Prospectus Supplement dated December 18, 1998 (To Prospectus dated November 13,
1998)
$688,079,000 (APPROXIMATE)
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1998-NC7
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
NEW CENTURY MORTGAGE CORPORATION
MASTER SERVICER
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-8 IN THIS
PROSPECTUS SUPPLEMENT AND PAGE 16 IN THE PROSPECTUS.
The certificates will represent interests only in a trust consisting primarily
of mortgage loans and will not represent ownership interests in or obligations
of any other entity.
This prospectus supplement may be used to offer and sell the certificates
offered hereby only if accompanied by the prospectus.
THE TRUST --
o will consist primarily of a pool of one- to four-family fixed-rate,
first lien and second lien residential mortgage loans; and
o will be represented by twelve classes of certificates, seven of which
are offered hereby.
THE OFFERED CERTIFICATES --
o will represent senior interests in the trust and will receive
distributions from the assets of the trust;
o will have credit enhancement in the forms of (i) a certificate
insurance policy issued by Financial Security Assurance Inc. and (ii)
overcollateralization; and
o will receive monthly distributions commencing on January 25, 1999.
Salomon Smith Barney Inc. (the "Underwriter") will offer the Class A-1
Certificates, the Class A-2 Certificates, the Class A-3 Certificates, the Class
A-4 Certificates, the Class A-5 Certificates, the Class A-6 Certificates and the
Class A-7 Certificates (collectively, the "Offered Certificates") from time to
time to the public in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. The proceeds to the Depositor from the sale
of such certificates, before deducting expenses, will be approximately 99.50% of
the initial principal balance of such certificates, plus accrued interest on
such certificates. The Underwriter's commission will be any positive difference
between the price it pays to the Depositor for such certificates and the amount
it receives from the sale of such certificates to the public. See "Method of
Distribution" herein.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. 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 UNLAWFUL.
SALOMON SMITH BARNEY
Underwriter
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD NOT
ASSUME THAT THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS DOCUMENT.
We provide information to you about the Offered Certificates in two separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to this series of certificates; and
o this prospectus supplement, which describes the specific terms of this
series of certificates.
Salomon Brothers Mortgage Securities VII, Inc.'s principal offices are located
at Seven World Trade Center, New York, New York 10048 and its phone number is
(212) 783-5635.
TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
SUMMARY OF PROSPECTUS SUPPLEMENT...........................................S-3
RISK FACTORS...............................................................S-8
USE OF PROCEEDS...........................................................S-13
THE MORTGAGE POOL.........................................................S-14
YIELD ON THE CERTIFICATES.................................................S-33
DESCRIPTION OF THE CERTIFICATES...........................................S-41
POOLING AND SERVICING AGREEMENT...........................................S-55
THE INSURER...............................................................S-63
FEDERAL INCOME TAX CONSEQUENCES...........................................S-66
METHOD OF DISTRIBUTION....................................................S-68
SECONDARY MARKET..........................................................S-68
LEGAL OPINIONS............................................................S-69
EXPERTS...................................................................S-69
RATINGS...................................................................S-69
LEGAL INVESTMENT..........................................................S-70
ERISA CONSIDERATIONS......................................................S-70
S-2
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SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS A VERY BROAD OVERVIEW OF THE CERTIFICATES
OFFERED HEREBY AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF
THE OFFERED CERTIFICATES, READ CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND
THE ENTIRE ACCOMPANYING PROSPECTUS. Capitalized terms used but not defined
herein have the meanings assigned to them in the prospectus. An Index of
Principal Definitions is included at the end of the prospectus.
<TABLE>
<CAPTION>
<S> <C>
Title of Series.............................Salomon Brothers Mortgage Securities VII, Inc., Mortgage
Pass-Through Certificates, Series 1998-NC7.
Cut-off Date................................December 1, 1998.
Closing Date................................On or about December 22, 1998.
Depositor...................................Salomon Brothers Mortgage Securities VII, Inc. (the
"Depositor"), an indirect wholly-owned subsidiary of Salomon
Smith Barney Holdings Inc. and an affiliate of Salomon
Smith Barney Inc. The Depositor will deposit the mortgage
loans into the trust. See "The Depositor" in the prospectus.
Mortgage Loan Seller........................Salomon Brothers Realty Corp. (the "Mortgage Loan Seller"),
an indirect wholly owned subsidiary of Salomon Smith
Barney Holdings Inc. and an affiliate of the Depositor and
Salomon Smith Barney Inc.
Master Servicer.............................New Century Mortgage Corporation (the "Master Servicer").
See "The Mortgage Pool--Underwriting Standards;
Representations" and "Pooling and Servicing
Agreement--New Century Mortgage Corporation" herein.
Originators and Servicers...................New Century Mortgage Corporation and Option One
Mortgage Corporation (each, an "Originator" and each, a
"Servicer"). See "The Mortgage Pool--Underwriting
Standards; Representations" and "Pooling and Servicing
Agreement--New Century Mortgage Corporation" and
"--Option One Mortgage Corporation" herein.
Trustee.....................................Firstar Bank Milwaukee, N.A. (the "Trustee"), a national
banking association, will be the Trustee of the trust. See
"Pooling and Servicing Agreement--The Trustee" herein.
Trust Administrator.........................U.S. Bank National Association (the "Trust Administrator"), a
national banking association, will perform certain
administrative functions on behalf of the Trustee and will act
as the initial paying agent, certificate registrar and custodian.
See "Pooling and Servicing Agreement--Trust Administrator" herein.
</TABLE>
S-3
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<TABLE>
<CAPTION>
<S> <C>
Insurer.....................................Financial Security Assurance Inc. (the "Insurer"). See "The
Insurer" herein.
Distribution Dates..........................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 January 1999.
Offered Certificates........................Each class of Offered Certificates will have the approximate
initial certificate principal balance and fixed pass-through
rate set forth in the table below, subject to the indicated
limitation in the case of the Class A-6 Certificates.
</TABLE>
<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-1............ $152,447,000 6.063% A-5 . . . . . . $58,112,000 6.838%
A-2............ $115,356,000 6.061% A-6 . . . . . . $72,275,000 7.491%(2)
A-3............ $ 97,463,000 6.595% A-7 . . . . . . $70,000,000 6.615%
A-4............ $122,426,000 6.704%
====================================================================================================================
</TABLE>
(1) Approximate.
(2) The Pass-Through Rate will equal the lesser of the rate stated above and
the weighted average net mortgage rate.
- ----------------------
THE TRUST
The Depositor will establish a trust with respect to the Series 1998-NC7
Certificates, pursuant to a pooling and servicing agreement dated as of December
1, 1998 among the Depositor, the Servicers, the Trust Administrator and the
Trustee. There are twelve classes of certificates representing the trust. See
"Description of the Certificates" herein.
Each Series 1998-NC7 Certificate will evidence a partial undivided interest in
the trust. Distributions of interest and/or principal on the Offered
Certificates will be made only from payments received in connection with the
mortgage loans described below and payments under the certificate insurance
policy (the "Policy").
THE MORTGAGE LOANS
The trust will contain approximately 8,317 conventional, one- to four-family,
fixed-rate mortgage loans secured by first liens and second liens on residential
real properties. The mortgage loans have an aggregate principal balance of
approximately $703,557,763 as of December 1, 1998.
The mortgage loans have original terms to maturity of not greater than 30 years
and the following characteristics as of December 1, 1998:
Range of mortgage rates 6.750% to 16.650%.
(approximate):
Weighted average mortgage 9.770%.
rate (approximate):
Weighted average remaining 25 years and 4 months.
term to stated maturity
(approximate):
Second lien mortgage loans 4.69%.
(approximate):
Balloon loans (approximate): 13.51%.
For additional information regarding the mortgage loans, see "The Mortgage Pool"
herein.
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THE CERTIFICATES
OFFERED CERTIFICATES. The Offered Certificates will have the characteristics
shown in the table above in this prospectus supplement. The Offered Certificates
will be sold by the Depositor to the Underwriter on the closing date.
The Offered 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 in minimum denominations of $10,000 and integral multiples of
$1.00 in excess thereof. See "Description of the Certificates --Registration of
the Offered Certificates" herein.
CLASS CE CERTIFICATES. The Class CE Certificates are one of the twelve classes
of certificates representing the trust, but are not offered hereby. The Class CE
Certificates will have an initial certificate principal balance of approximately
$15,478,663, which is equal to the initial overcollateralization required by the
pooling and servicing agreement. The Class CE Certificates initially evidence an
interest of approximately 2.20% in the trust. The Class CE Certificates will be
sold by the Depositor to Salomon Smith Barney Inc. on the closing date.
CLASS P CERTIFICATES. The Class P Certificates are one of the twelve classes of
certificates representing the trust, but are not offered hereby. The Class P
Certificates will have an initial certificate principal balance of $100 and will
not be entitled to distributions in respect of interest. The Class P
Certificates will be entitled to all prepayment charges received in respect of
the mortgage loans. The Class P Certificates will be sold by the Depositor to
Salomon Smith Barney Inc. on the closing date.
RESIDUAL CERTIFICATES. The Class R-I Certificates, the Class R-II Certificates
and the Class R-III Certificates are the classes of certificates representing
the residual interests in the trust, but are not offered hereby. Such
certificates will be sold by the Depositor to Salomon Smith Barney Inc. on the
closing date.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Offered
Certificates consists of the Policy and overcollateralization, each as described
below and under "Description of the Certificates--Credit Enhancement" and
"--Overcollateralization Provisions" herein.
OVERCOLLATERALIZATION. The aggregate principal balance of the mortgage loans as
of December 1, 1998 will exceed the aggregate certificate principal balance of
the Offered Certificates and the Class P Certificates on the closing date by
approximately $15,478,663, which is equal to the initial certificate principal
balance of the Class CE Certificates. Such amount represents approximately 2.20%
of the aggregate principal balance of the mortgage loans as of December 1, 1998,
and is the initial amount of overcollateralization required to be provided by
the mortgage pool under the pooling and servicing agreement.
The pooling and servicing agreement provides, however, that subject to certain
trigger tests set forth therein, the required level of overcollateralization may
increase or decrease over time. See "Description of the
Certificates--Overcollateralization Provisions" herein.
CERTIFICATE INSURANCE POLICY. The Offered Certificates will be entitled to the
benefit of the Policy to be issued by Financial Security Assurance Inc. The
Insurer will issue the Policy as a means of providing additional credit
enhancement to the Offered Certificates. The Policy will irrevocably and
unconditionally guarantee payment for the benefit of the holders of the Offered
Certificates of an amount that will cover (i) any interest shortfalls
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(except for certain shortfalls as described herein) allocated to the Offered
Certificates, (ii) the amount by which (a) the outstanding principal amount of
the Offered Certificates exceeds (b) the principal amount of the mortgage loans
and (iii) without duplication of the amount specified in clause (ii), the
outstanding principal amount of the Offered Certificates to the extent unpaid on
the final distribution date or the earlier termination of the trust pursuant to
the terms of the pooling and servicing agreement. See "Description of the
Certificates--Financial Guaranty Insurance Policy" herein.
ALLOCATION OF LOSSES; SUBORDINATION. If, on any distribution date, there is not
sufficient excess interest or overcollateralization to absorb realized losses on
the mortgage loans as described under "Description of the
Certificates--Overcollateralization Provisions" herein, then realized losses on
the mortgage loans will be allocated to the Offered Certificates. The pooling
and servicing agreement does not permit the allocation of realized losses on the
mortgage loans to the Class P Certificates. Subject to the terms of the Policy,
all realized losses allocated to the Offered Certificates will be covered by the
Policy. See "Description of the Certificates --Allocation of Losses;
Subordination" and "--Financial Guaranty Insurance Policy" herein.
P&I ADVANCES
Each Servicer is required to advance delinquent payments of principal and
interest on the mortgage loans that each services, subject to the limitations
described herein. Each Servicer is entitled to be reimbursed for such advances,
and therefore such advances are not a form of credit enhancement. See
"Description of the Certificates--P&I Advances" herein and "Description of the
Securities--Advances in respect of Delinquencies" in the prospectus.
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 or the Insurer) may
purchase all of the mortgage loans, together with any properties in respect
thereof acquired on behalf of the trust, and thereby effect termination and
early retirement of the Certificates, after the aggregate principal balance of
the mortgage loans (and properties acquired in respect thereof) remaining in the
trust has been reduced to less than 10% or 5% (as further provided herein) of
the aggregate principal balance of the mortgage loans as of December 1, 1998.
See "Pooling and Servicing Agreement-- Termination" herein and "Description of
the Securities-- Termination" in the prospectus.
FEDERAL INCOME TAX CONSEQUENCES
Three separate elections will be made to treat designated portions of the trust
as real estate mortgage investment conduits for federal income tax purposes. See
"Federal Income Tax Consequences--Characterization of Investments in REMIC
Certificates" in the prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Federal Income Tax Consequences"
herein and in the Prospectus.
RATINGS
It is a condition to the issuance of the certificates that the Offered
Certificates receive a rating of "Aaa" from Moody's Investors Service, Inc.
("Moody's") and a rating of "AAA" from Standard & Poor's Ratings Services
("Standard & Poor's").
The ratings on the Offered Certificates are based in part on the ratings of the
claims-paying ability of the Insurer by Moody's and Standard & Poor's.
A security rating does not address the frequency of prepayments on the mortgage
S-6
<PAGE>
loans or the corresponding effect on yield to investors. See "Yield on the
Certificates" and "Ratings" herein and "Yield Considerations" in the prospectus.
LEGAL INVESTMENT
The Offered Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
because the mortgage pool includes certain mortgage loans that are secured by
subordinate liens on the related mortgaged properties. See "Legal Investment"
herein and in the prospectus.
ERISA CONSIDERATIONS
The U.S. Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption 91-23, to the Underwriter. Such exemption 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 Internal Revenue Code of 1986 (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 exemption
generally applies to certificates such as the Offered Certificates, and the
servicing and operation of asset pools such as the mortgage pool, provided that
certain conditions are satisfied. See "ERISA Considerations" herein and in the
prospectus.
S-7
<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.
THE UNDERWRITING STANDARDS OF THE MORTGAGE LOANS ARE NOT AS STRINGENT AS THOSE
UNDERWRITTEN IN A MORE TRADITIONAL MANNER, OR UNDERWRITTEN TO THE STANDARDS OF
FANNIE MAE AND FREDDIE MAC, WHICH MAY RESULT IN LOSSES ALLOCATED TO THE OFFERED
CERTIFICATEHOLDERS
The Originators' 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 Originators provide loans
primarily to borrowers who do not qualify for loans conforming to Fannie Mae and
Freddie Mac guidelines but who generally have equity in their property. While
the Originators' primary consideration in underwriting a mortgage loan is the
value of the mortgaged property, each 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.
Neither Originator's underwriting standards prohibit a mortgagor from obtaining
secondary financing at the time of origination of such Originator's first lien,
which secondary financing would reduce the equity the mortgagor would otherwise
have in the related mortgaged property as indicated in the related Originator's
loan-to-value ratio determination.
As a result of such underwriting standards, the mortgage loans in the
mortgage pool 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 in the mortgage pool than on mortgage loans originated in
a more traditional manner. No assurance can be given that the values of the
related mortgaged properties have remained or will remain at the levels in
effect on the dates of origination of the related mortgage loans. See "The
Mortgage Pool--Underwriting Standards; Representations" herein.
As described below under "Pooling and Servicing Agreement--New Century
Mortgage Corporation", New Century Mortgage Corporation commenced receiving
applications for mortgage loans under its regular lending program in February
1996, commenced its default related servicing operations in September 1997 and
until July 1998 had outsourced certain of its other servicing duties to a
subservicer. As of July 1998, New Century Mortgage Corporation is directly
handling the servicing duties that it used to outsource, including loan setup,
escrow administration, monthly billings, cashiering and lockbox operation and
sweeps, demands and payoff requests, year-end tax reporting, routine customer
calls and correspondence and mortgage pool data reporting. Because New Century
Mortgage Corporation commenced its default related servicing operations in
September 1997 and certain other servicing duties in July 1998, New Century
Mortgage Corporation (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 examining New Century
Mortgage Corporation's performance in servicing mortgage loans similar to the
mortgage loans in the mortgage pool, other than to the limited extent as
described under "Pooling and Servicing Agreement--New Century Mortgage
Corporation--Loan Loss and Delinquency" herein.
S-8
<PAGE>
CERTAIN MORTGAGE LOANS HAVE HIGH LOAN-TO-VALUE RATIOS WHICH MAY PRESENT A
GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately 27.80% of the mortgage loans, by aggregate principal balance
as of December 1, 1998, had a loan-to-value ratio (or a combined loan-to-value
ratio, in the case of any second lien mortgage loan) at origination in excess of
80%. No mortgage loan in the mortgage pool with a loan-to-value ratio (or a
combined loan-to-value ratio, in the case of any second lien mortgage loan) at
origination in excess of 80% will be covered by a primary mortgage insurance
policy. No first lien mortgage loan will have a loan-to-value ratio exceeding
95% at origination and no second lien mortgage loan will have a combined
loan-to-value ratio exceeding 100.45% at origination. Mortgage loans with higher
loan-to-value ratios may present a greater risk of loss. In addition, an overall
decline in the residential real estate market, a rise in interest rates over a
period of time and the general condition of a mortgaged property, as well as
other factors, may have the effect of reducing the value of such mortgaged
property from the appraised value at the time the mortgage loan was originated.
If there is a reduction in value of the mortgaged property, the loan-to-value
ratio may increase over what it was at the time the mortgage loan was
originated. Such an increase may reduce the likelihood of liquidation or other
proceeds being sufficient to satisfy the mortgage loan. 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.
CERTAIN MORTGAGE LOANS ARE DELINQUENT AS OF THE CUT-OFF DATE, WHICH MAY PRESENT
A GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately 0.54% of the mortgage loans, by aggregate principal balance
as of December 1, 1998, were thirty days or more but less than sixty days
delinquent in their monthly payments as of November 30, 1998. Approximately
0.21% of the mortgage loans, by aggregate principal balance as of December 1,
1998, were sixty days or more but less than ninety days delinquent in their
monthly payments as of the November 30, 1998. However, investors in the mortgage
loans should realize that approximately 27.46% of the mortgage loans, by
aggregate principal balance as of December 1, 1998, have a first payment date
occurring on or after November 30, 1998 and, therefore, such mortgage loans
could not have been delinquent as of November 30, 1998.
THE MORTGAGE LOANS ARE CONCENTRATED IN THE STATE OF CALIFORNIA AND THE STATE OF
FLORIDA, WHICH MAY PRESENT A GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE
LOANS
Approximately 29.40% and 10.03% of the mortgage loans, in each case, by
aggregate principal balance as of December 1, 1998, are secured by mortgaged
properties located in the State of California and the State of Florida,
respectively. 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 December 1, 1998, was approximately $1,837,512. If the
California or Florida 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 increase over historical levels of comparable
type loans, and may increase substantially.
CERTAIN OF THE MORTGAGE LOANS ARE BALLOON LOANS, WHICH MAY PRESENT A GREATER
RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately 13.51% of the mortgage loans, by aggregate principal balance
as of December 1, 1998, are mortgage loans with balloon payments. Because
borrowers of mortgage loans with balloon payments are required to make
substantial single payments upon maturity, it is possible
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that the default risk associated with such mortgage loans is greater than that
associated with fully-amortizing mortgage loans.
CERTAIN MORTGAGE LOANS ARE SECURED BY SECOND LIENS ON THE RELATED MORTGAGED
PROPERTY, WHICH MAY PRESENT A GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE
LOANS
Approximately 4.69% of the mortgage loans, by aggregate principal balance
as of December 1, 1998, are secured by second liens on the related mortgaged
properties. The proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the outstanding balance of such
mortgage loans only to the extent that the claims of the related senior
mortgages have been satisfied in full, including any related foreclosure costs.
