disqualified organizations (without regard to whether the record holders of
the partnership furnish statements described in the preceding sentence) and the
amount that would be subject to tax under the second preceding sentence is
excluded from the gross income of the partnership (in lieu of a deduction in the
amount of such tax generally allowed to pass-through entities).
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
TERMINATION
A REMIC will terminate immediately after the Distribution Date following
receipt by the REMIC of the final payment in respect of the Mortgage Loans or
upon a sale of the REMIC's assets following the adoption by the REMIC of a plan
of complete liquidation. The last distribution on a REMIC Regular Certificate
will be treated as a payment in retirement of a debt instrument. In the case of
a REMIC Residual Certificate, if the last distribution on such REMIC Residual
Certificate is less than the REMIC Residual Certificateholder's adjusted basis
in such Certificate, such REMIC Residual Certificateholder should (but may not)
be treated as realizing a loss equal to the amount of such difference, and such
loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
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
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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.
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
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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 (except, in the case of a partnership, to the
extent provided in regulations), 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. To the extent
prescribed in regulations by the Secretary of the Treasury, which regulations
have not yet been issued, a trust which was in existence on August 20, 1996
(other than a trust treated as owned by the grantor under subpart E of part I of
subchapter J of chapter 1 of the Code), and which was treated as a United States
person on August 19, 1996, may elect to continue to be treated as a United
States person notwithstanding the previous sentence. It is possible that the IRS
may assert that the foregoing tax exemption should not apply with respect to a
REMIC Regular Certificate held by a REMIC Residual Certificateholder that owns
directly or indirectly a 10% or greater interest in the REMIC Residual
Certificates. If the holder does not qualify for exemption, distributions of
interest, including distributions in respect of accrued original issue discount,
to such holder may be subject to a tax rate of 30%, subject to reduction under
any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States persons will
be prohibited under the related Pooling and Servicing Agreement.
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
With respect to each series of Grantor Trust Certificates, Thacher Proffitt
& Wood, counsel to the Depositor, 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
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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)(4)(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.
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)(4)(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)
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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 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.
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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.
To the extent the Grantor Trust Fractional Interest Certificates represent
an interest in any pool of debt instruments the yield on which may be affected
by reason of prepayments, for taxable years beginning after August 5, 1997,
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. It is unclear whether those provisions would be
applicable to the Grantor Trust Fractional Interest Certificates that do not
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, or for taxable years beginning prior to
August 5, 1997, whether use of a reasonable prepayment assumption may be
required or permitted without reliance on these rules. It is also uncertain, if
a prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any holder, at the
time of purchase of the Grantor Trust Fractional Interest Certificate by that
holder. Certificateholders are advised to consult their own tax advisors
concerning reporting original issue discount with respect to Grantor Trust
Fractional Interest Certificates and, in particular, whether a prepayment
assumption should be used in reporting original issue discount.
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
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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.
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 1.1286-1, 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 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
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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. Section
1272(a)(6) of the Code requires that a prepayment assumption be made in
computing yield with respect to any pool of debt instruments the yield on which
may be affected by reason of prepayments. Accordingly, for certificates backed
by such pools, it is intended to base information reports and returns to the IRS
and Certificateholders for taxable years beginning after August 5, 1997, on the
use of a prepayment assumption. However, in the case of certificates not backed
by such pools or with respect to taxable years beginning prior to August 5,
1997, it currently is not intended to base such reports and returns on the use
of a prepayment assumption. 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
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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 (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
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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.
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
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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 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.
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. To the extent the Grantor Trust Strip
Certificates represent an interest in any pool of debt instruments the yield on
which may be affected by reason of prepayments, those provisions will apply to
the Grantor Trust Strip Certificates for taxable years beginning after August 5,
1997. It is unclear whether those provisions would be applicable to the Grantor
Trust Strip Certificates that do not represent an interest in any such pool or
for taxable years beginning prior to August 5, 1997, or whether use of a
prepayment assumption may be required or permitted in the absence of such
provisions. 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. 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
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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 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. Regulations were promulgated on June 14, 1996, regarding
contingent payment debt instruments (the "Contingent Payment Regulations"), but
it appears that Grantor Trust Strip Certificates, to the extent subject to
Section 1272(a)(6) of the Code as described above due to their similarity to
other mortgage-backed securities (such as REMIC regular interests and debt
instruments subject to Section 1272(a)(6) of the Code) that are expressly
excepted from the application of the Contingent Payment Regulations, are or may
be excepted from such regulations. Like the OID Regulations, the Contingent
Payment 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.