In circumstances when it is determined to be uneconomical to foreclose on the
mortgaged property, the related Servicer may write off the entire outstanding
balance of such mortgage loan as a bad debt. The foregoing considerations will
be particularly applicable to mortgage loans secured by second liens that have
high combined loan-to-value ratios because it is comparatively more likely that
the related Servicer would determine foreclosure to be uneconomical in the case
of such mortgage loans. The rate of default of second mortgage loans may be
greater than that of mortgage loans secured by first liens on comparable
properties. See "Risk Factors--Risks Associated with Junior Lien Mortgage Loans"
in the Prospectus.
THE CERTIFICATES ARE OBLIGATIONS OF THE TRUST ONLY
The certificates will not represent an interest in or obligation of the
Depositor, the Servicers, the Mortgage Loan Seller, the Trustee, the Trust
Administrator or any of their respective affiliates. Neither the certificates
nor the underlying mortgage loans will be guaranteed or insured by any
governmental agency or instrumentality, or by the Depositor, the Servicers, the
Trustee, the Trust Administrator or any of their respective affiliates. The
Offered Certificates are covered by the Policy, as and to the extent described
under the caption "Description of the Certificates--Financial Guaranty Insurance
Policy" herein. Proceeds of the assets included in the trust and proceeds from
the Policy will be the sole source of payments on the Offered Certificates, and
there will be no recourse to the Depositor, the Servicers, the Mortgage Loan
Seller, the Trustee, the Trust Administrator 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.
THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES WILL
BE AFFECTED BY PREPAYMENT SPEEDS AND BY THE PRIORITY OF PAYMENT ON SUCH
CERTIFICATES
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 because the mortgage loans may be
prepaid at any time. However, with respect to approximately 81.61% of the
mortgage loans, by aggregate principal balance as of December 1, 1998, a
prepayment may subject the related mortgagor to a prepayment charge, which may
act as a deterrent to prepayment of such mortgage loan. 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
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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 classes of Offered Certificates according to the priorities
described herein, rather than on a PRO RATA basis among such classes. 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.
During certain periods, no principal payments or a disproportionately small
portion of the amount of principal then payable to the Offered Certificates will
be distributed on the Class A-7 Certificates. During certain other periods, a
disproportionately large portion of the amount of principal then payable to the
Offered Certificates will be distributed on the Class A-7 Certificates as more
fully described herein.
For further information regarding the effect of principal prepayments on
the weighted average lives of the Offered Certificates, see "Yield on the
Certificates" herein, including the table entitled "Percent of Initial
Certificate Principal Balance Outstanding at the Following Percentages of the
Prepayment Assumption".
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON A VARIETY OF
FACTORS
The yield to maturity on the Offered Certificates will depend, in general,
on:
o the applicable purchase price; and
o the rate and timing of principal payments (including prepayments and
collections upon defaults, liquidations and repurchases) on the
mortgage loans, payments by the Insurer, and the allocation thereof to
reduce the certificate principal balance of such certificates, as well
as other factors.
The yield to investors on the Offered Certificates will be adversely
affected by any allocation thereto of interest shortfalls on the mortgage loans
not covered by the Insurer.
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 Offered Certificates
are purchased at a discount and principal distributions thereon occur at a rate
slower than that anticipated at the time of purchase, the investor's actual
yield to maturity will be lower than that originally assumed.
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 100% of the prepayment vector (as more fully described 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.
S-11
<PAGE>
THE YIELD TO MATURITY ON CERTAIN CLASSES OF THE OFFERED CERTIFICATES WILL BE
PARTICULARLY SENSITIVE TO THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS,
ESPECIALLY THE CLASS A-7 CERTIFICATES
The multiple class structure of the Offered Certificates causes the yield
of certain classes to be particularly sensitive to changes in the rates of
prepayments of the mortgage loans. Because distributions of principal will be
made to the classes of Offered Certificates according to the priorities
described herein, the yield to maturity on such classes of certificates will be
sensitive to the rates of prepayment on the mortgage loans experienced both
before and after the commencement of principal distributions on such class.
In particular, the Class A-7 Certificates do not receive (unless the
certificate principal balances of the other classes of Offered Certificates have
been reduced to zero) any portion of principal payments prior to the
distribution date in January 2002. In addition, the Class A-7 Certificates will
receive (unless the certificate principal balances of the other classes of
Offered Certificates have been reduced to zero) a disproportionately small or
large portion of the amount of principal then payable to the Offered
Certificates thereafter. Therefore, the weighted average life of the Class A-7
Certificates will be longer or shorter than would otherwise be the case. The
effect on the market value of the Class A-7 Certificates of changes in market
interest rates or market yields for similar securities may be greater or lesser
than for the other classes of Offered Certificates entitled to principal
distributions.
VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosure, and require licensing of the Originators. In
addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the mortgage loans.
The mortgage loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers
regarding the terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age,
race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under
the Consumer Credit Protection Act, in the extension of credit;
and
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience.
Approximately 3.20% of the mortgage loans, by aggregate principal balance
as of December 1, 1998, will be subject to the Riegle Community Development and
Regulatory Improvement Act of 1994 (the "Riegle Act"), which incorporates the
Home Ownership and Equity Protection Act of 1994. The Riegle Act adds certain
additional provisions to Regulation Z, which is the implementing regulation of
the Federal Truth-in-Lending Act. These provisions impose additional disclosure
and other requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates or high up-front fees and charges. In general,
mortgage loans within the purview of the Riegle Act have annual percentage rates
over 10% greater than the yield on treasury securities of comparable maturity
and/or fees and points which exceed the greater of 8% of the total loan amount
or $400. The provisions of the Riegle Act apply on a mandatory basis to all
applicable
S-12
<PAGE>
mortgage loans originated on or after October 1, 1995. These provisions can
impose specific statutory liabilities upon creditors who fail to comply with
their provisions and may affect the enforceability of the related loans. In
addition, any assignee of the creditor would generally be subject to all claims
and defenses that the consumer could assert against the creditor, including,
without limitation, the right to rescind the mortgage loan.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws, policies
and principles may limit the ability of the trust to collect all or part of the
principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the related
Originator to damages and administrative enforcement.
Each Originator will represent that as of the closing date, each mortgage
loan originated by it is in compliance with applicable federal and state laws
and regulations. In the event of a breach of such representation, such
Originator will be obligated to cure such breach or repurchase or replace the
affected mortgage loan in the manner described in the prospectus.
IF THE INSURER FAILS TO MEET ITS OBLIGATIONS UNDER THE POLICY, HOLDERS OF THE
OFFERED CERTIFICATES MAY EXPERIENCE A LOSS ON THEIR INVESTMENT
If the protection created by the overcollateralization is insufficient and
the Insurer is unable to meet its obligations under the Policy, then you could
experience a loss of some of your investment. In addition, any reduction in a
rating of the claims-paying ability of the Insurer may result in a reduction in
the rating of the Offered Certificates.
YEAR 2000 SYSTEMS RISK COULD AFFECT THE ABILITY OF THE SERVICERS TO PERFORM
THEIR DUTIES
As is the case with most companies using computers in their operations,
each Servicer is faced with the task of completing its compliance goals in
connection with the year 2000 issue. The year 2000 issue is the result of prior
computer programs being written using two digits, rather than four digits, to
define the applicable year. Any of the Servicers' computer programs that have
time- sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. Any such occurrence could result in major computer system
failure or miscalculations. Each Servicer is presently engaged in various
procedures to ensure that its computer systems and software will be year 2000
compliant. However, in the event that the related Servicer or any of its
suppliers, customers, brokers or agents do not successfully and timely achieve
year 2000 compliance, the performance of obligations of such Servicer under the
pooling and servicing agreement could be materially adversely affected.
USE OF PROCEEDS
Salomon Brothers Realty Corp. (the "Mortgage Loan Seller") will sell the
Mortgage Loans (as defined herein) to the Salomon Brothers Mortgage Securities
VII, Inc. (the "Depositor") and the Depositor will convey the Mortgage Loans to
the Trust Fund (as defined herein) in exchange for and concurrently with the
delivery of the Certificates (as defined herein). Net proceeds from the sale of
the Certificates will be applied by the Depositor to the purchase of the
Mortgage Loans from the Mortgage Loan Seller. Such net proceeds will represent
the purchase price to be paid by the Depositor to the Mortgage Loan Seller for
the Mortgage Loans. Such Mortgage Loans were previously purchased by the
Mortgage Loan Seller either directly or indirectly from New Century Mortgage
Corporation and Option One Mortgage Corporation (in such capacities, each an
"Originator").
S-13
<PAGE>
THE MORTGAGE POOL
GENERAL
The pool of Mortgage Loans (the "Mortgage Pool") will consist of
approximately 8,317 conventional, one- to four-family, fixed-rate mortgage loans
(the "Mortgage Loans") secured by first liens or second liens on residential
real properties (the "Mortgaged Properties") and having an aggregate principal
balance as of December 1, 1998 (the "Cut-off Date") of approximately
$703,557,763, 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.
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 Loans are secured by first or second mortgages or deeds of
trust or other similar security instruments creating first liens or second liens
on residential properties consisting of attached, detached or semi-detached,
one- to four-family dwelling units, townhouses, individual condominium units,
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 from the Mortgage Loan Seller, who acquired the Mortgage Loans either
directly or indirectly from the Originators. New Century Mortgage Corporation
will act as the master servicer (in such capacity, the "Master Servicer")
pursuant to the Agreement (as defined herein) for the Mortgage Loans and each of
the Master Servicer and Option One Mortgage Corporation will act as the servicer
(in such capacities, each, a "Servicer") pursuant to the Agreement for the
Mortgage Loans originated by it. See "--Underwriting Standards; Representations"
herein
Fifteen Mortgage Loans, representing approximately 0.15% of the Mortgage
Loans, have first payment dates occurring in February 1999. With respect to such
Mortgage Loans, no principal amortization payments will be distributed in
January 1999 unless principal payments thereon are received in the Prepayment
Period applicable to the Distribution Date occurring in January 1999. On the
Closing Date, however, cash will be deposited with the Trust Administrator in an
amount equal to interest accrued on such Mortgage Loans (net of the related
Servicing Fee (as defined herein)) for the related Interest Accrual Period for
distribution to the holders of the Offered Certificates on the first
Distribution Date.
The Mortgage Loans have scheduled monthly payments due generally 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 81.61% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment charge (a "Prepayment Charge") in limited
circumstances on certain prepayments as provided in the related Mortgage Note.
Such Mortgage Loans provide for payment of a Prepayment Charge on certain
partial prepayments and all prepayments in full made within a specified period
not in excess of five years from the date of origination of such Mortgage Loan,
as provided in the related Mortgage Note. The amount of the Prepayment Charge is
as provided in the related Mortgage Note, but is generally equal to six month's
interest on any amounts prepaid in excess of 20% of the then outstanding
principal balance of the related Mortgage Loan in any 12 month period, as
permitted by law. The holders of the Class P Certificates will be entitled to
all Prepayment Charges received on the Mortgage Loans, and such amounts will not
be available for distribution on the other classes of Certificates. Under
certain instances, as described in the Agreement, the applicable Servicer may
waive the payment of any otherwise applicable Prepayment Charge. Investors
should conduct their own analysis of the effect, if any, that the
S-14
<PAGE>
Prepayment Charges, and decisions by the Servicers with respect to the waiver
thereof, may have on the prepayment performance of the Mortgage Loans. The
Depositor makes no representation as to the effect that the Prepayment Charges,
and decisions by the Servicers with respect to the waiver thereof, may have on
the prepayment performance of the Mortgage Loans.
None of the Mortgage Loans are Buydown Mortgage Loans.
Approximately 13.51% of the Mortgage Loans are balloon loans ("Balloon
Loans"). Each Balloon Loan amortizes over 360 months, but the final payment (the
"Balloon Payment") on each Balloon Loan is due and payable on the 180th month.
The amount of the Balloon Payment on each Balloon Loan is substantially in
excess of the amount of the scheduled monthly payment on such Balloon Loan for
the period prior to the Due Date of such Balloon Payment.
The average principal balance of the Mortgage Loans at origination was
approximately $84,933. No Mortgage Loan had a principal balance at origination
greater than approximately $1,075,000 or less than approximately $6,250. The
average principal balance of the Mortgage Loans as of the Cut-off Date was
approximately $84,593. No Mortgage Loan had a principal balance as of the
Cut-off Date greater than approximately $1,075,000 or less than approximately
$5,169.
The Mortgage Loans had Mortgage Rates as of the Cut-off Date ranging from
approximately 6.750% per annum to approximately 16.650% per annum, and the
weighted average Mortgage Rate was approximately 9.770% per annum.
The weighted average loan-to-value ratio (or combined loan-to-value ratio,
in the case of second lien Mortgage Loans) of the Mortgage Loans at origination
was approximately 75.09%. At origination, no Mortgage Loan will have a
loan-to-value ratio (or combined loan-to-value ratio, in the case of any second
lien Mortgage Loan) greater than approximately 100.45% or less than
approximately 4.60%.
Approximately 4.69% of the Mortgage Loans are secured by second liens on
the related Mortgaged Property.
The weighted average remaining term to stated maturity of the Mortgage
Loans will be approximately 25 years and 4 months as of the Cut-off Date. None
of the Mortgage Loans will have a first Due Date prior to July 1997 or after
February 1999, or will have a remaining term to stated maturity of less than 3
years and 9 months or greater than 30 years as of the Cut-off Date. The latest
maturity date of any Mortgage Loan is January 2029.
The Mortgage Loans are expected to have the following characteristics as of
the Cut-off Date (the sum in any column may not equal the total indicated due to
rounding):
S-15
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF
ORIGINAL AGGREGATE
NUMBER PRINCIPAL ORIGINAL
RANGE ($) OF LOANS BALANCE PRINCIPAL BALANCE
--------- -------- -------- ------------------
<S> <C> <C> <C>
0.01 - 50,000.00 . . . . . . . . . . . 2,819 $99,016,013.00 14.02%
50,000.01 - 100,000.00 . . . . . . . . . . . 3,242 232,532,356.00 32.92
100,000.01 - 150,000.00 . . . . . . . . . . . 1,277 156,032,452.00 22.09
150,000.01 - 200,000.00 . . . . . . . . . . . 513 89,130,616.00 12.62
200,000.01 - 250,000.00 . . . . . . . . . . . 241 53,690,019.00 7.60
250,000.01 - 300,000.00 . . . . . . . . . . . 121 33,521,196.00 4.75
300,000.01 - 350,000.00 . . . . . . . . . . . 41 13,507,578.00 1.91
350,000.01 - 400,000.00 . . . . . . . . . . . 25 9,418,300.00 1.33
400,000.01 - 450,000.00 . . . . . . . . . . . 15 6,451,250.00 0.91
450,000.01 - 500,000.00 . . . . . . . . . . . 8 3,836,750.00 0.54
500,000.01 - 550,000.00 . . . . . . . . . . . 5 2,618,750.00 0.37
550,000.01 - 600,000.00 . . . . . . . . . . . 6 3,421,000.00 0.48
650,000.01 - 700,000.00 . . . . . . . . . . . 1 680,000.00 0.10
700,000.01 - 750,000.00 . . . . . . . . . . . 2 1,456,000.00 0.21
1,050,000.01 - 1,100,000.00 . . . . . . . . . . . 1 1,075,000.00 0.15
----- --------------- ------
Total . . . . . . . . . . . . . . . . . . . . 8,317 $706,387,280.00 100.00%
===== ============== =======
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE ($) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------- -------- ------------------ -----------------
<S> <C> <C> <C>
0.01 - 50,000.00 . . . . . . . . . . 2,832 $ 99,157,526.16 14.09%
50,000.01 - 100,000.00 . . . . . . . . . . 3,235 231,538,489.79 32.91
100,000.01 - 150,000.00 . . . . . . . . . . 1,273 155,169,131.41 22.05
150,000.01 - 200,000.00 . . . . . . . . . . 513 88,930,990.43 12.64
200,000.01 - 250,000.00 . . . . . . . . . . 241 53,575,631.30 7.61
250,000.01 - 300,000.00 . . . . . . . . . . 120 33,199,263.73 4.72
300,000.01 - 350,000.00 . . . . . . . . . . 41 13,510,952.69 1.92
350,000.01 - 400,000.00 . . . . . . . . . . 24 9,022,977.77 1.28
400,000.01 - 450,000.00 . . . . . . . . . . 15 6,424,068.10 0.91
450,000.01 - 500,000.00 . . . . . . . . . . 9 4,310,902.50 0.61
500,000.01 - 550,000.00 . . . . . . . . . . 4 2,106,883.71 0.30
550,000.01 - 600,000.00 . . . . . . . . . . 6 3,412,695.27 0.49
650,000.01 - 700,000.00 . . . . . . . . . . 1 674,582.50 0.10
700,000.01 - 750,000.00 . . . . . . . . . . 2 1,448,667.60 0.21
1,050,000.01 - 1,100,000.00 . . . . . . . . . . 1 1,075,000.00 0.15
----- ----------------- ------
Total . . . . . . . . . . . . . . . . . . . 8,317 $703,557,762.96 100.00%
===== ============== ======
</TABLE>
S-16
<PAGE>
<TABLE>
<CAPTION>
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
- ----------------- -------- ------------------ -----------------
<S> <C> <C> <C>
6.500 - 6.999................................. 1 $ 167,310.57 0.02%
7.000 - 7.499................................. 35 7,154,974.84 1.02
7.500 - 7.999................................. 298 42,437,453.58 6.03
8.000 - 8.499................................. 362 50,630,085.06 7.20
8.500 - 8.999................................. 1,272 139,513,714.30 19.83
9.000 - 9.499................................. 762 76,747,373.06 10.91
9.500 - 9.999................................. 1,560 136,564,458.18 19.41
10.000 - 10.499................................ 735 57,330,052.75 8.15
10.500 - 10.999................................ 1,215 82,619,160.93 11.74
11.000 - 11.499................................ 531 32,307,192.78 4.59
11.500 - 11.999................................ 593 33,928,364.36 4.82
12.000 - 12.499................................ 284 13,438,618.24 1.91
12.500 - 12.999................................ 348 15,825,157.17 2.25
13.000 - 13.499................................ 109 5,290,693.52 0.75
13.500 - 13.999................................ 130 5,652,802.73 0.80
14.000 - 14.499................................ 40 1,881,372.12 0.27
14.500 - 14.999................................ 23 1,026,569.27 0.15
15.000 - 15.499................................ 7 582,086.92 0.08
15.500 - 15.999................................ 9 367,837.36 0.05
16.000 - 16.499................................ 1 19,527.19 0.00
16.500 - 16.999................................ 2 72,958.03 0.01
----- -------------- ------
Total..................................... 8,317 $703,557,762.96 100.00%
===== ============== ======
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS(1)
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN-TO-VALUE RATIO (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------------- -------- ------------------ -----------------
<S> <C> <C> <C>
Less than or equal to 25.00..................... 57 $ 2,190,378.67 0.31%
25.01 - 30.00................................... 56 2,828,582.16 0.40
30.01 - 35.00................................... 81 4,025,546.11 0.57
35.01 - 40.00................................... 93 5,112,136.48 0.73
40.01 - 45.00................................... 131 8,179,768.80 1.16
45.01 - 50.00................................... 182 12,043,488.70 1.71
50.01 - 55.00................................... 216 15,530,768.08 2.21
55.01 - 60.00................................... 352 28,687,943.04 4.08
60.01 - 65.00................................... 611 47,839,608.63 6.80
65.01 - 70.00................................... 935 74,034,641.20 10.52
70.01 - 75.00................................... 1,364 111,625,974.74 15.87
75.01 - 80.00................................... 2,242 195,893,266.00 27.84
80.01 - 85.00................................... 1,028 95,583,722.23 13.59
85.01 - 90.00................................... 809 80,829,797.71 11.49
90.01 - 95.00................................... 147 18,607,508.27 2.64
95.01 - 100.00.................................. 12 502,067.22 0.07
greater than 100.00............................. 1 42,564.92 0.01
------ -------------- ------
Total...................................... 8,317 $703,557,762.96 100.00%
===== ============== ======
</TABLE>
(1) References to loan-to-value ratios are references to combined loan-to-value
ratios with respect to second lien Mortgage Loans.