If the contingent payment rules under the Contingent Payment 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 Contingent Payment
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
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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.
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 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.
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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, counsel to the Depositor, 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 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)(4)(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).
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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, counsel to the Depositor, 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.
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
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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 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.
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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 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
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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, 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
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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
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
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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.
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
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), impose certain fiduciary and prohibited transaction
restrictions on employee pension and welfare benefit plans subject to ERISA
("ERISA Plans") and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans and bank
collective investment funds and insurance company general and separate accounts
in which such ERISA Plans are invested. Section 4975 of the Code imposes
essentially the same prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code and on Individual
Retirement Accounts described in Section 408 of the Code (collectively, "Tax
Favored Plans"). ERISA and the Code prohibit a broad range of transactions
involving assets of ERISA Plans and Tax Favored Plans (collectively, "Plans")
and persons who have certain
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specified relationships to such Plans ("Parties in Interest" within the meaning
of ERISA or "Disqualified Persons" within the meaning of the Code, collectively
"Parties in Interest"), unless a statutory or administrative exemption is
available with respect to any such transaction.
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), 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 the
Certificates without regard to the ERISA considerations described below, subject
to the provisions of other applicable federal, state and local 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.
Certain transactions involving the Trust Fund might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan that
purchases a Certificate, if the Mortgage Loans, Agency Securities, Private
Mortgage-Backed Securities, Funding Agreements and other assets included in a
Trust Fund are deemed to be assets of the Plan. The U.S. Department of Labor
(the "DOL") has promulgated regulations at 29 C.F.R. ss.2510.3-101 (the "DOL
Regulations") defining the term "Plan Assets" for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code. Under the DOL Regulations,
generally, when a Plan acquires an "equity interest" in another entity (such as
a Trust Fund), the underlying assets of that entity may be considered to be Plan
Assets unless certain exceptions apply. Exceptions contained in the DOL
Regulations provide that a Plan's assets will not include an undivided interest
in each asset of an entity in which such Plan makes an equity investment if: (1)
the entity is an operating company; (2) the equity investment made by the Plan
is either a "publicly-offered security" that is "widely held," both as defined
in the DOL Regulations, or a security issued by an investment company registered
under the Investment Company Act of 1940, as amended; or (3) Benefit Plan
Investors do not own 25% or more in value of any class of equity securities
issued by the entity. For this purpose, "Benefit Plan Investors" include Plans,
as well as any "employee benefit plan" (as defined in Section 3(3) or ERISA)
which is not subject to Title I of ERISA, such as governmental plans (as defined
in Section 3(32) of ERISA) and church plans (as defined in Section 3(33) of
ERISA) which have not made an election under Section 410(d) of the Code, and any
entity whose underlying assets include Plan Assets by reason of a Plan's
investment in the entity. Because of the factual nature of certain of the rules
set forth in the DOL Regulations, Plan Assets either may be deemed to include an
interest in the assets of an entity (such as a Trust Fund) or may be deemed
merely to include an interest in the instrument evidencing such equity interest
(such as a Certificate). Neither Plans nor such entities should acquire or hold
Certificates in reliance upon the availability of any exception under the DOL
Regulations.
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. Any person who has discretionary authority or control with
respect to the management or disposition of Plan Assets and any person who
provides investment advice with respect to such Plan Assets for a fee is a
fiduciary of the investing Plan. If the Mortgage Loans, Agency Securities,
Private Mortgage-Backed Securities, Funding Agreements and other assets included
in a Trust Fund were to constitute Plan Assets, then any party exercising
management or discretionary control with respect to those Plan Assets may be
deemed to be a Plan "fiduciary," and thus subject to the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to any investing Plan. In
addition, the acquisition or holding of Certificates by or on behalf of a Plan
or with Plan Assets, as well as the operation of the Trust Fund, may constitute
or involve a prohibited transaction under ERISA and the Code unless a statutory
or administrative exemption is available.