S-17
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------- -------- ------------------ -----------------
<S> <C> <C> <C>
Alabama......................................... 1 $ 24,645.00 0.01%
Arizona......................................... 216 16,055,211.40 2.28
Arkansas........................................ 33 1,504,849.75 0.21
California...................................... 1,732 206,875,450.25 29.40
Colorado........................................ 126 10,815,258.34 1.54
Connecticut..................................... 94 8,754,960.94 1.24
Delaware........................................ 31 2,136,557.43 0.30
District of Columbia............................ 11 1,173,170.94 0.17
Florida......................................... 956 70,601,453.51 10.03
Georgia......................................... 283 23,077,339.04 3.28
Hawaii.......................................... 48 6,403,948.27 0.91
Idaho........................................... 45 3,573,618.67 0.51
Illinois........................................ 302 23,590,788.37 3.35
Indiana......................................... 272 14,783,226.86 2.10
Iowa............................................ 29 1,426,770.27 0.20
Kansas.......................................... 34 2,223,524.85 0.32
Kentucky........................................ 95 6,769,897.42 0.96
Louisiana....................................... 99 6,693,063.26 0.95
Maine........................................... 54 4,129,499.04 0.59
Maryland........................................ 90 7,963,342.79 1.13
Massachusetts................................... 193 19,610,082.19 2.79
Michigan........................................ 193 14,354,481.21 2.04
Minnesota....................................... 103 7,713,716.21 1.10
Mississippi..................................... 26 1,240,637.87 0.18
Missouri........................................ 157 8,165,131.02 1.16
Montana......................................... 23 1,826,678.88 0.26
Nebraska........................................ 15 827,343.75 0.12
Nevada.......................................... 113 10,195,791.14 1.45
New Hampshire................................... 50 4,443,824.81 0.63
New Jersey...................................... 52 5,362,735.34 0.76
New Mexico...................................... 72 5,282,975.77 0.75
New York........................................ 178 14,750,879.63 2.10
North Carolina.................................. 123 7,971,105.08 1.13
North Dakota.................................... 2 145,951.86 0.02
Ohio............................................ 421 27,583,947.32 3.92
Oklahoma........................................ 49 2,831,065.17 0.40
Oregon.......................................... 181 17,626,555.42 2.51
Pennsylvania.................................... 350 22,804,010.71 3.24
Rhode Island.................................... 49 4,173,520.04 0.59
South Carolina.................................. 69 4,121,895.69 0.59
South Dakota.................................... 3 154,773.81 0.02
Tennessee....................................... 106 8,000,475.02 1.14
Texas........................................... 560 37,456,178.29 5.32
Utah............................................ 94 9,664,440.96 1.37
Vermont......................................... 1 43,848.06 0.01
Virginia........................................ 197 16,343,517.41 2.32
Washington...................................... 232 22,825,449.33 3.24
West Virginia................................... 37 2,025,805.79 0.29
Wisconsin....................................... 104 6,658,209.64 0.95
Wyoming......................................... 13 776,159.14 0.11
---- --------------- ------
Total...................................... 8,317 $703,557,762.96 100.00%
===== =============== ======
</TABLE>
S-18
<PAGE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------- -------- ------------------ -----------------
<S> <C> <C> <C>
Single Family................................... 7,033 $588,558,082.68 83.65%
Two- to Four-Family............................. 506 43,448,051.86 6.18
Condominium..................................... 323 21,355,331.53 3.04
Planned Unit Development........................ 396 46,936,352.65 6.67
Manufactured Housing............................ 59 3,259,944.24 0.46
------- --------------- ------
Total...................................... 8,317 $703,557,762.96 100.00%
===== =============== ======
</TABLE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY OCCUPANCY STATUS OF THE MORTGAGE LOANS
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
- ---------------- -------- ------------------ -----------------
<S> <C> <C> <C>
Owner-Occupied.................................. 7,168 $629,263,529.98 89.44%
Secondary....................................... 104 9,703,397.45 1.38
Non Owner Occupied.............................. 1,045 64,590,835.53 9.18
----- --------------- ------
Total...................................... 8,317 $703,557,762.96 100.00%
===== =============== ======
</TABLE>
The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
<TABLE>
<CAPTION>
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
- ------------ -------- ------------------ -----------------
<S> <C> <C> <C>
Purchase........................................ 1,414 $119,687,305.16 17.01%
Equity-out Refinance............................ 5,515 450,597,634.70 64.05
Rate-term Refinance............................. 1,388 133,272,823.10 18.94
----- -------------- -----
Total...................................... 8,317 $703,557,762.96 100.00%
===== =============== ======
</TABLE>
<TABLE>
<CAPTION>
LOAN PROGRAMS 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 or Limited Documentation Program........... 5,612 $478,030,622.10 67.94%
Stated Income Documentation Program............. 2,705 225,527,140.86 32.06
----- --------------- -----
Total...................................... 8,317 $703,557,762.96 100.00%
===== =============== ======
</TABLE>
S-19
<PAGE>
<TABLE>
<CAPTION>
RISK CATEGORIES OF THE NEW CENTURY 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
- --------------- -------- ------------------ -----------------
<S> <C> <C> <C>
A+.............................................. 1,474 $119,218,137.18 35.01%
A-.............................................. 1,304 109,173,501.57 32.06
A-MO*........................................... 74 5,354,639.79 1.57
B............................................... 744 56,117,267.33 16.48
C............................................... 620 37,505,183.55 11.01
C-.............................................. 156 9,740,548.03 2.86
C-HS**.......................................... 62 3,410,704.46 1.00
------- ------------ ------
Total...................................... 4,434 $340,519,981.91 100.00%
===== =============== ======
</TABLE>
* Underwritten pursuant to the Mortgage Credit Only program.
** Underwritten pursuant to the Home Saver program.
<TABLE>
<CAPTION>
RISK CATEGORIES OF THE OPTION ONE 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
- --------------- -------- ------------------ -----------------
<S> <C> <C> <C>
AA.............................................. 1,620 $173,844,627.15 47.89%
A............................................... 1,206 110,117,925.75 30.33
B............................................... 838 66,229,056.07 18.24
C............................................... 157 9,564,563.11 2.63
CC.............................................. 62 3,281,608.97 0.90
------ --------------- ------
Total...................................... 3,883 $363,037,781.05 100.00%
===== =============== ======
</TABLE>
UNDERWRITING STANDARDS; REPRESENTATIONS
The Mortgage Loans will be acquired by the Depositor from the Mortgage Loan
Seller. The Mortgage Loan Seller will have acquired, either directly or
indirectly, approximately 48.40% of the Mortgage Loans (the "New Century
Mortgage Loans"), by aggregate principal balance as of the Cut-off Date, from
New Century Mortgage Corporation ("New Century"). The Mortgage Loan Seller will
have acquired approximately 51.60% of the Mortgage Loans (the "Option One
Mortgage Loans"), by aggregate principal balance as of the Cut-off Date, from
Option One Mortgage Corporation ("Option One"). All of the Mortgage Loans were
originated or acquired by the Originators generally in accordance with the
underwriting criteria described below.
The information set forth below with regard to the Originators'
underwriting standards has been provided to the Depositor or compiled from
information provided to the Depositor by the Originators. None of the Depositor,
the Trustee, the Trust Administrator, the Mortgage Loan Seller, 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 Originators' underwriting standards are primarily intended to assess
the value of the mortgaged property and to evaluate the adequacy of such
property as collateral for the mortgage loan. All of the Mortgage Loans were
also underwritten with a view toward the resale thereof in the
S-20
<PAGE>
secondary mortgage market. While the Originators' primary consideration in
underwriting a mortgage loan is the value of the mortgaged property, the
Originators also consider, 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 Mortgage Loans generally bear higher rates of
interest than mortgage loans that are originated in accordance with Fannie Mae
and Freddie Mac standards, which is likely to result in rates of delinquencies
and foreclosures that are higher, and that may be substantially higher, than
those experienced by portfolios of mortgage loans underwritten in a more
traditional manner.
As a result of the Originators' underwriting criteria, changes in the
values of Mortgaged Properties may have a greater effect on the delinquency,
foreclosure and loss experience on the Mortgage Loans than such changes would be
expected to have on mortgage loans that are originated in a more traditional
manner. No assurance can be given that the values of the related Mortgaged
Properties have remained or will remain at the levels in effect on the dates of
origination of the related Mortgage Loans.
NEW CENTURY'S UNDERWRITING PROGRAMS
The New Century Mortgage Loans will have been originated generally in
accordance with the underwriting guidelines of New Century (the "New Century
Underwriting Guidelines"). On a case- by-case basis, exceptions to the New
Century Underwriting Guidelines are made where compensating factors exist.
Each applicant completes an application which includes information with
respect to the applicant's liabilities, income, credit history, employment
history and personal information. The New Century Underwriting Guidelines
require a credit report on each applicant from a credit reporting company. The
report typically contains information relating to such matters as credit history
with local and national merchants and lenders, installment debt payments and any
record of defaults, bankruptcies, repossessions or judgments. Mortgaged
properties that are to secure mortgage loans generally are appraised by
qualified independent appraisers. Such appraisers inspect and appraise the
subject property and verify that such property is in acceptable condition.
Following each appraisal, the appraiser prepares a report which includes a
market value analysis based on recent sales of comparable homes in the area and,
when deemed appropriate, replacement cost analysis based on the current cost of
constructing a similar home. All appraisals are required to conform to the
Uniform Standards of Professional Appraisal Practice adopted by the Appraisal
Standards Board of the Appraisal Foundation and are generally on forms
acceptable to Fannie Mae and Freddie Mac. The New Century Underwriting
Guidelines require a review of the appraisal by a qualified employee of New
Century or by an appraiser retained by New Century.
The New Century Mortgage Loans were originated consistent with and
generally conform to the New Century Underwriting Guidelines' "Full
Documentation", "Limited Documentation" and "Stated Income Documentation"
residential loan programs. Under each of the programs, New Century reviews the
applicant's source of income, calculates the amount of income from sources
indicated on the loan application or similar documentation, reviews the credit
history of the applicant, calculates the debt service-to-income ratio to
determine the applicant's ability to repay the loan, reviews the type and use of
the property being financed, and reviews the property. In determining the
ability of the applicant to repay the loan, a rate (the "Qualifying Rate") has
been created under the New Century Underwriting Guidelines that generally is
equal to the lesser of the fully indexed interest rate on the loan being applied
for or one percent above the initial interest rate on such loan (in the case of
six-month LIBOR loans that do not provide for a delayed first adjustment) or is
generally equal to the initial interest rate on such loan (in the case of other
LIBOR-based loans). The New Century Underwriting Guidelines require that
mortgage loans be underwritten in a standardized procedure which complies with
applicable federal and state laws and regulations and
S-21
<PAGE>
requires New Century's underwriters to be satisfied that the value of the
property being financed, as indicated by an appraisal and a review of the
appraisal, currently supports the outstanding loan balance. In general, the
maximum loan amount for mortgage loans originated under the programs is
$500,000. The New Century Underwriting Guidelines generally permit loans on one-
to four-family residential properties to have (i) a loan-to-value ratio ("LTV")
at origination of up to 90% with respect to non-conforming first liens, (ii) a
combined loan-to-value ratio ("CLTV") at origination of up to 90% with respect
to non-conforming second liens and (iii) a CLTV at origination of up to 100%
with respect to conforming second liens, in each case depending on, among other
things, the purpose of the mortgage loan, a mortgagor's credit history,
repayment ability and debt service-to- income ratio, as well as the type and use
of the property. With respect to mortgage loans secured by mortgaged properties
acquired by a mortgagor under a "lease option purchase", the LTV of the related
mortgage loan is based on the lower of the appraised value at the time of
origination of such mortgage loan or the sale price of the related mortgaged
property if the "lease option purchase price" was set less than 12 months prior
to origination and is based on the appraised value at the time of origination if
the "lease option purchase price" was set 12 months or more prior to
origination.
The New Century Underwriting Guidelines require that the income of each
applicant be verified. The specific income documentation required for New
Century's various programs is as follows: under the Full Documentation program,
applicants generally are required to submit two written forms of verification of
stable income for at least 12 months; under the Limited Documentation programs,
one such form of verification is required for 12 months; under the Stated Income
Documentation program, an applicant may be qualified based upon monthly income
as stated on the mortgage loan application if the applicant meets certain
criteria. All the foregoing programs require that, with respect to salaried
employees, there be a telephone verification of the applicant's employment.
Verification of the source of funds (if any) required to be deposited by the
applicant into escrow in the case of a purchase money loan is required when the
LTV is greater than 70%.
In evaluating the credit quality of borrowers, New Century utilizes credit
bureau risk scores (a "FICO score"), a statistical ranking of likely future
credit performance developed by Fair, Isaac & Company and the three national
credit data repositories--Equifax, TransUnion and Experian.
The New Century 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:
NON-CONFORMING FIRST LIEN MORTGAGE LOANS:
"A+" RISK. Under the "A+" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms or
must have a FICO score of 640 or higher. A maximum of one 30-day late
payment and no 60-day late payments within the last 12 months is acceptable
on an existing mortgage loan. An existing mortgage loan is required to be
current at the time the application is submitted. No open collection
accounts or open charge-offs may remain open after the funding of the loan.
No bankruptcy or notice of default filings may have occurred during the
preceding three years; provided, however, that if the borrower's bankruptcy
has been discharged during the past three years and the borrower has
re-established a credit history otherwise complying with the credit
parameters set forth in this paragraph, then the borrower may qualify for a
mortgage loan. The mortgaged property must be in at least average
condition. A maximum LTV of 90% is permitted for a mortgage loan on a
single family owner-occupied property. A maximum LTV of 80% is permitted
for a mortgage loan on a non-owner occupied property, an owner-occupied
condominium or a two- to four-family residential property. The maximum LTV
for rural, remote or unique properties is 75%. The maximum CLTV (including
any related subordinate lien) is 100% for either a refinance loan or a
purchase
S-22
<PAGE>
money loan. The debt service-to-income ratio generally ranges from 42% to
45% or less, depending on the Qualifying Rate and the LTV.
"A-" RISK. Under the "A-" risk category, an applicant must have
generally repaid installment or revolving debt according to its terms or
must have a FICO score of 620 or higher. A maximum of three 30-day late
payment and no 60-day late payments within the last 12 months is acceptable
on an existing mortgage loan if the LTV is 85% or less. An existing
mortgage loan is required to be current at the time of funding of the loan.
Minor derogatory items are allowed as to non-mortgage credit, and a letter
of explanation may be required under the Full Documentation program.
Medical derogatories are not considered. Open collection accounts or open
charge-offs affecting title with balances of less than $500 may remain open
after funding of the loan. No bankruptcy may have occurred during the
preceding two years. No notice of default filings may have occurred during
the preceding three years; provided, however, that if the borrower's
bankruptcy has been discharged during the past two years and the borrower
has re-established a credit history otherwise complying with the credit
parameters set forth in this paragraph, then the borrower may qualify for a
mortgage loan. The mortgaged property must be in at least average
condition. A maximum LTV of 90% (or 80% for mortgage loans originated under
the Limited Documentation and Stated Income Documentation programs) is
permitted for a mortgage loan on a single family owner-occupied property. A
maximum LTV of 80% (or 70% for mortgage loans originated under the Limited
Documentation and Stated Income Documentation programs) is permitted for a
mortgage loan on a non-owner- occupied property, an owner-occupied
condominium or a two- to four-family residential property. The maximum LTV
for rural, remote, or unique properties is 75%. The maximum CLTV (including
any related subordinate lien) is 100% for a refinance loan and 95% for a
purchase money loan. The debt service-to-income ratio is generally 50% or
less.
"B" RISK. Under the "B" risk category, an applicant may have
experienced isolated credit problems, but should have generally repaid
installment or revolving debt according to its terms or must have a FICO
score of 600 or higher. A maximum of one 60-day late payment within the
last 12 months is acceptable on an existing mortgage loan. An existing
mortgage loan must be less than 60 days late at the time of funding of the
loan. As to non-mortgage credit, some prior defaults may have occurred and
a letter of explanation may be required under the Full Documentation
program. Medical derogatories are not considered. Generally, open
charge-offs or collection accounts with balances of less than $1,000 may
remain open after the funding of the loan. No bankruptcy or notice of
default filings by the applicant may have occurred during the preceding two
years; provided, however, that if the borrower's bankruptcy has been
discharged during the past two years and the borrower has re-established a
credit history otherwise complying with the credit parameters set forth in
this paragraph, the borrower may qualify for a mortgage loan. The mortgaged
property must be in at least average condition. A maximum LTV of 80% (or
75% for mortgage loans originated under the Limited Documentation and
Stated Income Documentation programs) is permitted for a mortgage loan on
an owner-occupied detached property originated under the Full Documentation
program. A maximum LTV of 75% (or 70% for mortgage loans originated under
the Limited Documentation and Stated Income Documentation programs) is
permitted for a mortgage loan on a non-owner- occupied property, an
owner-occupied condominium or a two- to four-family residential property.
The maximum LTV for rural, remote or unique properties is 70%. The maximum
CLTV (including any related subordinate lien) is 100% for a refinance loan
and 95% for a purchase money loan. The debt service-to-income ratio is
generally 55% or less.
"C" RISK. Under the "C" risk category, an applicant may have
experienced significant credit problems in the past. A maximum of one
90-day late payment within the last 12 months is acceptable on an existing
mortgage loan. An existing mortgage loan must be less than 90 days late at
the time of funding of the loan. As to non-mortgage credit, significant
prior defaults may
S-23
<PAGE>
have occurred. Open charge-offs or collection accounts with balances of
less than $2,500 may remain open after the funding of the loan. No
bankruptcy or notice of default filings by the applicant may have occurred
during the preceding 12 months; provided, however, that if the borrower's
bankruptcy has been discharged during the past 12 months and the borrower
has re-established a credit history otherwise complying with the credit
parameters set forth in this paragraph, the borrower may qualify for a
mortgage loan. The mortgaged property must be in average condition.
Generally, a maximum LTV of 75% for a mortgage loan on a single family,
owner-occupied property for a Full Documentation program (or 70% for
mortgage loans originated under the Limited Documentation and Stated Income
Documentation programs) is permitted. A maximum LTV of 70% (or 65% for
mortgage loans originated under the Limited Documentation and the Stated
Income Documentation programs) is permitted for a mortgage loan on a
non-owner-occupied property, an owner-occupied condominium or a two-
to-four family residential property. The maximum LTV for rural, remote or
unique properties is 70%. The maximum CLTV (including any related
subordinate lien) is 95% for a refinance loan and for a purchase money
loan. The debt service-to-income ratio is generally 59% or less.
"C-" RISK. Under the "C-" risk category, an applicant may have
experienced significant credit problems in the past. A maximum of two
90-day late payments and one 120-day late payment is acceptable on an
existing mortgage loan. An existing mortgage loan must be less than 90 days
late at the time of funding of the loan. As to non-mortgage credit,
significant prior defaults may have occurred. Open charge-offs or
collection accounts with balances less than $5,000 may remain open after
the funding of the loan. There may be no current notice of default and any
bankruptcy must be discharged. The mortgaged property may exhibit some
deferred maintenance. A maximum LTV of 70% (or 65% for mortgage loans
originated under the Limited Documentation and Stated Income Documentation
programs) is permitted for a mortgage loan on a single family
owner-occupied property. A maximum LTV of 65% (or 60% for mortgage loans
originated under the Limited Documentation and Stated Income Documentation
programs) is permitted for a mortgage loan on a non-owner occupied
property, an owner-occupied condominium or a two- to four-family
residential property. The maximum LTV for rural, remote or unique
properties is 65%. The maximum CLTV (including any related subordinate
lien) is 100% for a refinance loan and 95% for a purchase money loan. The
debt service-to-income ratio is generally 59% or less.
MORTGAGE CREDIT ONLY ("MO"). The Mortgage Credit Only program allows
for three 30-day late payments and no 60-day late payments within the last
12 months on an existing mortgage loan. An existing mortgage loan is not
required to be current at the time the application is submitted. Derogatory
items are allowed as to non-mortgage credit. No bankruptcy or notice of
default filings may have occurred during the preceding two years; provided,
however, that if the borrower's bankruptcy has been discharged during the
past two years and the borrower has reestablished a credit history
otherwise complying with the credit parameters set forth in this paragraph,
the borrower may then qualify for a mortgage loan. The mortgaged property
must be in at least average condition. A maximum LTV of 75% for mortgage
loans originated under either the Full or Limited Documentation programs is
permitted for a mortgage loan on a single family owner-occupied property.
Mortgage Credit Only loans are not made available under the Stated Income
Documentation program. A maximum LTV of 70% is permitted for a mortgage
loan on a non-owner occupied property, second home, owner-occupied
condominium, or two- to four-family residential property. The Mortgage
Credit Only program is not available for rural, remote or unique
properties. The maximum CLTV (including any related subordinate lien) is
100% for a refinance loan or 95% for a purchase money loan. The debt
service-to-income ratio is generally equal to or less than 55%.
HOME SAVER PROGRAM ("HS"). New Century originates loans under a program
called "Home Saver" to enable borrowers with an existing delinquent loan to
preserve their home ownership.
S-24
<PAGE>
The existing loan may be over 90 days delinquent, but any bankruptcy
proceeding must be dismissed before the loan is funded. The LTV may not
exceed 65% (or 60% for loans originated under the Limited Documentation
program). Home Saver loans are not made available under the Stated Income
Documentation Program. A maximum LTV of 60% (or 55% for mortgage loans
originated under the Limited Documentation program) is permitted for a
mortgage loan on a non-owner occupied property, owner-occupied condominium
or a two- to four-family residential property. The Home Saver program is
not available for rural, remote or unique properties. The maximum CLTV
(including any related subordinate lien) is 95% for either a refinance loan
or a purchase money loan. The maximum loan amount is $250,000 (or $200,000
for loans originated under the Limited Documentation program).
EXCEPTIONS. As described above, the foregoing categories and criteria
are guidelines only. On a case-by-case basis, it may be determined that an
applicant warrants a debt service-to- income ratio exception, a pricing
exception, a loan-to-value exception, an exception from certain
requirements of a particular risk category, etc. (collectively called an
"exception"). An exception may generally be allowed if the application
reflects certain compensating factors, among others: low LTV; pride of
ownership; a maximum of one 30-day late payment on all mortgage loans
during the last 12 months; and stable employment or ownership of current
residence of five or more years. An exception may also be allowed if the
applicant places a down payment through escrow of at least 20% of the
purchase price of the mortgaged property or if the new loan reduces the
applicant's monthly aggregate mortgage payment by 25% or more. Accordingly,
certain mortgagors may qualify in a more favorable risk category that, in
the absence of such compensating factors, would satisfy only the criteria
of a less favorable risk category.
NON-CONFORMING SECOND LIEN MORTGAGE LOANS:
"A+" RISK. Under the "A+" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms or
must have a FICO score of 640 or higher. A maximum of one 30-day late
payment and no 60-day late payments within the last 12 months is acceptable
on an existing mortgage loan. An existing mortgage loan is required to be
current at the time the application is submitted. No open collection
accounts or open charge-offs may remain open after the funding of the loan.
No bankruptcy or notice of default filings may have occurred during the
preceding three years; provided, however, that if the borrower's bankruptcy
has been discharged during the past three years and the borrower has
re-established a credit history otherwise complying with the credit
parameters set forth in this paragraph, then the borrower may qualify for a
mortgage loan. The mortgaged property must be in at least average
condition. A maximum CLTV of 90% (or 85% for mortgage loans originated
under the Limited Documentation and Stated Income Documentation programs)
is permitted for a mortgage loan on a single family owner-occupied
property. A maximum CLTV of 85% is permitted for a mortgage loan on a
non-owner occupied property, an owner-occupied condominium or a two- to
four-family residential property. The maximum CLTV for rural, remote or
unique properties is 75%. The debt service-to-income ratio generally ranges
from 42% to 45% or less, depending on the Qualifying Rate and the CLTV.
"A-" RISK. Under the "A-" risk category, an applicant must have
generally repaid installment or revolving debt according to its terms or
must have a FICO score of 620 or higher. A maximum of three 30-day late
payments and no 60-day late payment within the last 12 months are
acceptable on an existing mortgage loan. An existing mortgage loan is
required to be current at the time of funding of the loan. Minor derogatory
items are allowed as to non-mortgage credit, and a letter of explanation
may be required under the Full Documentation program. Medical derogatories
are not considered. Open collection accounts or open charge-offs affecting
title with balances of less than $500 may remain open after funding of the
loan.
S-25
<PAGE>
No bankruptcy may have occurred during the preceding two years. No notice
of default filings may have occurred during the preceding three years;
provided, however, that if the borrower's bankruptcy has been discharged
during the past two years and the borrower has re-established a credit
history otherwise complying with the credit parameters set forth in this
paragraph, then the borrower may qualify for a mortgage loan. The mortgaged
property must be in at least average condition. A maximum CLTV of 90% (or
80% for mortgage loans originated under the Limited Documentation and
Stated Income Documentation programs) is permitted for a mortgage loan on a
single family owner-occupied property. A maximum CLTV of 80% (or 70% for
mortgage loans originated under the Limited Documentation and Stated Income
Documentation programs) is permitted for a mortgage loan on a
non-owner-occupied property. A maximum CLTV of 85% (or 75% for mortgage
loans originated under the Limited Documentation and Stated Income
Documentation programs) is permitted for a mortgage loan secured by an
owner-occupied condominium or a two- to four-family residential property.
The maximum CLTV for rural, remote, or unique properties is 75%. The debt
service-to-income ratio is generally 50% or less.
"B" RISK. Under the "B" risk category, an applicant may have
experienced isolated credit problems, but should have generally repaid
installment or revolving debt according to its terms or must have a FICO
score of 600 or higher. A maximum of one 60-day late payment within the
last 12 months is acceptable on an existing mortgage loan. An existing
mortgage loan must be less than 60 days late at the time of funding of the
loan. As to non-mortgage credit, some prior defaults may have occurred and
a letter of explanation may be required under the Full Documentation
program. Medical derogatories are not considered. Generally, open
charge-offs or collection accounts with balances of less than $1,000 may
remain open after the funding of the loan. No bankruptcy or notice of
default filings by the applicant may have occurred during the preceding two
years; provided, however, that if the borrower's bankruptcy has been
discharged during the past two years and the borrower has re-established a
credit history otherwise complying with the credit parameters set forth in
this paragraph, the borrower may qualify for a mortgage loan. The mortgaged
property must be in at least average condition. A maximum CLTV of 80% (or
75% for mortgage loans originated under the Limited Documentation and
Stated Income Documentation programs) is permitted for a mortgage loan on
an owner-occupied detached property. A maximum CLTV of 75% (or 70% for
mortgage loans originated under the Limited Documentation and Stated Income
Documentation programs) is permitted for a mortgage loan on a
non-owner-occupied property, an owner-occupied condominium or a two- to
four-family residential property. The maximum CLTV for rural, remote or
unique properties is 70%. The debt service-to-income ratio is generally 55%
or less.
"C" RISK. Under the "C" risk category, an applicant may have
experienced significant credit problems in the past. A maximum of one
90-day late payment within the last 12 months is acceptable on an existing
mortgage loan. An existing mortgage loan must be less than 90 days late at
the time of funding of the loan. As to non-mortgage credit, significant
prior defaults may have occurred. Open charge-offs or collection accounts
with balances of less than $2,500 may remain open after the funding of the
loan. No bankruptcy or notice of default filings by the applicant may have
occurred during the preceding 12 months; provided, however, that if the
borrower's bankruptcy has been discharged during the past 12 months and the
borrower has re-established a credit history otherwise complying with the
credit parameters set forth in this paragraph, the borrower may qualify for
a mortgage loan. The mortgaged property must be in average condition.
Generally, a maximum CLTV of 75% for a mortgage loan on a single family,
owner-occupied property for a Full Documentation program (or 70% for
mortgage loans originated under the Limited Documentation and Stated Income
Documentation programs) is permitted. A maximum CLTV of 70% (or 65% for
mortgage loans originated under the Limited Documentation and the Stated
Income Documentation programs) is permitted for a mortgage
S-26
<PAGE>
loan on a non-owner-occupied property, an owner-occupied condominium or a
two- to-four family residential property. The maximum CLTV for rural,
remote or unique properties is 70%. The debt service-to-income ratio is
generally 59% or less.
"C-" RISK. Under the "C-" risk category, an applicant may have
experienced significant credit problems in the past. A maximum of two
90-day late payments and one 120-day late payment is acceptable on an
existing mortgage loan. An existing mortgage loan must be less than 90 days
late at the time of funding of the loan. As to non-mortgage credit,
significant prior defaults may have occurred. Open charge-offs or
collection accounts with balances of less than $5,000 may remain open after
the funding of the loan. There may be no current notice of default and any
bankruptcy must be discharged. The mortgaged property may exhibit some
deferred maintenance. A maximum CLTV of 75% (or 65% for mortgage loans
originated under the Limited Documentation and Stated Income Documentation
programs) is permitted for a mortgage loan on a single family
owner-occupied property. A maximum CLTV of 70% (or 60% for mortgage loans
originated under the Limited Documentation and Stated Income Documentation
programs) is permitted for a mortgage loan on a non-owner occupied
property, an owner-occupied condominium or a two- to four-family
residential property. The maximum CLTV for rural, remote or unique
properties is 65%. The debt service-to-income ratio is generally 65% or
less.
EXCEPTIONS. As described above, the foregoing categories and criteria
are guidelines only. On a case-by-case basis, it may be determined that an
applicant warrants a debt service-to- income ratio exception, a pricing
exception, a loan-to-value exception, an exception from certain
requirements of a particular risk category, etc. (collectively called an
"exception"). An exception may generally be allowed if the application
reflects certain compensating factors, among others: low CLTV; pride of
ownership; a maximum of one 30-day late payment on all mortgage loans
during the last 12 months; and stable employment or ownership of current
residence of five or more years. An exception may also be allowed if the
applicant places a down payment through escrow of at least 20% of the
purchase price of the mortgaged property or if the new loan reduces the
applicant's monthly aggregate mortgage payment by 25% or more. Accordingly,
certain mortgagors may qualify in a more favorable risk category that, in
the absence of such compensating factors, would satisfy only the criteria
of a less favorable risk category.
CONFORMING SECOND LIEN MORTGAGE LOANS:
"A+" RISK. Under the "A+" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms or
must have a FICO score of 720 or higher. A maximum of no late payments in
the last 12 months and one 30-day late payment within the last 24 months is
acceptable on an existing mortgage loan. An existing mortgage loan is
required to be current at the time the application is submitted. No open
collection accounts or open charge-offs may remain open after the funding
of the loan. No bankruptcy filings may have occurred during the preceding
five years; provided, however, that if the borrower's bankruptcy has been
discharged during the past five years and the borrower has re-established a
credit history otherwise complying with the credit parameters set forth in
this paragraph, then the borrower may qualify for a mortgage loan. The
mortgaged property must be in at least average condition. A maximum CLTV of
100% is permitted for a mortgage loan on an owner-occupied single-family
residence, townhome or planned unit development. A maximum CLTV of 90% is
permitted for a mortgage loan on an owner-occupied condominium or a two- to
four-family residential property. The maximum debt service-to-income ratio
is 45% or 50% with $2,500 in disposable income.
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"A" RISK. Under the "A" risk category, an applicant must have generally
repaid installment or revolving debt according to its terms or must have a
FICO score of 680 or higher. A maximum of one 30-day late payment and no
60-day late payments within the last 24 months is acceptable on an existing
mortgage loan. An existing mortgage loan is required to be current at the
time the application is submitted. Minor derogatory items are allowed as to
non-mortgage credit, and a letter of explanation may be required under the
Full Documentation program. No bankruptcy or notice of default filings may
have occurred during preceding five years; provided, however, that if the
borrower's bankruptcy has been discharged during the past five years and
the borrower has re-established a credit history otherwise complying with
the credit parameters set forth in this paragraph, then the borrower may
qualify for a mortgage loan. The mortgaged property must be in at least
average condition. A maximum CLTV of 100% is permitted for a mortgage loan
on an owner-occupied single-family residence, townhome or planned unit
development. A maximum CLTV of 90% is permitted for a mortgage loan on an
owner-occupied condominium or two- to four-family residential property. The
debt service-to-income ratio is 45% or 50% with $1,500 in disposable
income.
"B+" RISK. Under the "B+" risk category, an applicant may have
experienced isolated credit problems, but should have generally repaid
installment or revolving debt according to its terms or must have a FICO
score of 640 or higher. A maximum of one 30-day late payment within the
last 12 months and two 30-day late payments within the last 24 months is
acceptable on an existing mortgage loan. No bankruptcy filings by the
applicant may have occurred during the preceding five years; provided,
however, that if the borrower's bankruptcy has been discharged during the
past five years and the borrower has re-established a credit history
otherwise complying with the credit parameters set forth in this paragraph,
the borrower may qualify for a mortgage loan. The mortgaged property must
be in at least average condition. A maximum CLTV of 100% is permitted for a
mortgage loan on an owner-occupied single-family residence, townhome or
planned unit development. A maximum CLTV of 90% is permitted for a mortgage
loan on an owner-occupied condominium or a two- to four-family residential
property. The maximum debt service-to-income ratio is 42%, however a 5%
debt service-to-income ratio allowance may be made based on compensating
factors.
"B" RISK. Under the "B" risk category, an applicant may have
experienced isolated credit problems but should have generally repaid
installment or revolving debt according to its terms or must have a FICO
score of 610 or higher for loans with CLTVs of 85% or higher, or 600 or
higher for loans with CLTVs of less than 85%. A maximum of one 30-day late
payment within the last 12 months and two 30-day late payments within the
last 24 months is acceptable on an existing mortgage loan. No bankruptcy
filings by the applicant may have occurred during the preceding five years;
provided, however, that if the borrower's bankruptcy has been discharged
during the past five years and the borrower has re-established a credit
history otherwise complying with the credit parameters set forth in this
paragraph, the borrower may qualify for a mortgage loan. The mortgaged
property must be in average condition. A maximum CLTV of 100% for a
mortgage loan on an owner-occupied single-family residence, townhome or
planned unit development is permitted. A maximum CLTV of 90% is permitted
for a mortgage loan on an owner-occupied condominium or a two- to-four
family residential property. The maximum debt service-to-income ratio is
38%, however a 5% debt service-to-income allowance may be made based on
compensating factors.
EXCEPTIONS. As described above, the foregoing categories and criteria
are guidelines only. On a case-by-case basis, it may be determined that an
applicant warrants a debt service-to- income ratio exception, a pricing
exception, a loan-to-value exception, an exception from certain
requirements of a particular risk category, etc. (collectively called an
"exception"). An exception may generally be allowed if the application
reflects certain compensating factors, among others: low CLTV; pride of
ownership; a maximum of one 30-day late payment on all
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mortgage loans during the last 12 months; and stable employment or
ownership of current residence of five or more years. An exception may also
be allowed if the applicant places a down payment through escrow of at
least 20% of the purchase price of the mortgaged property or if the new
loan reduces the applicant's monthly aggregate mortgage payment by 25% or
more. Accordingly, certain mortgagors may qualify in a more favorable risk
category that, in the absence of such compensating factors, would satisfy
only the criteria of a less favorable risk category.
New Century commenced receiving applications for mortgage loans under its
regular lending program in February 1996, commenced its default related
servicing operations in September 1997 and until July 1998 had outsourced
certain of its other servicing duties to a subservicer. As of July 1998, New
Century is directly handling the servicing duties that it used to outsource,
including loan setup, escrow administration, monthly billings, cashiering and
lockbox operation and sweeps, demands and payoff requests, year-end tax
reporting, routine customer calls and correspondence and mortgage pool data
reporting. Accordingly, other than to the limited extent as described under
"Pooling and Servicing Agreement--New Century Mortgage Corporation--Loan Loss
and Delinquency" herein, New Century (whether as an originator or acquirer of
mortgage loans) does not have representative historical delinquency, bankruptcy,
foreclosure or default experience that may be referred to for purposes of
examining New Century's performance in servicing mortgage loans similar to the
Mortgage Loans.
OPTION ONE UNDERWRITING PROGRAMS
The Option One Mortgage Loans will have been originated generally in
accordance with Option One's Guidelines (the "Option One Guidelines"). On a
case-by-case basis, exceptions to the Option One Guidelines are made where
compensating factors exist. Except as specifically stated herein, the Option One
Guidelines are the same for first-lien mortgage loans and second-lien mortgage
loans.
The Option One Guidelines 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 Option One Mortgage Loans were also generally
underwritten with a view toward the resale thereof in the secondary market. All
the Option One Mortgage Loans generally bear higher rates of interest than
mortgage loans that are originated in accordance with Fannie Mae and Freddie Mac
standards.
Each applicant completes an application which includes information with
respect to the applicant's liabilities, income, credit history, employment
history and personal information. The Option One Guidelines require a credit
report on each applicant from a credit reporting company. The report typically
contains information relating to such matters as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions or judgments. Mortgaged properties that
are to secure mortgage loans generally are appraised by qualified independent
appraisers. Such appraisers inspect and appraise the subject property and verify
that such property is in acceptable condition. Following each appraisal, the
appraiser prepares a report which includes a market value analysis based on
recent sales of comparable homes in the area and, when deemed appropriate,
replacement cost analysis based the current cost of constructing a similar home.
All appraisals are required to conform to the Uniform Standards of Professional
Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal
Foundation and are generally on forms acceptable to Fannie Mae and Freddie Mac.
The Option One Guidelines require a review of the appraisal by a loan
underwriter, who may request a written review by an independent appraiser
retained by Option One.
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The Option One Mortgage Loans were originated consistent with and generally
conform to the Option One Guidelines' "Full Documentation" and "Stated Income
Documentation" residential loan programs. Under each of the programs, Option One
reviews the applicant's source of income, calculates the amount of income from
sources indicated on the loan application or similar documentation, reviews the
credit history of the applicant, calculates the debt service-to-income ratio to
determine the applicant's ability to repay the loan, reviews the type and use of
the property being financed, and reviews the property. In determining the
ability of the applicant to repay the loan, a rate (the "Qualifying Rate") has
been created under the Option One Guidelines that generally is equal to the
lesser of the fully indexed interest rate on the loan being applied for or one
percent above the initial interest rate on such loan. The Option One Guidelines
require that mortgage loans be underwritten in a standardized procedure which
complies with applicable federal and state laws and regulations and requires
Option One's underwriters to be satisfied that the value of the property being
financed, as indicated by an appraisal and a review of the appraisal, currently
supports the outstanding loan balance. In general, the maximum loan amount for
mortgage loans originated under the programs is $350,000. Mortgage loans may,
however, be originated generally up to $950,000. The Option One Guidelines
permit one-to-four-family loans to have LTV's at origination of generally up to
80%, depending on, among other things, the purpose of the mortgage loan, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the property. Any references to LTVs under this
section "Underwriting Standards; Representations--OPTION ONE UNDERWRITING
PROGRAMS" includes the LTV of any related senior lien when referring to any
second lien mortgage loan. With respect to mortgage loans where the review of
the appraisal results in a valuation of the mortgaged property that is more than
(i) 10% less in the case of mortgage loans with LTV's less than or equal to 80%
or (ii) 5% less in the case of mortgage loans with LTV's in excess of 80%, the
LTV of the related mortgage loan is based on the valuation obtained in the
review of the original appraisal. With respect to mortgage loans secured by
mortgaged properties acquired by a mortgagor under a "lease option purchase,"
the LTV of the related mortgage loan is based on the lower of the appraised
value at the time of origination of such mortgage loan or the sale price of the
related mortgaged property if the "lease option purchase price" was set less
than 12 months prior to origination and is based on the appraised value at the
time of origination if the "lease option purchase price" was set 12 months or
more prior to origination.
With respect to any second-lien mortgage loan, the minimum loan amount for
such second-lien mortgage loan is 20% of the related first-lien mortgage loan,
if the LTV of such mortgage loan is at the maximum LTV of the related program
and the minimum loan amount for such second-lien mortgage loan is 10% of the
related first-lien mortgage loan, if the LTV of such mortgage loan is 10% below
the maximum LTV of the related program. If any related senior lien mortgage loan
has a balloon payment, the second lien mortgage loan must mature before such
balloon payment. Balloon loans are only allowed under the fixed rate program.