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The DOL issued an individual exemption, Prohibited Transaction Exemption
89-89 (54 Fed. Reg. 42581, Oct. 17, 1989) (the "Exemption"), 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, certain
transactions, among others, relating to the servicing and operation of mortgage
pools and the initial purchase, holding and subsequent resale 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
the Exemption to apply. First, the acquisition of Certificates by a Plan or with
Plan Assets 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 that are
not subordinated to the rights and interests evidenced by other Certificates of
the same trust. Third, the Certificates at the time of acquisition by a Plan or
with Plan Assets must be rated in one of the three highest generic rating
categories by Standard & Poor's Structured Ratings Group, Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors Service, L.P.
(collectively, the "Exemption Rating Agencies"). 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 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 as of the date of initial issuance 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 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
Agreement and reimbursement of such person's reasonable expenses in connection
therewith. Sixth, the Exemption states that the investing Plan or Plan Asset
investor must be an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the Commission under the Securities Act of 1933, as amended.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) Certificates evidencing
interests in such other investment pools must have been rated in one of the
three highest generic categories of one of the Exemption Rating Agencies for at
least one year prior to the acquisition of Certificates by or on behalf of a
Plan or with Plan Assets; and (iii) Certificates evidencing interests in such
other investment pools must have been purchased by investors other than Plans
for at least one year prior to any acquisition of Certificates by or on behalf
of a Plan or with Plan Assets.
A fiduciary of a Plan or any person investing Plan Assets to purchase a
Certificate must make its own determination that the 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(a)
of ERISA, and 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 or transfer of Certificates in the initial
issuance of such Certificates or the direct or indirect acquisition or
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disposition in the secondary market of Certificates by a Plan or with Plan
Assets or the continued holdings of Certificates acquired by a Plan or with Plan
Assets pursuant to either of the foregoing. 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 excise taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code, in
connection with (1) the direct or indirect sale, exchange or transfer of
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 or with Plan Assets and (3) the continued holding of
Certificates acquired by a Plan or with Plan Assets pursuant to either of the
foregoing.
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 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
Trust Fund. 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 Trust Fund, 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 excise 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 with respect to an investing Plan by
virtue of providing services to the Plan (or by virtue of having certain
specified relationships to such a person) solely as a result of the Plan's
ownership of Certificates.
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Exemption, which will extend exemptive relief to certain mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. With respect to the Certificates, the
amendment will generally allow Mortgage Loans supporting payments to
Certificateholders, and having a value equal to no more than 25% of the total
principal amount of the Certificates being offered by a Trust Fund, to be
transferred to such Trust Fund within a period no longer than 90 days or three
months following the Closing Date ("Pre-Funding Period") instead of requiring
that all such Mortgage Loans be either identified or transferred on or before
the Closing Date. In general, the relief applies to the purchase, sale and
holding of Certificates which otherwise qualify for the Exemption, provided that
the following general conditions are met:
(1) the ratio of the amount allocated to the Pre-Funding Account to the
total principal amount of the Certificates being offered ("Pre-Funding
Limit") must be less than or equal to: (i) 40% for transactions occurring
on or after January 1, 1992 but prior to May 23, 1997 and (ii) 25% for
transactions occurring on or after May 23, 1997;
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(2) all additional Mortgage Loans transferred to the related Trust
Fund after the Closing Date ("Subsequent Mortgage Loans") must meet the
same terms and conditions for eligibility as the original Mortgage Loans
used to create the Trust Fund, which terms and conditions have been
approved by one of the Exemption Rating Agencies;
(3) the transfer of such Subsequent Mortgage Loans to the Trust Fund
during the Pre-Funding Period must not result in the Certificates to be