The Option One Guidelines require that income be verified for each
applicant and that the source of funds (if any) required to be deposited by the
applicant into escrow under its various programs as follows: Under the Full
Documentation program, applicants generally are required to submit two written
forms of verification of stable income for 24 months (or, if the LTV is less
than or equal to 80%, for 12 months). Under the Stated Income Documentation
program, an applicant may be qualified based upon monthly income as stated on
the mortgage loan application if the applicant meets certain criteria. All the
foregoing programs require that with respect to salaried employees there be a
telephone verification of the applicant's employment. Verification of the source
of funds (if any) required to be deposited by the applicant into escrow in the
case of a purchase money loan is generally required under the Full Documentation
program guidelines. No such verification is required under the other programs.
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The Option One Guidelines have the following categories and criteria for
grading the potential likelihood that an applicant will satisfy the repayment
obligations of a mortgage loan:
"AA" RISK. Under the "AA" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms. A
maximum of one 30-day late payment, and no 60-day late payments, within the
last 12 months is acceptable on an existing mortgage loan. An existing
mortgage loan is not required to be current at the time the application is
submitted. No open collection accounts or open charge-offs may remain open
after the funding of the loan. No bankruptcy or notice of default filings
may have occurred during the preceding three years; provided, however, that
if the borrower's chapter 13 bankruptcy has been discharged during the past
three years and the borrower has re-established a credit history otherwise
complying with the credit parameters set forth in this paragraph, then the
borrower may qualify for a mortgage loan on LTVs less than or equal to 80%.
The mortgaged property must be in at least average condition. A maximum LTV
of 95% is permitted for a mortgage loan on a single family owner-occupied
property. A maximum LTV of 90% is permitted for a mortgage loan on an
owner-occupied condominium or a maximum LTV of 80% is permitted on a two-
to four-family residential property. A maximum LTV of 85% is permitted for
a second-lien mortgage loan. The debt service-to-income ratio generally
ranges from 45% or less to 55% or less depending on the Qualifying Rate and
the LTV.
"A" RISK. Under the "A" risk category, an applicant must have
generally repaid installment or revolving debt according to its terms. A
maximum of two 30-day late payments, and no 60-day late payments, within
the last 12 months is acceptable on an existing mortgage loan. An existing
mortgage loan is not required to be current at the time the application is
submitted. Minor derogatory items are allowed as to non-mortgage credit,
and a letter of explanation may be required under the Full Documentation
program. No open collection accounts or open charge-offs may remain open
after funding of the loan; except that under the Option One Guidelines for
the Stated Income Documentation program up to $500 may remain open after
funding of the loan. No bankruptcy or notice of default filings may have
occurred during the preceding two years; provided, however, that if the
borrower's chapter 13 bankruptcy has been discharged during the past two
years and the borrower has re-established a credit history otherwise
complying with the credit parameters set forth in this paragraph, then the
borrower may qualify for a mortgage loan, if the LTV is less than or equal
to 80%. The mortgaged property must be in at least average condition. A
maximum LTV of 90% (or 80% for mortgage loans originated under the Stated
Income Documentation program or for any second-lien mortgage loan) is
permitted for a mortgage loan on a single family or condo owner-occupied
property. A maximum LTV of 75% (or 70% for mortgage loans originated under
the Stated Income Documentation program) is permitted for a mortgage loan
on a non-owner-occupied property. However, for most refinance mortgage
loans under the Full Documentation program, a maximum LTV of 80% is
permitted for a mortgage loan on an owner-occupied property, and a maximum
LTV of 75% is permitted only for a mortgage loan on a non-owner-occupied
property. The debt service-to-income ratio generally ranges from 45% or
less to 55% or less depending on the Qualifying Rate and the LTV.
"B" RISK. Under the "B" risk category, an applicant must have
generally repaid installment or revolving debt according to its terms. A
maximum of four 30-day late payments, and no 60-day late payments, within
the last 12 months, or two 30-day late payments, and one 60-day late
payment in the last 12 months, is acceptable on an existing mortgage loan.
An existing mortgage loan is not required to be current at the time the
application is submitted, unless there has been a 60-day late payment in
the last 12 months. As to non-mortgage credit, some prior defaults may have
occurred, and a letter of explanation may be required under the Full
Documentation program. Generally, no more than $500 in open charge-offs or
collection accounts may remain open after the funding of the loan. No
bankruptcy or notice of default
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filings by the applicant may have occurred during the preceding 18 months;
provided, however, that if the borrower's chapter 13 bankruptcy has been
discharged during the past 18 months and the borrower has re-established a
credit history otherwise complying with the credit parameters set forth in
this paragraph, then the borrower may qualify for a mortgage loan, if the
LTV is less than or equal to 80%. The mortgaged property must be in at
least average condition. A maximum LTV of 80% is permitted for a mortgage
loan on an owner-occupied property for the Full Documentation or the Stated
Income Documentation programs. A maximum LTV of 75% (or 70% for mortgage
loans originated under the Stated Income Documentation program) is
permitted for a mortgage loan on a non-owner-occupied property. In certain
instances, a maximum LTV of 85% is permitted for a mortgage loan secured by
a single family or condo owner-occupied property originated under the Full
Documentation program. The debt service-to-income ratio generally ranges
from 45% or less to 55% or less depending on the Qualifying Rate and the
LTV.
"C" RISK. Under the "C" risk category, an applicant may have
experienced significant credit problems in the past. A maximum of six
30-day late payments, including one 60-day late payment and one 90-day late
payment, within the last 12 months is acceptable on an existing mortgage
loan. However, more than six 30-day late payments within the last 12 moths
are acceptable if there are no 60-day or 90-day late payments within the
last 12 months. An existing mortgage loan is not required to be current at
the time the application is submitted. As to non-mortgage credit,
significant prior defaults may have occurred. No more than $2,500 in open
charge-offs or collection accounts may remain open after the funding of the
loan. No bankruptcy or notice of default filings by the applicant may have
occurred during the preceding 12 months; provided, however, that if the
borrower's chapter 13 bankruptcy has been discharged during the past 12
months and the borrower has re-established a credit history otherwise
complying with the credit parameters set forth in this paragraph, then the
borrower may qualify for a mortgage loan. The mortgaged property must be in
adequate condition. Generally, a maximum LTV of 70% for a mortgage loan on
an owner-occupied property for the Full Documentation or Stated Income
Documentation programs is permitted. A maximum LTV of 75% is permitted on a
case-by-case basis. A maximum LTV of 70% is permitted for a mortgage loan
on a single family, detached non-owner-occupied property. A maximum LTV of
65% is permitted under the Full Documentation or Stated Income
Documentation programs for all other acceptable types of properties. The
debt service-to-income ratio generally ranges from 55% or less to 60% or
less depending on the Qualifying Rate and the LTV.
"CC" RISK. Under the "CC" risk category, an applicant may have
experienced significant credit problems in the past. As to mortgage credit,
mortgage delinquency, including foreclosure proceedings, will be considered
on a case-by-case basis. As to non-mortgage credit, significant prior
defaults may have occurred. Open charge-offs or collection accounts may
remain open after the funding of the loan. The mortgaged property may
exhibit some deferred maintenance. A maximum LTV of 65% (or 60%
non-owner-occupied for mortgage loans originated under the Stated Income
Documentation program) is permitted for a mortgage loan on either an
owner-occupied property or a non-owner-occupied property. The debt
service-to- income ratio generally is 60% or less depending on the
Qualifying Rate and the LTV.
EXCEPTIONS. As described above, the foregoing categories and criteria
are guidelines only. On a case-by-case basis, it may be determined that an
applicant warrants a risk category upgrade, a debt service-to-income ratio
exception, a pricing exception, a loan-to-value exception or an exception
from certain requirements of a particular risk category (collectively
called an "upgrade" or an "exception"). An upgrade or exception may
generally be allowed if the application reflects certain compensating
factors, among others: low LTV; pride of ownership; a maximum of one 30-day
late payment on all mortgage loans during the last 12 months; stable
employment or ownership of current residence of five or more years. An
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upgrade or exception may also be allowed if the applicant places a down
payment through escrow of at least 20% of the purchase price of the
mortgaged property, or if the new loan reduces the applicant's monthly
aggregate mortgage payment by 25% or more. Accordingly, certain mortgagors
may qualify in a more favorable risk category that, in the absence of such
compensating factors, would satisfy only the criteria of a less favorable
risk category.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted as of the
close of business on the Cutoff Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Certificates,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise if the Depositor deems such removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the Mortgage Pool prior to the issuance of the
Certificates unless including such mortgage loans would materially alter the
characteristics of the Mortgage Pool as described herein. The Depositor believes
that the information set forth herein will be representative of the
characteristics of the Mortgage Pool as it will be constituted at the time the
Certificates are issued, although the range of Mortgage Rates and maturities and
certain other characteristics of the Mortgage Loans may vary.
YIELD ON THE CERTIFICATES
DELAY IN DISTRIBUTIONS ON THE OFFERED CERTIFICATES
The effective yield to holders of the Offered Certificates of each class
will be less than the yields otherwise produced by their respective Pass-Through
Rates (as defined herein) and purchase prices because (i) on the first
Distribution Date one month's interest is payable thereon even though 54 days
will have elapsed from the date on which interest begins to accrue thereon, (ii)
on each succeeding Distribution Date the interest payable thereon is the
interest accrued during the month preceding the month of such Distribution Date,
which ends 24 days prior to such Distribution Date and (iii) during each
Interest Accrual Period (as defined herein) (other than the first Interest
Accrual Period), interest accrues on a Certificate Principal Balance that may be
less than the Certificate Principal Balance of such class actually outstanding
for the first 24 days of such Interest Accrual Period.
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of such prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan, the
mortgagor is not charged interest on the amount of such prepayment for the month
in which such prepayment is made. In addition, the application of the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"), to any
Mortgage Loan will adversely affect, for an indeterminate period of time, the
ability of applicable 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. Each Servicer is obligated
to pay from its own funds only those interest shortfalls attributable to full
and partial prepayments by the mortgagors on the related Mortgage Loans, but
only to the extent of its Servicing Fee for the related Due Period (as defined
herein). See "Pooling and Servicing Agreement--Servicing and Other
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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
applicable Servicer from its own funds ("Compensating Interest") or (ii) any
shortfalls resulting from the application of the Relief Act, will be to reduce
the aggregate amount of interest collected that is available for distribution to
Certificateholders. Any such shortfalls will be allocated among the Certificates
as provided under "Description of the Certificates--Interest Distributions on
the Offered Certificates" and "--Overcollateralization Provisions" herein. The
Policy will not cover any shortfalls resulting from application of the Relief
Act.
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. Furthermore, since mortgage loans secured by
second liens are not generally viewed by borrowers as permanent financing and
generally carry a high rate of interest, the Mortgage Loans may experience a
higher rate of prepayments than traditional mortgage loans. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of such Mortgage Loans and by the rate of principal
prepayments thereon (including for this purpose, payments resulting from
refinancings, liquidations of the Mortgage Loans due to defaults, casualties,
condemnations and repurchases, whether optional or required, by the Depositor,
the Originators, the Mortgage Loan Seller, the majority holder of the Class CE
Certificates, the Insurer 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
81.61% 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 Offered
Certificates that otherwise would be distributed over the remaining terms of the
Mortgage Loans. See "Maturity and Prepayment Considerations" in the Prospectus.
Since the rates of payment of principal on the Mortgage Loans will depend on
future events and a variety of factors (as described more fully herein and in
the Prospectus under "Yield Considerations" and "Maturity and Prepayment
Considerations"), no assurance can be given as to such rate or the rate of
principal prepayments. The extent to which the yield to maturity of the Offered
Certificates may vary from the anticipated yield will depend upon the degree to
which the Offered 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
Offered 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 Offered 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 the Offered 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,
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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. 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. In particular, with respect to the Lockout
Certificates (as defined herein), as described under "Description of the
Certificates--Principal Distributions on the Offered Certificates" herein,
during certain periods, no principal payments or a disproportionately small
portion of the amount of principal then payable to the Offered Certificates will
be distributed on the Lockout Certificates, and during certain other periods, a
disproportionately large portion of the amount of principal then payable to the
Offered Certificates will be distributed on the Lockout Certificates. Unless the
Certificate Principal Balances of the Offered Certificates (other than the
Lockout Certificates) have been reduced to zero, the Lockout Certificates will
not be entitled to receive any distributions of principal payments prior to the
Distribution Date in January 2002.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years and the rate of defaults and the severity of
losses on mortgage loans secured by second liens may be substantially higher
than mortgage loans secured by first liens. 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, other than as provided by the
Policy as described herein, there can be no assurance that recourse will be
available beyond the specific Mortgaged Property pledged as security for
repayment. See "The Mortgage Pool--Underwriting Standards; Representations"
herein.
MARKET INTEREST RATE CONSIDERATIONS
Because the Mortgage Rates on the Mortgage Loans and the Pass-Through Rates
on the Offered Certificates are fixed, such rates will not change in response to
changes in market interest rates. Accordingly, if mortgage market interest rates
or market yield for securities similar to such Offered Certificates were to
rise, the market value of such Offered Certificates may decline.
BALLOON PAYMENTS
The Mortgage Loans with Balloon Payments will not be fully-amortizing
over their terms to maturity, and will require substantial principal payments at
their stated maturity. Mortgage Loans of this type involve a greater degree of
risk than self-amortizing loans because the ability of a borrower to make a
Balloon Payment typically will depend upon the borrower's ability either to
fully refinance the loan or to sell the related Mortgaged Property at a price
sufficient to permit the
S-35
<PAGE>
borrower to make the Balloon Payment. The ability of a borrower to accomplish
either of these goals will be affected by a number of factors, including the
value of the related Mortgaged Property, the level of available mortgage rates
at the time of sale or refinancing, the borrower's equity in the related
Mortgaged Property, tax laws, prevailing general economic conditions and the
availability of credit for loans secured by residential property. Because the
ability of a borrower to make a Balloon Payment typically will depend upon the
borrower's ability to either refinance the loan or to sell the related Mortgaged
Property, there is a risk that the Balloon Loans may default at maturity. Any
defaulted Balloon Payment that extends the maturity of a Mortgage Loan may delay
distributions of principal on the Offered Certificates and thereby extend the
weighted average life of such Certificates and, if such Certificates were
purchased at a discount, reduce the yield thereon.
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.
Except as otherwise described under "Description of the Certificates--
Principal Distributions on the Offered Certificates" herein, distributions of
principal will be made to the classes of the Offered Certificates according to
the priorities described herein, rather than on a PRO RATA basis among such
classes, unless a Insurer Default (as defined herein) exists. The timing of
commencement of principal distributions to each class of the Offered
Certificates and the weighted average life of each such class will be affected
by the rates of prepayment on the Mortgage Loans experienced both before and
after the commencement of principal distributions on each such class. Moreover,
because the Lockout Certificates do not receive (unless the Certificate
Principal Balances of the Offered Certificates, other than the Lockout
Certificates, have been reduced to zero) any portion of principal payments prior
to the Distribution Date occurring in January 2002 and thereafter will receive
(unless the Certificate Principal Balances of the Offered Certificates, other
than the Lockout Certificates, have been reduced to zero) a disproportionately
small or large portion of principal payments, the weighted average life of the
Lockout Certificates will be longer or shorter than would otherwise be the case,
and the effect on the market value of the Lockout Certificates of changes in
market interest rates or market yields for similar securities may be greater or
lesser than for the other classes of Offered Certificates entitled to principal
distributions.
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
100% of the Prepayment Vector. A 100% Prepayment Vector assumes that the
outstanding balance of a pool of mortgage loans prepays at a rate of 5.00% CPR
in the first month of the life of such pool, such rate increasing by an
additional approximate 1.82% CPR (precisely 20/11, expressed as a percentage)
each month thereafter through the eleventh month of the life of such pool, and
such rate thereafter remaining constant at 25% CPR for the remainder of the life
of such pool. A 75% Prepayment Vector assumes, for example, that the outstanding
balance of a pool of mortgage loans prepays at a rate of 3.75% CPR in the first
month of the life of such pool, such rate increasing by an additional
approximate 1.36% CPR (precisely 15/11, expressed as a percentage) each month
thereafter through the eleventh month of the life of such pool, and such rate
thereafter remaining constant at 18.75% CPR for the remainder of the life of
such pool. No representation is made that the Mortgage Loans in the Mortgage
Pool will prepay at the above-described rates or any other rate. CPR refers to
the Constant Prepayment Rate model, which assumes that the outstanding principal
balance of a pool
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<PAGE>
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 25% 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.
The tables following the next paragraph indicate the percentage of the
initial Certificate Principal Balance of the Offered 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 twelve 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 January 1999,
(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
Originators, the Mortgage Loan Seller, the majority holder of the Class CE
Certificates, the Insurer, the Servicers, the Master Servicer or any other
person purchases from the Trust Fund (as defined herein) any Mortgage Loan
pursuant to any obligation or option under the Agreement, except as indicated in
footnote two in the tables below, (vi) scheduled monthly payments on the
Mortgage Loans are received on the first day of each month commencing in January
1999, 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 December
1998, and include 30 days' interest thereon, (viii) the scheduled monthly
payment for each Mortgage Loan is calculated based on its principal balance,
Mortgage Rate, original term to stated maturity and remaining term to stated
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 stated maturity, (ix) the Certificates are purchased on December 22,
1998, (x) the Servicing Fee Rate is equal to 0.50% per annum, the Master
Servicing Fee Rate is equal to 0.00% per annum on the Mortgage Loans directly
serviced by New Century and is equal to 0.04% per annum on the Mortgage Loans
serviced by Option One, the Administration Fee Rate is equal to 0.0045% per
annum and the amount of the premium payable to the Insurer is as described under
the heading "Pooling and Servicing Agreement--Certain Matters Regarding the
Insurer", (xi) the first six Mortgage Loans in the table below are Mortgage
Loans that do not by their terms have Prepayment Charges and the last six
Mortgage Loans in the table below are Mortgage Loans that by their terms do have
Prepayment Charges, (xii) the third Mortgage Loan in the table below is a
Balloon Loan with a Balloon Payment of $87,082 and the ninth Mortgage Loan in
the table below is a Balloon Loan with a Balloon Payment of $705,576 and (xiii)
the first, second, sixth, seventh, eighth and twelfth Mortgage Loans in the
table below are Mortgage Loans that have been originated by New Century and the
third, fourth, fifth, ninth, tenth and eleventh Mortgage Loans in the table
below are Mortgage Loans that have been originated by Option One.
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<PAGE>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
PRINCIPAL BALANCE ORIGINAL TERM REMAINING TERM
AS OF THE MORTGAGE TO MATURITY TO MATURITY
CUT-OFF DATE RATE (MONTHS) (MONTHS)
----------------- -------- ------------ --------------
$17,679,179 11.1670% 174 173
$39,783,998 10.6850% 351 350
$9,602,552 10.3340% 180 173
$7,663,027 10.0870% 178 171
$36,758,765 9.9403% 352 345
$17,866,943 10.6230% 359 357
$34,719,275 10.6760% 177 176
$159,471,934 9.9104% 354 353
$85,089,236 9.2689% 180 173
$33,384,622 9.4323% 179 172
$190,539,579 9.3113% 356 349
$70,998,652 9.7257% 360 358
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, the Offered Certificates
may mature earlier or later than indicated by the tables. Based on the foregoing
assumptions, the tables indicate the weighted average lives of the Offered
Certificates and sets forth the percentages of the initial Certificate Principal
Balance of the Offered Certificates that would be outstanding after each of the
Distribution Dates shown, at various percentages of the Prepayment Assumption.
Neither the prepayment model used herein nor any other prepayment model or
assumption purports to be an historical description of prepayment experience or
a prediction of the anticipated rate of prepayment of any pool of mortgage
loans, including the Mortgage Loans included in the 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 table. 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-1 CERTIFICATES CLASS A-2 CERTIFICATES CLASS A-3 CERTIFICATES
---------------------------------- ------------------------------ -----------------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
- ----------------- ------- ------- ---- ------- ----- ----- ---- ----- ------- ---- ------- ---- ------- ------- ------
<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%
December 25, 1999........ 95 49 2 0 0 100 100 100 40 0 100 100 100 100 72
December 25, 2000........ 90 0 0 0 0 100 92 0 0 0 100 100 74 0 0
December 25, 2001........ 85 0 0 0 0 100 28 0 0 0 100 100 0 0 0
December 25, 2002........ 79 0 0 0 0 100 0 0 0 0 100 72 0 0 0
December 25, 2003........ 73 0 0 0 0 100 0 0 0 0 100 19 0 0 0
December 25, 2004........ 66 0 0 0 0 100 0 0 0 0 100 0 0 0 0
December 25, 2005........ 59 0 0 0 0 100 0 0 0 0 100 0 0 0 0
December 25, 2006........ 53 0 0 0 0 100 0 0 0 0 100 0 0 0 0
December 25, 2007........ 46 0 0 0 0 100 0 0 0 0 100 0 0 0 0
December 25, 2008........ 38 0 0 0 0 100 0 0 0 0 100 0 0 0 0
December 25, 2009........ 29 0 0 0 0 100 0 0 0 0 100 0 0 0 0
December 25, 2010........ 19 0 0 0 0 100 0 0 0 0 100 0 0 0 0
December 25, 2011........ 7 0 0 0 0 100 0 0 0 0 100 0 0 0 0
December 25, 2012........ 0 0 0 0 0 93 0 0 0 0 100 0 0 0 0
December 25, 2013........ 0 0 0 0 0 26 0 0 0 0 100 0 0 0 0
December 25, 2014........ 0 0 0 0 0 15 0 0 0 0 100 0 0 0 0
December 25, 2015........ 0 0 0 0 0 3 0 0 0 0 100 0 0 0 0
December 25, 2016........ 0 0 0 0 0 0 0 0 0 0 88 0 0 0 0
December 25, 2017........ 0 0 0 0 0 0 0 0 0 0 71 0 0 0 0
December 25, 2018........ 0 0 0 0 0 0 0 0 0 0 52 0 0 0 0
December 25, 2019........ 0 0 0 0 0 0 0 0 0 0 31 0 0 0 0
December 25, 2020........ 0 0 0 0 0 0 0 0 0 0 8 0 0 0 0
December 25, 2021........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2022........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2023........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2024........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2025........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2026........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2027........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2028........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
in Years(1)............ 7.9 1.0 0.6 0.4 0.3 14.9 2.7 1.4 1.0 0.8 20.1 4.5 2.3 1.5 1.1
Weighted Average Life
in Years(2)............ 7.9 1.0 0.6 0.4 0.3 14.9 2.7 1.4 1.0 0.8 20.1 4.5 2.3 1.5 1.1
</TABLE>
CLASS A-4 CERTIFICATES
------------------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200%
- ----------------- ----- ----- ------ ------ -------
Closing Date............. 100% 100% 100% 100% 100
December 25, 1999........ 100 100 100 100 100
December 25, 2000........ 100 100 100 67 0
December 25, 2001........ 100 100 72 0 0
December 25, 2002........ 100 100 19 0 0
December 25, 2003........ 100 100 0 0 0
December 25, 2004........ 100 83 0 0 0
December 25, 2005........ 100 56 0 0 0
December 25, 2006........ 100 42 0 0 0
December 25, 2007........ 100 25 0 0 0
December 25, 2008........ 100 9 0 0 0
December 25, 2009........ 100 0 0 0 0
December 25, 2010........ 100 0 0 0 0
December 25, 2011........ 100 0 0 0 0
December 25, 2012........ 100 0 0 0 0
December 25, 2013........ 100 0 0 0 0
December 25, 2014........ 100 0 0 0 0
December 25, 2015........ 100 0 0 0 0
December 25, 2016........ 100 0 0 0 0
December 25, 2017........ 100 0 0 0 0
December 25, 2018........ 100 0 0 0 0
December 25, 2019........ 100 0 0 0 0
December 25, 2020........ 100 0 0 0 0
December 25, 2021........ 86 0 0 0 0
December 25, 2022........ 63 0 0 0 0
December 25, 2023........ 38 0 0 0 0
December 25, 2024........ 10 0 0 0 0
December 25, 2025........ 0 0 0 0 0
December 25, 2026........ 0 0 0 0 0
December 25, 2027........ 0 0 0 0 0
December 25, 2028........ 0 0 0 0 0
Weighted Average Life
in Years(1)............ 24.5 7.7 3.5 2.2 1.6
Weighted Average Life
in Years(2)............ 24.5 7.7 3.5 2.2 1.6
- -----------------
* Represents less than one-half of one percent.
(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 on the earliest possible Distribution Date on which it is
permitted to exercise such option. See "Pooling and Servicing
Agreement --Termination" herein.
(Table continued on next page.)
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-5 CERTIFICATES CLASS A-6 CERTIFICATES CLASS A-7 CERTIFICATES
--------------------------------- --------------------------------- --------------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%% 0% 50% 100% 150% 200%
- ----------------- ----- ----- ------ ------ ----- ----- ------ ----- ----- ------ ----- ---- ---- ---- -----
<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%
December 25, 1999........ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
December 25, 2000........ 100 100 100 100 76 100 100 100 100 100 100 100 100 100 100
December 25, 2001........ 100 100 100 45 0 100 100 100 100 20 100 100 100 100 100
December 25, 2002........ 100 100 100 0 0 100 100 100 70 0 99 93 88 82 65
December 25, 2003........ 100 100 57 0 0 100 100 100 28 0 99 87 77 66 30
December 25, 2004........ 100 100 5 0 0 100 100 100 12 0 97 77 60 44 12
December 25, 2005........ 100 100 0 0 0 100 100 77 7 0 95 66 44 25 3
December 25, 2006........ 100 100 0 0 0 100 100 71 7 0 89 41 17 11 0
December 25, 2007........ 100 100 0 0 0 100 100 56 7 0 83 26 6 2 0
December 25, 2008........ 100 100 0 0 0 100 100 42 3 0 76 16 2 * 0
December 25, 2009........ 100 87 0 0 0 100 100 30 * 0 69 9 1 0 0
December 25, 2010........ 100 57 0 0 0 100 100 21 0 0 61 6 * 0 0
December 25, 2011........ 100 29 0 0 0 100 100 14 0 0 54 3 * 0 0
December 25, 2012........ 100 5 0 0 0 100 100 8 0 0 46 2 * 0 0
December 25, 2013........ 100 0 0 0 0 100 73 3 0 0 21 1 * 0 0
December 25, 2014........ 100 0 0 0 0 100 61 1 0 0 19 * * 0 0
December 25, 2015........ 100 0 0 0 0 100 51 0 0 0 17 * 0 0 0
December 25, 2016........ 100 0 0 0 0 100 42 0 0 0 15 * 0 0 0
December 25, 2017........ 100 0 0 0 0 100 34 0 0 0 12 * 0 0 0
December 25, 2018........ 100 0 0 0 0 100 27 0 0 0 10 * 0 0 0
December 25, 2019........ 100 0 0 0 0 100 21 0 0 0 8 * 0 0 0
December 25, 2020........ 100 0 0 0 0 100 16 0 0 0 6 * 0 0 0
December 25, 2021........ 100 0 0 0 0 100 12 0 0 0 5 * 0 0 0
December 25, 2022........ 100 0 0 0 0 100 8 0 0 0 3 * 0 0 0
December 25, 2023........ 100 0 0 0 0 100 5 0 0 0 2 * 0 0 0
December 25, 2024........ 100 0 0 0 0 100 2 0 0 0 1 * 0 0 0
December 25, 2025........ 55 0 0 0 0 100 0 0 0 0 * 0 0 0 0
December 25, 2026........ 0 0 0 0 0 84 0 0 0 0 * 0 0 0 0
December 25, 2027........ 0 0 0 0 0 18 0 0 0 0 * 0 0 0 0
December 25, 2028........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
in Years(1)............ 27.1 12.3 5.2 3.1 2.2 28.6 18.1 9.8 4.9 2.8 13.4 7.8 6.4 5.8 4.6
Weighted Average Life
in Years(2)............ 227.1 12.3 5.2 3.1 2.2 27.9 14.4 7.5 4.4 2.8 13.4 7.8 6.3 4.7 3.5
- -----------------
</TABLE>
* Represents less than one-half of one percent.
(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 on the earliest possible Distribution Date on which it is
permitted to exercise such option. See "Pooling and Servicing
Agreement --Termination" herein.
(Table continued from prior page.)
<PAGE>
There is no assurance that prepayments of the Mortgage Loans will conform
to any of the levels of the Prepayment Assumption indicated in the 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 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. The timing of changes in the rate of
prepayments may significantly affect the actual yield to maturity to investors,
even if the average rate of principal prepayments is consistent with the
expectations of investors.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Salomon Brothers Mortgage Securities VII, Inc., Mortgage Pass-Through
Certificates, Series 1998-NC7 (the "Certificates") will consist of twelve
classes of certificates, designated as: (i) the Class A-1 Certificates, the
Class A-2 Certificates, the Class A-3 Certificates, the Class A-4 Certificates,
the Class A-5 Certificates, the Class A-6 Certificates (collectively, the
"Senior Sequential Certificates"); (ii) the Class A-7 Certificates (the "Lockout
Certificates", and collectively with the Senior Sequential Certificates, the
"Offered Certificates"); (iii) the Class CE Certificates; (iv) the Class P
Certificates and (v) the Class R-I Certificates, the Class R-II Certificates and
the Class R-III Certificates (collectively, the "Residual Certificates"). Only
the Offered Certificates are offered hereby. The Class CE Certificates, the
Class P Certificates and the Residual Certificates, which are not being offered
hereby, will be sold by the Depositor to Salomon Smith Barney Inc. on the
Closing Date.
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 January 1999 (each, a "Distribution Date")
The Certificates represent in the aggregate the entire beneficial ownership
interest in a trust fund (the "Trust Fund") consisting primarily of the Mortgage
Pool of conventional, one- to four-family, fixed-rate, first lien and second
lien mortgage loans having original terms to maturity of not greater than 30
years. The Certificates have an aggregate principal balance as of the Cut-off
Date of approximately $703,557,763, subject to a permitted variance as described
under "The Mortgage Pool" herein.
Each class of Offered Certificates will have the approximate initial
Certificate Principal Balance and Pass-Through Rate as set forth under "Summary
of Prospectus Supplement--Offered Certificates" above. The Pass-Through Rate on
the Class A-6 Certificates for any Distribution Date will be a rate per annum be
equal to the lesser of (i) 7.491% and (ii) the Net WAC Pass-Through Rate for
such Distribution Date. The Offered Certificates in the aggregate evidence an
initial undivided interest of approximately 97.80% in the Trust Fund and the
Class CE Certificates evidence an initial undivided interest of approximately
2.20% in the Trust Fund.
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<PAGE>
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 (A) 1/12 of the aggregate Scheduled Principal Balance
(as defined herein) of the then outstanding Mortgage Loans multiplied by the
weighted average of the Expense Adjusted Mortgage Rates on the then outstanding
Mortgage Loans minus (B) the amount of the premium payable to the Insurer with
respect to the Policy for such Distribution Date, and the denominator of which
is (ii) 1/12 of the aggregate Scheduled Principal Balance of the then
outstanding Mortgage Loans.
The "Expense Adjusted Mortgage Rate" on any Mortgage Loan is equal to the
then applicable Mortgage Rate thereon minus the sum of (i) the Administration
Fee Rate, (ii) the Servicing Fee Rate and (iii) the Master Servicing Fee Rate.
For any Distribution Date, the Administration Fee Rate is equal to 0.0045% per
annum, the Servicing Fee Rate is equal to 0.50% per annum and the Master
Servicing Fee Rate is equal to 0.04% per annum with respect to each Mortgage
Loan serviced by Option One. See "Pooling and Servicing Agreement--The Trustee",
"--The Trust Administrator" and "--Servicing and Other Compensation and Payment
of Expenses" herein. The amount of the premium payable to the Insurer with
respect to the Policy for any Distribution Date is described under "Pooling and
Servicing Agreement--Certain Matters Regarding the Insurer" herein.
The Offered Certificates will be issued, maintained and transferred on the
book-entry records of the Depository Trust Company ("DTC") and its Participants
(as defined herein) in minimum denominations of $10,000 and integral multiples
of $1.00 in excess thereof.
The Offered 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
Offered Certificate (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 a certificate is issued in fully
registered certificated form (a "Definitive Certificate") under the limited
circumstances described herein, all references to actions by Certificateholders
with respect to the Offered Certificates shall refer to actions taken by DTC
upon instructions from its Participants, and all references herein to
distributions, notices, reports and statements to Certificateholders with
respect to the Offered Certificates shall refer to distributions, notices,
reports and statements to DTC or CEDE, as the registered holder of the Offered
Certificates, for distribution to Certificate Owners in accordance with DTC
procedures. See "--Registration of the Offered Certificates" and "--Definitive
Certificates" herein.
Any Definitive Certificates will be transferable and exchangeable at the
offices of the Trust Administrator. No service charge will be imposed for any
registration of transfer or exchange, but the Trust Administrator 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 the Trust
Administrator on behalf of the Trustee to the persons in whose names such
Certificates are registered at the close of business on each Record Date. The
"Record Date" for each Distribution Date (i) with respect to any book-entry
Certificate will be the close of business on the business day immediately
preceding such Distribution Date or (ii) with respect to any other class of
Certificates, including any Definitive Certificates, will be the close of
business on the last business day of the month preceding the month in which such
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 Trust Administrator at
least five business days prior to the relevant Record Date by any holder of
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<PAGE>
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 Trust Administrator or such
other location specified in the notice to Certificateholders of such final
distribution.
REGISTRATION OF THE OFFERED 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 Smith Barney 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 Offered 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 Offered Certificates from the Trust
Administrator through DTC and DTC Participants. The Trust Administrator will
forward payments to DTC in same day funds and DTC will forward such payments to
Participants in next day funds settled through the New York Clearing House. Each
Participant will be responsible for disbursing such payments to Indirect
Participants or to Certificate Owners. Unless and until Definitive Certificates
are issued, it is anticipated that the only Certificateholder of the Offered
Certificates will be CEDE, as nominee of DTC. Certificate Owners will not be
recognized by the Trust Administrator 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
Offered Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and Indirect Participants with which Certificate Owners have
accounts with respect to the Offered 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 Offered 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
Offered Certificates. In addition, under a book-entry format, Certificate Owners
may experience
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delays in their receipt of payments since distribution will be made by the Trust
Administrator 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 Offered Certificates are credited.
Additionally, under the Rules, DTC will take such actions with respect to
specified Voting Rights only at the direction of and on behalf of Participants
whose holdings of Offered Certificates evidence such specified Voting Rights.
DTC may take conflicting actions with respect to Voting Rights to the extent
that Participants whose holdings of Offered Certificates evidence such Voting
Rights, authorize divergent action.
DTC management is aware that some computer applications, systems and
similar items for processing data ("Systems") that are dependent upon calendar
dates, including dates before, on and after January 1, 2000, may encounter "Year
2000 problems". DTC has informed its Participants and other members of the
financial community (collectively, the "Industry") that it has developed and is
implementing a program so that its Systems, as the same relate to the timely
payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries and settlement of trades within DTC ("DTC
Services"), continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to, issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on which DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being Year 2000 compliant and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty or contract modification of any kind.
The Depositor, the Servicers, the Trustee, the Trust Administrator, the
Originators, the Insurer and the Mortgage Loan Seller will have no liability for
any actions taken by DTC or its nominee, including, without limitation, actions
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the Offered 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 Trust Administrator in writing that DTC is no longer willing or able to
discharge properly its responsibilities as Clearing Agency with respect to the
Offered Certificates and the Depositor is unable to locate a qualified
successor, (ii) the Depositor, at its option, advises the Trust Administrator 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 Offered Certificates
advise the Trust
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Administrator and DTC through Participants, in writing, that the continuation of
a book-entry system through DTC (or a successor thereto) is no longer in the
Certificate Owners' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trust Administrator 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 Offered
Certificates and receipt of instructions for re-registration, the Trust
Administrator will reissue the Offered Certificates as Definitive Certificates
issued in the respective principal amounts owned by individual Certificate
Owners, and thereafter the Trust Administrator 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 Offered 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 Offered Certificate.
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.
INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES
Distributions in respect of interest will be made on each Distribution Date
to the holders of each class of Offered Certificates in an amount (allocable
among such Certificates PRO RATA in accordance with the respective amounts
payable as to each in respect of interest) equal to the Interest Distribution
Amount for such class for such Distribution Date.
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 Pass- Through
Rate for such class, reduced (to not less than zero), in the case of each such
class, by the allocable share for such class of shortfalls resulting from the
application of the Relief Act, plus any undistributed Interest Distribution
Amount for such class from any previous Distribution Dates. On any Distribution
Date, any shortfalls resulting from the application of the Relief Act will be
allocated, first, to the interest distribution amount with respect to the Class
CE Certificates, and thereafter, to the Interest Distribution Amounts with
respect to the Offered Certificates on a PRO RATA basis based on the respective
amounts of interest accrued on such Certificates for such Distribution Date. On
any Distribution Date, any Prepayment Interest Shortfalls to the extent not
covered by Compensating Interest (as defined herein) paid by the Servicers will
be allocated to the interest distribution amount with respect to the Class CE
Certificates. The holders of the Offered Certificates will be entitled to
reimbursement for any shortfalls resulting from application of the Relief Act,
subject to available funds, in the priority described under
"--Overcollateralization Provisions" herein. The Pass-Through Rate applicable to
the calculation on the Interest Distribution Amount for each class of Offered
Certificates is fixed and set forth under "Summary of Prospectus
Supplement--Offered Certificates" above; subject to the Net WAC Pass-Through
Rate in the case of the Class A-6 Certificates.
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The "Interest Accrual Period" for any Distribution Date and the Offered
Certificates of any class is the one-month period preceding the month in which
such Distribution Date occurs, and all distributions of interest on the Offered
Certificates will be based on a 360-day year consisting of twelve 30-day months.
Except as otherwise described herein, on any Distribution Date, distributions of
the Interest Distribution Amount for a class of Certificates will be made in
respect of such class of Certificates, to the extent provided herein, on a PARI
PASSU basis, based on the Certificate Principal Balance of the Certificates of
each such class.
Subject to the terms of the Policy, any interest losses incurred by the
Offered Certificates (other than shortfalls resulting from the application of
the Relief Act) will be covered under the Policy. Notwithstanding the foregoing,
however, if payments are not made as required under the Policy, any such
interest losses may be borne by the Offered Certificates to the extent the
amount of such losses is not paid from Net Monthly Excess Cashflow (as defined
herein), in the priority described under "--Overcollateralization Provisions"
herein.
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 Certificate Principal
Balance of any class of Offered Certificates as of any date of determination is
equal to the initial Certificate Principal Balance thereof reduced by the
aggregate of (a) all amounts allocable to principal previously distributed with
respect to such 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 and the Class P Certificates.
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;
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(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 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.
Notwithstanding the foregoing, as described under "--Overcollateralization
Provisions" herein, no amounts will be distributed to the holders of the Offered
Certificates pursuant to clause (v) above except to the extent of any Net
Monthly Excess Cashflow remaining after payment to the holders of the Offered
Certificates of all amounts in respect of Realized Losses pursuant to clause
(iv) above and payment to the Insurer of any Cumulative Insurance Payments. As
of any Distribution Date, "Cumulative Insurance Payments" refers to the
aggregate of any payments made by the Insurer under the Policy to the extent not
previously reimbursed, plus interest thereon.
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.
The "Available Distribution Amount" for any Distribution Date is equal to
the sum, net of amounts reimbursable therefrom to the Master Servicer, the
Servicers, the Trust Administrator 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 Fees, the Master Servicing
Fee, the Administration Fee and the premium payable with respect to the Policy,
(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 holders of the Class P
Certificates will be entitled to all Prepayment Charges received on the Mortgage
Loans and such amounts will not be available for distribution on the Offered
Certificates.