covered by the Exemptions receiving a lower credit rating from an Exemption
Rating Agency upon termination of the Pre-Funding Period than the rating
that was obtained at the time of the initial issuance of the Certificates
by the Trust Fund;
(4) solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "Average Interest Rate") for all of
the Mortgage Loans and Subsequent Mortgage Loans in the Trust Fund at the
end of the Pre-Funding Period must not be more than 100 basis points lower
than the Average Interest Rate for the Mortgage Loans which were
transferred to the Trust Fund on the Closing Date;
(5) for transactions occurring on or after May 23, 1997, either:
(i) the characteristics of the Subsequent Mortgage Loans must be
monitored by an insurer or other credit support provider which is
independent of the Depositor; or
(ii) an independent accountant retained by the Depositor must
provide the Depositor with a letter (with copies provided to the Exemption
Rating Agency rating the Certificates, the Underwriter and the Trustee)
stating whether or not the characteristics of the Subsequent Mortgage Loans
conform to the characteristics described in the Prospectus or Prospectus
Supplement and/or Agreement. In preparing such letter, the independent
accountant must use the same type of procedures as were applicable to the
Mortgage Loans which were transferred to the Trust Fund as of the Closing
Date;
(6) the Pre-Funding Period must end no later than three months or 90
days after the Closing Date or earlier in certain circumstances if the
Pre-Funding Accounts falls below the minimum level specified in the
Agreement or an event of default occurs;
(7) amounts transferred to any Pre-Funding Accounts and/or capitalized
interest account used in connection with the pre-funding may be invested
only in investments which are permitted by the Exemption Rating Agencies
rating the Certificates and must:
(i) be direct obligations of, or obligations fully guaranteed as
to timely payment of principal and interest by, the United States or any
agency or instrumentality thereof (provided that such obligations are
backed by the full faith and credit of the United States); or
(ii) have been rated (or the obligor has been rated) in one of the
three highest generic rating categories by one of the Exemption Rating
Agencies ("ERISA Permitted Investments");
(8) the Prospectus or Prospectus Supplement must describe the duration
of the Pre-Funding Period;
(9) the Trustee (or any agent with which the Trustee contracts to
provide trust services) must be a substantial financial institution or
trust company experienced in trust activities and familiar with its duties,
responsibilities and liabilities with ERISA. The Trustee, as legal owner of
the Trust Fund, must enforce all the rights created in favor of
Certificateholders of the Trust Fund, including employee benefit plans
subject to ERISA.
In addition to the Exemption, a fiduciary or other Plan Asset investor
should consider the availability of certain class exemptions granted by the DOL
("Class Exemptions"), which may provide relief from certain of the prohibited
transaction provisions of ERISA and the related excise tax provisions of the
Code, including Prohibited Transaction Class Exemption ("PTCE") 83-1, regarding
transactions involving mortgage pool investment trusts; PTCE 84-14, regarding
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transactions effected by a "qualified professional asset manager"; PTCE 90-1,
regarding transactions by insurance company pooled separate accounts; PTCE
91-38, regarding investments by bank collective investment funds; PTCE 95-60,
regarding transactions by insurance company general accounts; and PTCE 96-23,
regarding transactions effected by an "in-house asset manager."
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by the Code, for transactions involving an insurance company
general account. Pursuant to Section 401(c) of ERISA, the DOL is required to
issue final regulations ("401(c) Regulations") no later than December 31, 1997
which are to provide guidance for the purpose of determining, in cases where
insurance policies supported by an insurer's general account are issued to or
for the benefit of a Plan on or before December 31, 1998, which general account
assets constitute Plan Assets. Section 401(c) of ERISA generally provides that,
until the date which is 18 months after the 401(c) Regulations become final, no
person shall be subject to liability under Part 4 of Title I of ERISA and
Section 4975 of the Code on the basis of a claim that the assets of an insurance
company general account constitute Plan Assets, unless (i) as otherwise provided
by the Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal or
state criminal law. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued to
Plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) Regulations may be treated as Plan Assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan Assets of any Plan invested in
such separate account. Insurance companies contemplating the investment of
general account assets in the Certificates should consult with their legal
counsel with respect to the applicability of Section 401(c) of ERISA, including
the general account's ability to continue to hold the Certificates after the
date which is 18 months after the date the 401(c) Regulations become final.
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not apply to the purchase, sale or
holding of certain Certificates, such as Subordinate Certificates, Residual
Certificates or any Certificates which are not rated in one of the three highest
generic rating categories by one of the Exemption Rating Agencies, transfers of
such Certificates to a Plan, to a trustee or other person acting on behalf of
any Plan or to any other person investing Plan Assets to effect such acquisition
will not be registered by the Trustee unless the transferee provides the
Depositor, the Trustee and the Master Servicer with an opinion of counsel
satisfactory to the Depositor, the Trustee and the Master Servicer, which
opinion will not be at the expense of the Depositor, the Trustee or the Master
Servicer, that the purchase of such Certificates by or on behalf of such Plan is
permissible under applicable law, will not constitute or result in any
non-exempt prohibited transaction under ERISA or Section 4975 of the Code and
will not subject the Depositor, the Trustee or the Master Servicer to any
obligation in addition to those undertaken in the related Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Certificates by
or on behalf of such Plan, trustee or other person acting on behalf of any Plan
or other person investing Plan Assets to effect such acquisition is permissible
under applicable law, will not constitute or result in any non-exempt prohibited
transaction under ERISA or Section 4975 of the Code and will not subject the
Depositor, the Trustee or the Master Servicer to any obligation in addition to
those undertaken in the Agreement, and the following conditions have been
satisfied: (i) the transferee is an insurance company and the source of funds
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used to purchase such Certificates is an "insurance company general account" (as
such term is defined in PTCE 95-60); (ii) the conditions set forth in PTCE 95-60
have been satisfied; and (iii) there is no Plan with respect to which the amount
of such general account's reserves and liabilities for contracts held by or on
behalf of such Plan and all other Plans maintained by the same employer (or any
"affiliate" thereof, as defined in PTCE 95-60) or by the same employee
organization exceed 10% of the total of all reserves and liabilities of such
general account (as determined under PTCE 95-60) as of the date of the
acquisition of such Certificates.
An opinion of counsel or certification will not be required with respect to
the purchase of DTC registered Certificates. Any purchaser of a DTC registered
Certificate will be deemed to have represented by such purchase that either (a)
such purchaser is not a Plan and is not purchasing such Certificates on behalf
of, or with Plan Assets of, any Plan or (b) the purchase of any such Certificate
by or on behalf of, or with Plan Assets of, any Plan is permissible under
applicable law, will not result in any non-exempt prohibited transaction under
ERISA or Section 4975 of the Code and will not subject the Depositor, the
Trustee or the Master Servicer to any obligation in addition to those undertaken
in the related Agreement and the following conditions have been satisfied: (i)
the transferee is an insurance company and the source of funds used to purchase
such Certificates is an "insurance company general account" (as such term is
defined in PTCE 95-60); (ii) the conditions set forth in PTCE 95-60 have been
satisfied; and (iii) there is not a Plan with respect to which the amount of
such general account's reserves and liabilities for contracts held by or on
behalf of such Plan and all other Plans maintained by the same employer (or any
"affiliate" thereof, as defined in PTCE 95-60) or by the same employee
organization exceed 10% of the total of all reserves and liabilities of such
general account (as determined under PTCE 95-60) as of the date of the
acquisition of such Certificates.
There can be no assurance that any DOL exemption will apply with respect to
any particular Plan that acquires the Certificates or, even if all the
conditions specified therein were satisfied, that any such exemption would apply
to transactions involving the related Trust Fund. Prospective Plan investors
should consult with their legal counsel concerning the impact of ERISA and the
Code and the potential consequences to their specific circumstances prior to
making an investment in the Certificates. Neither the Depositor, the Trustee,
the Master Servicer nor any of their respective affiliates will make any
representation to the effect that the Certificates satisfy all legal
requirements with respect to the investment therein by Plans generally or any
particular Plan or to the effect that the Certificates are an appropriate
investment for Plans generally or any particular Plan.
BEFORE PURCHASING A CERTIFICATE, A FIDUCIARY OF A PLAN OR OTHER PLAN ASSET
INVESTOR SHOULD ITSELF CONFIRM THAT (A) ALL THE SPECIFIC AND GENERAL CONDITIONS
SET FORTH IN THE EXEMPTION, ONE OF THE CLASS EXEMPTIONS OR SECTION 401(C) OF
ERISA WILL BE SATISFIED AND (B) IN THE CASE OF A CERTIFICATE PURCHASED UNDER THE
EXEMPTION, THE CERTIFICATE CONSTITUTES A "CERTIFICATE" FOR PURPOSES OF THE
EXEMPTION. IN ADDITION TO MAKING ITS OWN DETERMINATION AS TO THE AVAILABILITY OF
THE EXEMPTIVE RELIEF PROVIDED IN THE EXEMPTION, ONE OF THE CLASS EXEMPTIONS OR
SECTION 410(C) OF ERISA, THE PLAN FIDUCIARY SHOULD CONSIDER ITS GENERAL
FIDUCIARY OBLIGATIONS UNDER ERISA IN DETERMINING WHETHER TO PURCHASE A
CERTIFICATE ON BEHALF OF A PLAN.
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
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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 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
127
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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.
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.