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 (as defined herein) occurring out of a Deficient Valuation
(as defined herein) that was incurred prior to the calendar month in which the
date of determination occurs.
In addition, on each Distribution Date, funds received as a result of a
claim under the Policy in respect of the principal portion of Realized Losses
allocated to the Offered Certificates will be distributed by the Trust
Administrator on behalf of the Trustee to the holders of such Certificates. See
"--Financial Guaranty Insurance Policy" herein.
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Distributions of the Principal Distribution Amount (and any amounts
distributable in accordance with clauses FIRST and THIRD under
"--Overcollateralization Provisions" herein) on the Offered Certificates on each
Distribution Date will be made as follows:
(i) First, to the holders of the Lockout Certificates, the Lockout
Distribution Percentage of the Principal Distribution Amount, until the
Certificate Principal Balance thereof has been reduced to zero;
(ii) Second, to the holders of the Class A-1 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(iii)Third, to the holders of the Class A-2 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(iv) Fourth, to the holders of the Class A-3 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(v) Fifth, to the holders of the Class A-4 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(vi) Sixth, to the holders of the Class A-5 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(vii) Seventh, to the holders of the Class A-6 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and
(viii) Eighth, to the holders of the Lockout Certificates, until the
Certificate Principal Balance thereof has been reduced to zero.
Notwithstanding the foregoing priorities, if an Insurer Default exists, the
priority of distributions of principal among the Offered Certificates will be
disregarded and distributions allocable to principal will be paid on each
succeeding Distribution Date to holders of the Offered Certificates, on a PRO
RATA basis, based on the Certificate Principal Balances thereof.
The "Lockout Certificate Percentage" for the Lockout Certificates will be
calculated for each Distribution Date to be the percentage equal to the
aggregate Certificate Principal Balance of the Lockout Certificates immediately
prior to such Distribution Date divided by the sum of the aggregate Certificate
Principal Balances of the Offered Certificates immediately prior to such
Distribution Date. The "Lockout Distribution Percentage" for the Lockout
Certificates and for any Distribution Date occurring prior to the Distribution
Date in January 2002 will be equal to 0%. The "Lockout Distribution Percentage"
for any Distribution Date occurring after the first three years following the
Closing Date will be as follows: for any Distribution Date during the fourth or
fifth year after the Closing Date, 45% of the Lockout Certificate Percentage for
such Distribution Date; for any Distribution Date during the sixth year after
the Closing Date, 80% of the Lockout Certificate Percentage for such
Distribution Date; for any Distribution Date during the seventh year after the
Closing Date, 100% of the Lockout Certificate Percentage for such Distribution
Date, and for any Distribution Date thereafter, the lesser of (x) 300% of the
Lockout Certificate Percentage and (y) 100%. Notwithstanding the foregoing, if
the Certificate Principal Balances of the Offered Certificates (other than the
Lockout Certificates) have been reduced to zero, the Lockout Distribution
Percentage will be equal to 100%.
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OVERCOLLATERALIZATION PROVISIONS
The weighted average Mortgage Rate (net of the Administration Fee Rate, the
Servicing Fee Rate, the Master Servicing Fee Rate and the amount of the premium
payable to the Insurer) for the Mortgage Loans is generally expected to be
higher than the weighted average of the Pass-Through Rate 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 the Offered Certificates, 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 Offered Certificates then
entitled to receive distributions in respect of principal, in an amount
equal to the principal portion of any Realized Losses incurred or deemed to
have been incurred on the Mortgage Loans;
SECOND, to the Insurer, in an amount equal to any Cumulative Insurance
Payments;
THIRD, to the holders of the class or classes of Offered Certificates then
entitled to receive distributions in respect of principal, in an amount
equal to the Overcollateralization Increase Amount;
FOURTH, to the holders of the Offered Certificates, in an amount equal to
such Certificates' allocated share of any shortfalls resulting from the
application of the Relief Act with respect to the Mortgage Loans;
FIFTH, to the Insurer, for any amounts remaining due to the Insurer under
the terms of the Insurance Agreement (as defined herein);
SIXTH, to the holders of the Class CE Certificates as provided in the
Agreement; and
SEVENTH, to the holders of the Residual Certificates, any remaining
amounts; provided that if such Distribution Date is the Distribution Date
immediately following the expiration of the latest Prepayment Charge term
or any Distribution Date thereafter, then any such remaining amounts will
be distributed FIRST, to the holders of the Class P Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and SECOND,
to the holders of the Residual Certificates.
With respect to any Distribution Date, the excess, if any, of (a) the
aggregate principal balance of the Mortgage Loans immediately following such
Distribution Date, over (b) the sum of the aggregate Certificate Principal
Balances of the Offered Certificates and the Class P Certificates as of such
date, 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
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Closing Date, the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date will exceed the sum of the aggregate Certificate Principal Balances
of the Offered Certificates and the Class P Certificates by an amount equal to
approximately $15,478,663, which is equal to the initial Certificate Principal
Balance of the Class CE Certificates. Such amount represents approximately 2.20%
of the aggregate principal balance of the Mortgage Loans as of the Cut-off Date
and 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 Balances 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 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 an "Overcollateralization Increase
Amount".
With respect to any Distribution Date, the Required Overcollateralized
Amount for the Offered Certificates will be an amount equal to approximately
2.20% of the aggregate principal balance of the Mortgage Loans as of the Cut-off
Date, subject to increase ("step up") or, after 36 months, decrease ("step
down"), upon the occurrence of certain loss and delinquency triggers with
respect to the Mortgage Pool set forth in the Agreement.
In the event that the Required Overcollateralized Amount is required to
step up on any Distribution Date, the Agreement provides that all Net Monthly
Excess Cashflow remaining after the distributions described in clauses FIRST and
SECOND above will be distributed in respect of the Overcollateralization
Increase Amount for the Offered Certificates until the Overcollateralized Amount
is equal to the stepped up Required Overcollateralized Amount. 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.
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
Certificates on such Distribution Date shall be distributed to the holders of
the Class CE Certificates on such Distribution Date. 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. Any such Overcollateralization Reduction Amount shall be distributed as
part of 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.
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FINANCIAL GUARANTY INSURANCE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy. A form of
the Policy may be obtained, upon request, from the Depositor.
Simultaneously with the issuance of the Offered Certificates, the Insurer
will deliver the Policy to the Trust Administrator for the benefit of the
holders of the Offered Certificates. Under the Policy, the Insurer will
irrevocably and unconditionally guarantee payment to the Trust Administrator on
behalf of the Trustee on each Distribution Date for the benefit of the holders
of the Offered Certificates, the full and complete payment of Insured Payments
with respect to the Offered Certificates calculated in accordance with the
original terms of the Offered Certificates when issued and without regard to any
amendment or modification of the Offered Certificates or the Agreement except
amendments or modifications to which the Insurer has given its prior written
consent. "Insured Payments" shall mean with respect to the Offered Certificates
as of any Distribution Date, the sum of (i) any shortfall in amounts available
in the Distribution Account (as defined in the Agreement) to pay the Interest
Distribution Amount on such Certificates for the related Interest Accrual
Period, (ii) the excess, if any, of (a) the aggregate Certificate Principal
Balance of the Offered Certificates then outstanding over (b) the aggregate
principal balances of the Mortgage Loans then outstanding and (iii) without
duplication of the amount specified in clause (ii), the aggregate Certificate
Principal Balance of the Offered Certificates to the extent unpaid on the final
Distribution Date or the earlier termination of the Trust Fund pursuant to the
terms of the Agreement. The Policy does not cover Relief Act Shortfalls.
If any Insured Payment is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law, the Insurer will pay such
amount out of funds of the Insurer on the later of (a) the date when due to be
paid pursuant to the Order referred to below or (b) the first to occur of (i)
the fourth Business Day following Receipt by the Insurer from the Trust
Administrator of (A) a certified copy of the order of the court or other
governmental body which exercised jurisdiction to the effect that a holder of
Offered Certificates is required to return principal or interest distributed
with respect to an Offered Certificate during the Term of the Policy because
such distributions were avoidable preferences under applicable bankruptcy law
(the "Order"), (B) a certificate of such holder of Offered Certificates that the
Order has been entered and is not subject to any stay, and (C) an assignment
duly executed and delivered by such holder of Offered Certificates, in such form
as is reasonably required by the Insurer and provided to such holder of Offered
Certificates by the Insurer, irrevocably assigning to the Insurer all rights and
claims of such holder of Offered Certificates relating to or arising under the
Offered Certificates against the debtor which made such preference payment or
otherwise with respect to such preference payment, or (ii) the date of Receipt
by the Insurer from the Trust Administrator of the items referred to in clauses
(A), (B) and (C) above if, at least four Business Days prior to such date of
Receipt, the Insurer shall have Received written notice from the Trust
Administrator that such items were to be delivered on such date and such date
was specified in such notice. Such payment shall be disbursed to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order
and not to the Trust Administrator or holder of Offered Certificates directly,
unless a holder of Offered Certificates has previously paid such amount to the
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the Order, in which case such payment shall be disbursed to the Trust
Administrator for distribution to such holder of the Offered Certificates upon
proof of such payment reasonably satisfactory to the Insurer. In connection with
the foregoing, the Insurer shall have the rights provided pursuant to the
Agreement.
Payment of claims under the Policy made in respect of Insured Payments will
be made by the Insurer following Receipt by the Insurer of the appropriate
notice for payment on the later to occur of
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(a) 12:00 noon, New York City time, on the second Business Day following Receipt
of such notice for payment, and (b) 12:00 noon, New York City time, on the
relevant Distribution Date.
The terms "Receipt" and "Received", with respect to the Policy, means
actual delivery to the Insurer and to its fiscal agent appointed by the Insurer
at its option, if any, prior to 12:00 p.m., New York City time, on a Business
Day; delivery either on a day that is not a Business Day or after 12:00 p.m.,
New York City time, shall be deemed to be Receipt on the next succeeding
Business Day. If any notice or certificate given under the Policy by the Trust
Administrator is not in proper form or is not properly completed, executed or
delivered, it shall be deemed not to have been Received, and the Insurer or the
fiscal agent shall promptly so advise the Trust Administrator and the Trust
Administrator may submit an amended notice.
Under the Policy, "Business Day" means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the City of New York, New
York, the State of New York or in the city in which the corporate trust office
of the Trust Administrator is located, are authorized or obligated by law or
executive order to be closed. The Insurer's obligations under the Policy to make
Insured Payments shall be discharged to the extent funds are transferred to the
Trust Administrator as provided in the Policy, whether or not such funds are
properly applied by the Trust Administrator.
"Term of the Policy" means the period from and including the date of
issuance of the Policy to and including the date on which the Certificate
Principal Balances of the Offered Certificates are reduced to zero, plus such
additional period, to the extent specified in the Policy, during which any
payment on the Offered Certificates could be avoided in whole or in part as a
preference payment.
The Insurer shall be subrogated to the rights of the holders of the Offered
Certificates to receive payments of principal and interest, as applicable, with
respect to distributions on such Certificates to the extent of any payment by
the Insurer under the Policy. To the extent the Insurer makes Insured Payments,
either directly or indirectly (as by paying through the Trust Administrator), to
the holders of the Offered Certificates, the Insurer will be subrogated to the
rights of the holders of the Offered Certificates, as applicable, with respect
to such Insured Payment and shall be deemed to the extent of the payments so
made to be a registered holder of the Offered Certificates for purposes of
payment.
Claims under the Policy constitute direct unsecured and unsubordinated
obligations of the Insurer, and will rank not less than PARI PASSU with any
other unsecured and unsubordinated indebtedness of the Insurer except for
certain obligations in respect to tax and other payments to which preference is
or may become afforded by statute. The terms of the Policy cannot be modified,
altered or affected by any other agreement or instrument, or by the merger,
consolidation or dissolution of the Depositor. The Policy by its terms may not
be canceled or revoked prior to distribution in full of all Guaranteed
Distributions (as defined therein). The Policy is governed by the laws of the
State of New York. The Policy is not covered by the property/casualty insurance
security fund specified in Article 76 of the New York Insurance Law.
To the fullest extent permitted by applicable law, the Insurer agrees under
the Policy not to assert, and waives, for the benefit of each holder of the
Offered Certificates, all its rights (whether by counterclaim, setoff or
otherwise) and defenses (including, without limitation, the defense of fraud),
whether acquired by subrogation, assignment or otherwise, to the extent that
such rights and defenses may be available to the Insurer to avoid payment of its
obligations under the Policy in accordance with the express provisions of the
Policy.
Pursuant to the terms of the Agreement, unless an Insurer Default exists,
the Insurer will be entitled to exercise certain rights of the holders of the
Offered Certificates, without the consent of
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such Certificateholders, and the holders of the Offered Certificates may
exercise such rights only with the prior written consent of the Insurer. See
"Pooling and Servicing Agreement--Voting Rights" and "--Certain Matters
Regarding the Insurer" herein.
The Depositor, the Mortgage Loan Seller, the Servicers and the Insurer will
enter into an Insurance and Indemnity Agreement (the "Insurance Agreement")
pursuant to which the Depositor, the Mortgage Loan Seller and the Servicers will
agree to reimburse, with interest, the Insurer for amounts paid pursuant to
claims under the Policy. The Depositor, the Mortgage Loan Seller and the
Servicers will further agree to pay the Insurer all reasonable charges and
expenses which the Insurer may pay or incur relative to any amounts paid under
the Policy or otherwise in connection with the transaction and to indemnify the
Insurer against certain liabilities. Except to the extent provided therein,
amounts owing under the Insurance Agreement will be payable solely from the
Trust Fund. An event of default by either Servicer under the Insurance Agreement
will constitute an Event of Default by such Servicer under the Agreement and
allow the Insurer, among other things, to direct the Trustee to terminate such
Servicer. An "event of default" by each Servicer under the Insurance Agreement
includes (i) such Servicer's failure to pay when due any amount owed under the
Insurance Agreement or certain other documents, (ii) such Servicer's untruth or
incorrectness in any material respect of any representation or warranty of such
Servicer in the Insurance Agreement, the Agreement (in its capacity as Servicer)
or certain other documents, (iii) such Servicer's failure to perform or to
observe any covenant or agreement in the Insurance Agreement, the Agreement (in
its capacity as Servicer) and certain other documents, (iv) such Servicer's
failure to pay its debts in general or the occurrence of certain events of
insolvency or bankruptcy with respect to such Servicer and (v) the occurrence of
an Event of Default relating to such Servicer under the Agreement or certain
other documents.
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
Servicers for P&I Advances, servicing advances and other related expenses,
including attorney's fees) towards interest and principal owing on the Mortgage
Loan. Such amount of loss realized and any Bankruptcy Losses are referred to
herein as "Realized Losses". In the event that amounts recovered in connection
with the final liquidation of a defaulted Mortgage Loan are insufficient to
reimburse the Servicers for P&I Advances and servicing advances, such amounts
may be reimbursed to the Servicers out of any funds in the Certificate Account
prior to the distribution on the Certificates.
Any Realized Losses on the Mortgage Loans will be allocated on any
Distribution Date, FIRST, to Net Monthly Excess Cashflow, SECOND, to the Class
CE Certificates until the Certificate Principal Balance thereof has been reduced
to zero, and THIRD, to the Offered Certificates on a PRO RATA basis. The
Agreement does not permit the allocation of any Realized Losses to the Class P
Certificates. The Policy will cover any Realized Losses allocable to the Offered
Certificates pursuant to clause THIRD above. Notwithstanding the foregoing,
however, if payments are not made as required under the Policy, Realized Losses
will be allocated to the Offered Certificates.
If Realized Losses have been allocated to the Offered Certificates and the
Insurer has defaulted in its obligation to cover such Realized Losses, such
amounts with respect to such Certificates will no longer accrue interest nor
will such amounts be reinstated thereafter (even if Net Monthly Excess
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Cashflow and/or the Overcollateralized Amount are greater than zero on any
subsequent Distribution Dates).
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 an Offered Certificate be reduced more
than once in respect of any particular amount both (i) allocable to such Offered
Certificate in respect of Realized Losses and (ii) payable as principal to the
holder of such Offered Certificate from Net Monthly Excess Cashflow or from
amounts paid under the Policy.
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.
P&I ADVANCES
Subject to the following limitations, each 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 serviced
by it 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"). With respect to a delinquent Balloon
Payment, the related Servicer is not required to make a P&I Advance of such
delinquent Balloon Payment. The related Servicer will, however, make monthly P&I
Advances with respect to a Balloon Loan with delinquent Balloon Payments, in
each case in an amount equal to the assumed monthly principal and interest
payment (net of the related Servicing Fee) that would have been due during the
related Due Period based on the original principal amortization schedule for
such Balloon Loan.
P&I Advances are required to be made only to the extent they are deemed by
the applicable 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. Neither Servicer will be required to
make any P&I Advances with respect to reductions in the amount of the monthly
payments on the Mortgage Loans due to bankruptcy proceedings or the application
of the Relief Act.
All P&I Advances will be reimbursable to the applicable Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
serviced by it 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 applicable Servicer to be nonrecoverable from related late collections,
insurance proceeds or liquidation proceeds may be reimbursed to such Servicer
out of any funds in the Certificate Account prior to the distributions on the
Certificates. In the event that
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either Servicer fails in its obligation to make any required advance, the Trust
Administrator will be obligated to make any such advance and in the event that
the Trust Administrator fails in its obligation to make any such advance, the
Trustee will be obligated to make any such advance, in each case to the extent
required in the Agreement. Notwithstanding the foregoing, in the event Option
One fails in its obligation to make any required advance as Servicer, the Master
Servicer will be obligated to make any such advance prior to the obligation of
the Trust Administrator or the Trustee to make such advances as provided above.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of December 1, 1998 (the "Agreement"), among the Depositor,
the Servicers, the Trust Administrator and the Trustee, 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
Mortgage Loan Seller and New Century and under the Mortgage Loan Purchase
Agreement among the Depositor, the Mortgage Loan Seller and Option One.
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 Trust
Administrator, located in St. Paul, Minnesota. The Depositor will provide to a
prospective or actual Certificateholder without charge, on written request, a
copy (without exhibits) of the Agreement. Requests should be addressed to the
Secretary, Salomon Brothers Mortgage Securities VII, Inc., Seven World Trade
Center, New York, New York 10048.
ASSIGNMENT OF THE MORTGAGE LOANS
The Depositor will deliver to the Trust Administrator, as custodian for the
Trustee, with respect to each Mortgage Loan (i) the mortgage note endorsed
without recourse to the Trustee to reflect the transfer of the Mortgage Loan,
(ii) the original mortgage with evidence of recording indicated thereon and
(iii) an assignment of the mortgage in recordable form to the Trustee,
reflecting the transfer of the Mortgage Loan. Such assignments of Mortgage Loans
are required to be recorded by or on behalf of the Depositor in the appropriate
offices for real property records.
NEW CENTURY MORTGAGE CORPORATION
The information set forth in the following paragraphs has been provided by
New Century. None of the Depositor, the Trustee, the Trust Administrator, the
other Servicer or the Insurer or any of their
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respective affiliates has made or will make any representation as to the
accuracy or completeness of such information.
New Century will serve as the Servicer pursuant to the Agreement for the
Mortgage Loans sold directly or indirectly by it to the Depositor and will act
as Master Servicer for all of the Mortgage
Loans.
New Century is a wholly-owned subsidiary of New Century Financial
Corporation ("NCFC"), a public company. New Century is a consumer finance and
mortgage banking company that originates, sells and services first and second
mortgage loans and other consumer loans. New Century emphasizes the origination
of mortgage loans that are commonly referred to as non-conforming "B&C" loans.
New Century commenced lending operations on February 26, 1996. It is
headquartered in Irvine, California.
For the year ended December 31, 1997, New Century originated and purchased
approximately $1,964.6 million in mortgage loans. For the nine months ended
September 30, 1998, New Century originated and purchased approximately $2,392
million in mortgage loans. As of September 30, 1998, approximately $1,011
million of mortgage loans were sold during the first nine months ended September
30, 1998, mostly on a servicing-retained basis and approximately $1,276 million
of mortgage loans had been sold through securitization.