128
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
- ---- ----------------
401(c) Regulations ..........................................................125
Accrual Certificates ..........................................................6
Accrued Certificate Interest .................................................44
Agency Securities .............................................................1
Agreement ....................................................................35
ARM Loans .................................................................8, 15
Available Distribution Amount ................................................43
Average Interest Rate .......................................................124
Bankruptcy Amount ............................................................57
BIF ..........................................................................33
Buydown Account ..............................................................42
Buydown Funds ................................................................18
Buydown Mortgage Loans .......................................................17
Buydown Period ...............................................................18
Cash Flow Agreement ...................................................1, 10, 64
Certificate ..................................................................35
Certificate Account ......................................................10, 40
Certificate Guarantee Insurance ..............................................64
Certificate Principal Balance .............................................5, 45
Certificates ..................................................................5
Charter Act ..................................................................24
Class Exemptions ............................................................124
Closing Date .................................................................88
Code ..................................................................6, 36, 85
Commission ....................................................................4
Committee Report .............................................................88
Contingent Payment Regulations ..............................................112
Contracts ....................................................................15
Contributions Tax ...........................................................100
Cooperative ...............................................................7, 15
Cooperative Loans .........................................................7, 15
Cooperative Notes ............................................................20
Cooperative Unit .............................................................15
Credit Support ...........................................................10, 36
Cut-off Date .................................................................11
Defaulted Mortgage Amount ....................................................57
Deficient Valuation ..........................................................46
Deleted Mortgage Loan ........................................................38
Depositor ....................................................................15
Determination Date ...........................................................43
Distribution Date ............................................................10
DOL .........................................................................121
DOL Regulations .............................................................121
DTC ..........................................................................35
Due Period ...................................................................44
ERISA ...................................................................14, 120
ERISA Permitted Investments .................................................124
ERISA Plans .................................................................120
Excluded Plan ...............................................................123
Exemption ...............................................................14, 122
Exemption Rating Agencies ...................................................122
FDIC .........................................................................33
FHA ...........................................................................8
FHA Loans ....................................................................20
FHLMC .........................................................................1
FHLMC Act ....................................................................22
FHLMC Certificates ............................................................8
129
<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
- ---- ----------------
Finance Company ..............................................................27
FNMA ..........................................................................1
FNMA Certificates .............................................................8
FTC Rule .....................................................................79
Funding Agreement .........................................................1, 27
Garn-St Germain Act ..........................................................79
GNMA ..........................................................................1
GNMA Certificates .............................................................9
GNMA Issuer ..................................................................20
Grantor Trust Certificates ...............................................12, 86
Grantor Trust Fractional Interest Certificate ...............................103
Grantor Trust Fractional Interest Certificates ...............................13
Grantor Trust Fund ...........................................................86
Grantor Trust Strip Certificate .............................................104
Grantor Trust Strip Certificates .............................................13
Guaranty Agreement ...........................................................20
High Cost Loans ..............................................................78
Holder-in-Due-Course .........................................................79
Housing Act ..................................................................20
HUD ..........................................................................66
Insurance Instruments ........................................................48
Insurance Proceeds ...........................................................41
Interest Rate .............................................................7, 15
IRS ..........................................................................88
Issue Premium ................................................................94
Letter of Credit Bank ........................................................59
Liquidated Loan ..............................................................46
Liquidation Proceeds .........................................................41
Loan-to-Value Ratio ..........................................................16
Lockout Period ...............................................................29
Manufacturer's Invoice Price .................................................17
Mark-to-Market Regulations ...................................................97
Master Servicer ...............................................................5
Mortgage Loan Seller .........................................................15
Mortgage Loans .............................................................1, 7
Mortgage Notes ...............................................................19
Mortgage Pool .................................................................7
Mortgaged Properties ......................................................7, 15
Mortgages ....................................................................19
Multifamily Loans ............................................................15
Multifamily Properties .......................................................15
Net Interest Rate ............................................................37
Nonrecoverable Advance .......................................................47
OID Regulations ..............................................................86
Originator ...................................................................15
Parties in Interest .........................................................121
Pass-Through Rate .............................................................5
Permitted Investments ........................................................40
Plan .........................................................................14
Plan Assets .................................................................121
Plans .......................................................................120
PMBS Agreement ...............................................................25
PMBS Issuer ..................................................................26
PMBS Servicer ................................................................26
PMBS Trustee .................................................................25
Pre-Funding Account ..........................................................45
130
<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
- ---- ----------------
Pre-Funding Limit ...........................................................123
Pre-Funding Period ..........................................................123
Prepayment Assumption ...................................................88, 107
Prepayment Period ............................................................29
Private Mortgage-Backed Securities ............................................1
Prohibited Transactions Tax ..................................................99
PTCE ........................................................................124
PTCE 83-1 ...................................................................125
Purchase Price ...............................................................34
Rating Agency ................................................................37
Record Date ..................................................................43
Related Proceeds .............................................................47
Relief Act ...................................................................83
REMIC ........................................................................86
REMIC Certificates ...........................................................86
REMIC Provisions .............................................................86
REMIC Regular Certificates ...............................................12, 86
REMIC Regulations ............................................................86
REMIC Residual Certificates ..............................................12, 86
Reserve Fund .................................................................64
Reserve Funds ................................................................58
Retained Interest ............................................................36
SAIF .........................................................................33
Sales of Grantor Trust Certificates .........................................106
Salomon .................................................................14, 127
Scheduled Principal Balance ..................................................58
Senior Certificates ....................................................5, 6, 36
Senior Liens .................................................................16
Senior Percentage ............................................................45
Senior/Subordinate Series ....................................................36
Single Family Loans ..........................................................15
Single Family Properties .....................................................15
SMMEA ...................................................................13, 126
Special Hazard Amount ........................................................57
Special Hazard Realized Losses ...............................................57
Special Hazard Subordination Amount ..........................................57
Stated Principal Balance .....................................................35
Strip Certificates ........................................................6, 36
Stripped Interest ............................................................28
Sub-Servicer .................................................................50
Sub-Servicing Account ........................................................41
Sub-Servicing Agreement ......................................................50
Subordinate Certificates ...............................................5, 6, 36
Subsequent Mortgage Loans ...................................................124
Substitute Mortgage Loan .....................................................38
Tax Favored Plans ...........................................................120
Tiered REMICs ................................................................87
Title V ......................................................................81
Title VIII ...................................................................82
Trust Fund .................................................................1, 5
Trust Fund Asset ..............................................................5
Trustee .......................................................................5
Underwriter .................................................................122
Unrecovered Senior Portion ...................................................58
VA Loans .....................................................................20
Window Period Loans ..........................................................80
131
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO
NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH SOLICITATION.
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Summary of Prospectus Supplement..................................... S-4
Risk Factors......................................................... S-23
The Mortgage Pool.................................................... S-25
Yield on the Certificates............................................ S-32
Description of the Certificates...................................... S-39
Pooling and Servicing Agreement...................................... S-55
Certain Federal Income Tax Consequences.............................. S-63
Method of Distribution............................................... S-65
Secondary Market..................................................... S-66
Legal Opinions....................................................... S-66
Ratings.............................................................. S-66
Legal Investment..................................................... S-67
ERISA Considerations................................................. S-67
Appendix A........................................................... A-1
Annex I.............................................................. I-1
PROSPECTUS
Summary of Prospectus................................................ 5
The Trust Funds...................................................... 15
Use of Proceeds...................................................... 28
Yield Considerations................................................. 28
Maturity and Prepayment Considerations............................... 29
The Depositor........................................................ 31
Mortgage Loan Program................................................ 31
Description of the Certificates...................................... 35
Description of Credit Support........................................ 57
Description of Primary Insurance Policies............................ 64
Certain Legal Aspects of Mortgage Loans.............................. 67
Certain Federal Income Tax Consequences.............................. 85
State and Other Tax Consequences..................................... 120
ERISA Considerations................................................. 120
Legal Investment..................................................... 126
Methods of Distribution.............................................. 127
Legal Matters........................................................ 128
Financial Information................................................ 128
Index of Principal Definitions....................................... 129
UNTIL FEBRUARY 18, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
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 ALLOTMENTS OR SUBSCRIPTION.
$177,623,300 (APPROXIMATE)
ASSET-BACKED FLOATING RATE
CERTIFICATES, SERIES 1997-LB5
SALOMON BROTHERS MORTGAGE
SECURITIES VII, INC.
DEPOSITOR
LONG BEACH MORTGAGE COMPANY
ORIGINATOR AND MASTER SERVICER
-----------------------------
SALOMON BROTHERS INC
-------------------------------------------------------------
Prospectus Supplement
Dated November 20, 1997