As of September 30, 1998, New Century had retail and wholesale branch
offices in 27 states, and was originating mortgage loans through 4 regional
operating centers, 58 wholesale sales offices and 84 retail sales offices. As of
September 30, 1998, New Century had approximately 1,595
employees.
LOAN LOSS AND DELINQUENCY
NEW CENTURY COMMENCED LENDING OPERATIONS IN FEBRUARY 1996, COMMENCED ITS
DEFAULT RELATED SERVICING OPERATIONS IN SEPTEMBER 1997 AND AS OF JULY 1998 IS
DIRECTLY HANDLING CERTAIN SERVICING DUTIES THAT IT USED TO OUTSOURCE, INCLUDING
LOAN SETUP, ESCROW ADMINISTRATION, MONTHLY BILLINGS, CASHIERING AND LOCKBOX
OPERATION AND SWEEPS, DEMANDS AND PAYOFF REQUESTS, YEAR-END TAX REPORTING,
ROUTINE CUSTOMER CALLS AND CORRESPONDENCE AND MORTGAGE POOL DATA REPORTING.
ACCORDINGLY, NEW CENTURY HAS NO REPRESENTATIVE HISTORICAL DELINQUENCY,
BANKRUPTCY, FORECLOSURE OR DEFAULT EXPERIENCE THAT MAY BE REFERRED TO FOR
PURPOSES OF ESTIMATING FUTURE DELINQUENCY AND LOSS EXPERIENCE OF THE MORTGAGE
LOANS.
However, the following table sets forth certain information regarding the
loan loss and delinquency experience of mortgage loans for which New Century is
servicer or master servicer. The mortgage loans for which this information is
provided include those originated or acquired under New Century's regular
lending program and either owned by New Century or previously sold to trusts in
transactions in which New Century was appointed as servicer or master servicer.
Because New Century commenced loan origination only in February 1996, all
of the mortgage loans included in the statistics below are seasoned less than 34
months. Moreover, because mortgage loans are continually being originated and
added to the group for which such statistics are compiled, the average seasoning
of the mortgage loans included in such statistics is considerably shorter.
Because newly originated mortgage loans will not be added to the Mortgage Pool
after the Funding Period, the Mortgage Pool will consist of a static group of
Mortgage Loans, and accordingly the actual loss and delinquency percentages with
respect to the Mortgage Pool are likely to be substantially higher than those
indicated below.
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<PAGE>
Certain of the mortgage loans in the statistics below are serviced by a
subservicer for New Century. Accordingly, such performance statistics reflect
the servicing practices of that subservicer, as well as the quality and type of
mortgage loans. These servicing practices are not necessarily representative of
the practices employed by New Century in its servicing and administrative
duties.
DELINQUENCY AND FORECLOSURE EXPERIENCE
OF NEW CENTURY'S SERVICING PORTFOLIO AS OF SEPTEMBER 30, 1998
Percentage
Dollar of Total
Amount Servicing Portfolio
------ -------------------
Delinquency(1)
30-59 Days $ 40,155,901 1.63%
60-89 Days $ 14,618,087 0.59%
90 Days or more $ 15,755,943 0.64%
Loans in Foreclosure(2) $ 55,757,081 2.26%
REO Properties(2) $ 6,925,213 0.28%
Total Servicing Portfolio $2,462,926,076
- -------------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period exclude
loans in foreclosure.
(2) The percentage of loans in foreclosure and REO properties is based on the
dollar amount of loans in foreclosure and REO properties as a percentage of
the total dollar amount of the mortgage loans in the servicing portfolio as
of the date indicated.
OPTION ONE MORTGAGE CORPORATION
The information set forth in the following paragraphs has been provided by
the Option One. None of the Depositor, the Trustee, the Mortgage Loan Seller,
the Master Servicer or any of their respective affiliates has made or will make
any representation as to the accuracy or completeness of such information.
Option One, a California corporation, headquartered in Irvine, California,
will serve as the Servicer pursuant to the Agreement for the Mortgage Loans sold
indirectly by it to the Depositor.
Option One was incorporated in 1992, commenced receiving applications for
mortgage loans under its regular lending program in February 1993 and began
funding such mortgage loans indirectly in the same month. The principal business
of Option One is the origination, sale and servicing of non-conforming mortgage
loans.
Option One is a subsidiary of Block Financial which is in turn a subsidiary
of H&R Block, Inc. ("H&R Block"). Option One has four loan origination centers
in California, two loan origination centers in Florida, and one loan origination
center in each of Georgia, Illinois, Ohio, Texas, Virginia, Connecticut, Rhode
Island, Pennsylvania, Massachusetts and Wisconsin.
Option One operates as a stand-alone mortgage banking company and is a
Fannie Mae and Freddie Mac approved servicer.
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<PAGE>
The following tables set forth, as of December 31, 1995, 1996, 1997 and
September 30, 1998 certain information relating to the delinquency experience
(including imminent foreclosures, foreclosures in progress and bankruptcies) of
one- to four-family residential mortgage loans included in Option One's entire
servicing portfolio (which portfolio includes mortgage loans originated under
Option One's Guidelines and mortgage loans that are subserviced for others) at
the end of the indicated periods. The indicated periods of delinquency are based
on the number of days past due on a contractual basis. No mortgage loan is
considered delinquent for these purposes until it is one month past due on a
contractual basis.
----------------------------
<TABLE>
<CAPTION>
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
At December 31, At December 31,
1995 1996
-------------------------------------------- ----------------------------------------------
Percent Percent Percent Percent
By No. By Dollar By No. of By Dollar By No. By Dollar By No. of By Dollar
of Loans Amount Loans Amount of Loans Amount Loans Amount
-------- ------ ----- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio........ 14,625 $1,367,031 N/A N/A 20,107 $1,865,636 N/A N/A
Period of Delinquency
31-59 Days.......... 161 16,501 1.10% 1.21% 329 29,980 1.64% 1.61%
60-89 Days.......... 104 10,117 0.71% 0.74% 161 14,972 0.80% 0.80%
90 days or more..... 388 40,275 2.65% 2.95% 773 70,607 3.84% 3.78%
--- ------ ---- ---- --- ------ ---- ----
Total Delinquent Loans. 653 66,893 4.46% 4.90% 1,263 115,559 6.28% 6.19%
Loans in Foreclosure(1) 388 38,985 2.65% 2.85% 677 61,555 3.37% 3.30%
</TABLE>
<TABLE>
<CAPTION>
At December 31, At September 30,
1997 1998
------------------------------------------- -------------------------------------------
Percent Percent Percent Percent
By No. By Dollar By No. of By Dollar By No. By Dollar By No. of By Dollar
of Loans Amount Loans Amount of Loans Amount Loans Amount
-------- ------ ----- ------ -------- --------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio........ 34,707 $3,407,167 N/A N/A 51,296 $5,175,155 N/A N/A
Period of Delinquency
31-59 Days.......... 457 42,556 1.32% 1.25% 425 36,193 0.83% 0.70
60-89 Days.......... 222 20,364 0.64% 0.60% 214 19,399 0.42% 0.37%
90 days or more..... 1,099 100,238 3.17 2.94% 1,043 95,872 2.03 1.85%
----- ------- ---- ----- ----- ----- ---- ----
Total Delinquent Loans. 1,778 163,158 5.12% 4.79% 1,682 151,464 3.28% 2.93%
Loans in Foreclosure(1) 923 83,726 2.66% 2.46% 841 79,044 1.64% 1.53%
</TABLE>
(1) Loans in foreclosure are also included under the heading "Total Delinquent
Loans".
------------------------
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
At December 31, At December 31, At December 31, At September 30,
1995 1996 1997 1998
-----------------------------------------------------------------------------------------------------------
By Dollar By Dollar By Dollar By Dollar
By No. Amount By No. Amount By No. Amount By No. Amount
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio 14,625 $1,367,031 20,107 $1,865,636 34,707 $3,407,167 51,296 $5,175,155
Foreclosed Loans(1) 100 9,632 323 30,677 296 26,313 321 26,602
Foreclosure Ratio(2) 0.68 0.70 1.61 1.64 0.85 0.77 0.63 0.51
</TABLE>
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by Option One, by investors or by an insurer
following foreclosure or delivery of a deed in lieu of foreclosure.
(2) The Foreclosure Ratio is equal to the aggregate principal balance or number
of Foreclosed Loans divided by the aggregate principal balance, or number,
as applicable, of mortgage loans in the Total Portfolio at the end of the
indicated period.
----------------------------
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<PAGE>
LOAN LOSS EXPERIENCE ON OPTION ONE'S
SERVICING PORTFOLIO OF MORTGAGE LOANS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Nine Months Ended
Year Ended December 31, September 30,
1995 1996 1997 1998
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Portfolio(1) $1,367,031 $1,865,636 $3,407,167 $5,175,155
Net Losses(2)(3) $1,506 $8,451 $24,663 $16,700
Net Losses as a Percentage of
Total Portfolio(4)
0.11% 0.45% 0.72% 0.43%
</TABLE>
(1) "Total Portfolio" on the date stated above is the principal balances of the
mortgage loans outstanding on the last day of the period.
(2) "Net Losses" means "Gross Losses" minus "Recoveries." "Gross Losses" are
actual losses incurred on liquidated properties for each respective period.
Losses are calculated after repayment of all principal, foreclosure costs
and accrued interest to the date of liquidation. "Recoveries" are
recoveries from liquidation proceeds and deficiency judgments.
(3)"Net Losses" are computed on a loan-by-loan basis and are reported with
respect to the period in which the loan is liquidated. If additional costs
are incurred or recoveries are received after the end of the period, the
amounts are adjusted with respect to the period in which the related loan
was liquidated. Accordingly, the Net Losses reported in the table may
change in future periods. The information in this table reflects costs and
recoveries through November 30, 1998.
(4)For the nine months ended September 30, 1998, "Net Losses" as a Percentage of
Total Portfolio" was annualized by multiplying "Net Losses" by 1.33 before
calculating the percentage of "Net Losses as a Percentage of Total
Portfolio".
----------------------------
It is unlikely that the delinquency experience of the Mortgage Loans sold
indirectly by Option One to the Depositor for inclusion in the Mortgage Pool
will correspond to the delinquency experience of Option One's mortgage portfolio
set forth in the foregoing tables. The statistics shown above represent the
delinquency experience for Option One's mortgage servicing portfolio only for
the periods presented, whereas the aggregate delinquency experience on the
Mortgage Loans sold indirectly by Option One to the Depositor for inclusion in
the Mortgage Pool will depend on the results obtained over the life of the
Mortgage Pool. There can be no assurance that such Mortgage Loans will perform
consistent with the delinquency or foreclosure experience described herein. In
particular, 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 Option One. In addition,
adverse economic conditions may affect the timely payment by Mortgagors of
scheduled payments of principal and interest on such Mortgage Loans and,
accordingly, the actual rates of delinquencies and foreclosures with respect to
the Mortgage Pool.
THE TRUSTEE
Firstar Bank Milwaukee, N.A., 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 1555 North RiverCenter Drive,
Suite 301, Milwaukee, Wisconsin 53212, and its telephone number is (414)
905-5000. In the event the Trust Administrator advises the Trustee that it is
unable to continue to perform its obligations pursuant to the terms of the
Agreement prior to the appointment of a successor, the Trustee shall be
obligated to perform such obligations until a new trust administrator is
appointed.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Agreement will be equal to the related portion of accrued
interest at the Administration Fee Rate of
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<PAGE>
0.0045% per annum on the Scheduled Principal Balance of the Mortgage Loans (the
"Administration Fee"). 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 either Servicer's or the Trust Administrator's obligations and duties under
the Agreement, (ii) that constitutes a specific liability of the 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.
THE TRUST ADMINISTRATOR
U.S. Bank National Association, a national banking association, will act as
Trust Administrator for the Certificates pursuant to the Agreement. The Trust
Administrator's offices for notices under the Agreement are located at 180 East
Fifth Street, St. Paul, Minnesota 55101, and its telephone number is (612)
973-5800. The Trust Administrator will perform certain administrative functions
on behalf of the Trustee and will act as initial paying agent, certificate
registrar and custodian.
The principal compensation to be paid to the Trust Administrator in respect
of its obligations under the Agreement will be equal to the related portion of
the Administration Fee. The Agreement will provide that the Trust Administrator
and any director, officer, employee or agent of the Trust Administrator 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 Trust Administrator, including the compensation and the
expenses and disbursements of its agents and counsel, in the ordinary course of
the Trust Administrator's performance in accordance with the provisions of the
Agreement) incurred by the Trust Administrator 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 either
Servicer's or the Trustee's obligations and duties under the Agreement, (ii)
that constitutes a specific liability of the Trust Administrator under the
Agreement or (iii) incurred by reason of willful misfeasance, bad faith or
negligence in the performance of the Trust Administrator's duties under the
Agreement or as a result of a breach, or by reason of reckless disregard, of the
Trust Administrator's obligations and duties under the Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to New Century, in its capacity as
Master Servicer, will be equal to accrued interest at the Master Servicing Fee
Rate of 0.04% per annum with respect to each Mortgage Loan serviced by Option
One on the Scheduled Principal Balance of each such Mortgage Loan (the "Master
Servicing Fee"). The principal compensation to be paid to each of New Century
and Option One, in its capacity as a 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
serviced by it on the Scheduled Principal Balance of each such
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<PAGE>
Mortgage Loan (the "Servicing Fee"). As additional servicing compensation, each
Servicer is entitled to retain all assumption fees, late payment charges and
other miscellaneous servicing fees in respect of the Mortgage Loans serviced by
it (with the exception of Prepayment Charges, which will be distributed to the
holders of the Class P Certificates) 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 in respect of the Mortgage Loans
serviced by it.
Each Servicer is obligated to offset any Prepayment Interest Shortfall in
respect of the Mortgage Loans serviced by it on any Distribution Date (payments
made by such Servicer in satisfaction of such obligation, "Compensating
Interest") to the extent of its Servicing Fee for such Distribution Date. Each
Servicer is obligated to pay certain insurance premiums and certain ongoing
expenses associated with the Mortgage Pool in respect of the Mortgage Loans
serviced by it and incurred by such Servicer in connection with its
responsibilities under the Agreement and is entitled to reimbursement therefor
as provided in the Agreement. See "Description of the Securities--Retained
Interest; Servicing Compensation and Payment of Expenses" in the Prospectus for
information regarding expenses payable by the Servicers and "Federal Income Tax
Consequences" herein regarding certain taxes payable by the Servicers.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
The Master Servicer has the option to purchase from the Trust Fund any
Mortgage Loan that is 90 days or more delinquent, which the Master Servicer
determines in good faith will otherwise become subject to foreclosure
proceedings; provided, however, that (i) the Master Servicer shall purchase any
such Mortgage Loans on the basis of delinquency, purchasing the most delinquent
Mortgage Loans first and (ii) after it has purchased 5% of the Mortgage Loans,
by aggregate principal balance as of the Cut-off Date, pursuant to clause (i)
above, the Master Servicer must also obtain the consent of the Insurer prior to
any further purchases of delinquent Mortgage Loans. Notwithstanding the
foregoing, prior to purchasing any Mortgage Loan serviced by Option One, the
Master Servicer must give Option One the right of first refusal to purchase such
Mortgage Loan.
EVENTS OF DEFAULT
In addition to those Events of Default (as defined in the Prospectus)
described under "Description of the Securities--Events of Default" in the
Prospectus, upon the occurrence of certain loss and delinquency triggers with
respect to the Mortgage Loans serviced by the related Servicer or upon the
occurrence of certain other defaults set forth in the Agreement, each Servicer
may be removed as servicer of such Mortgage Loans in accordance with the terms
of the Agreement and the Insurance Agreement. In addition, if New Century is
terminated in its capacity as Servicer under the Agreement, it shall also be
terminated as Master Servicer.
Pursuant to the Agreement, each Servicer covenants and agrees to act as a
Servicer for an initial term from the Closing Date to March 31, 1999, which term
shall be extendable by the Insurer for successive terms of three (3) calendar
months thereafter, until the termination of the Trust Fund. Each such notice of
extension (a "Servicer Extension Notice") shall be delivered by the Insurer to
the Trustee, the Trust Administrator and the related Servicer. Each Servicer
will, upon its receipt of any such Servicer Extension Notice, become bound for
the duration of the term covered by such Servicer Extension Notice to continue
as a Servicer subject to and in accordance with the other provisions of the
Agreement. If as of the fifteenth (15th) day prior to the last day of any term
of such Servicer, the Trust Administrator shall not have received any Servicer
Extension Notice from the Insurer, the Trust Administrator will, within five (5)
days thereafter, give written
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notice of such non-receipt to the Insurer, the related Servicer and the Trustee.
The failure of the Insurer to deliver a Servicer Extension Notice by the end of
a calendar term shall result in the termination of the related Servicer.
Any successor to either Servicer appointed under the Agreement must be a
housing loan servicing institution acceptable to each Rating Agency (as defined
in the Prospectus) with a net worth at the time of such appointment of at least
$15,000,000. See "Description of the Securities--Rights Upon Event of Default"
in the Prospectus.
VOTING RIGHTS
At all times, 98% of all Voting Rights will be allocated among the holders
of the Offered Certificates and the Class CE Certificates in proportion to the
then outstanding Certificate Principal Balances of their respective
Certificates, 1% of all Voting Rights will be allocated to the holders of the
Class P Certificates in proportion to the then outstanding Certificate Principal
Balances of their respective Certificates and 1/3 of 1% of all Voting Rights
will be allocated among the holders of each class of Residual Certificates in
proportion to the percentage interests in such classes evidenced by their
respective Certificates. Unless an Insurer Default exists, the Insurer will be
entitled to exercise certain voting and other rights of the holders of the
Offered Certificates. See "--Certain Matters Regarding the Insurer" herein.
CERTAIN MATTERS REGARDING THE INSURER
Under the Agreement, on each Distribution Date, the Trust Administrator is
required to pay to the Insurer a premium with respect to the Policy equal to
1/12 times 0.20% per annum times the Certificate Principal Balance of the
Offered Certificates.
Pursuant to the terms of the Agreement, unless there exists a continuance
of any failure by the Insurer to make a required payment under the Policy or
there exists a proceeding in bankruptcy by or against the Insurer (either such
condition, an "Insurer Default"), the Insurer will be entitled to exercise,
among others, the following rights of the holders of the Offered Certificates,
without the consent of such holders, and the holders of the Offered Certificates
may exercise such rights only with the prior written consent of the Insurer: (i)
the right to direct the Trustee to terminate the rights and obligations of the
either Servicer under the Agreement in the event of a default by such Servicer;
(ii) the right to consent to or direct any waivers of defaults by either
Servicer; (iii) the right to remove the Trustee or the Trust Administrator
pursuant to the Agreement; and (iv) the right to institute proceedings against
either Servicer in the event of default by such Servicer and refusal of the
Trustee to institute such proceedings. In addition, unless an Insurer Default
exists, the Insurer will have the right to direct all matters relating to any
proceeding seeking the avoidance as a preferential transfer under applicable
bankruptcy, insolvency, receivership or similar law of any distribution made
with respect to the Offered Certificates, and, unless an Insurer Default exists,
the Insurer's consent will be required prior to, among other things, (i) the
removal of the Trustee or the Trust Administrator, (ii) the appointment of any
successor Trustee, Trust Administrator or Servicer, as the case may be, or (iii)
any amendment to the Agreement.
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TERMINATION
The circumstances under which the obligations created by the Agreement will
terminate in respect of the Certificates are described in "Description of the
Securities--Termination" in the Prospectus. The majority holder of the Class CE
Certificates (or if such holder does not exercise such option, the Master
Servicer or the Insurer) will have the right to purchase all remaining Mortgage
Loans and any properties acquired in respect thereof and thereby effect early
retirement of the Certificates on any Distribution Date following the Due Period
during which the aggregate principal balance of the Mortgage Loans (and
properties acquired in respect thereof) remaining in the Trust Fund at the time
of purchase is reduced to less than 10%, in the event the majority holder of the
Class CE Certificates exercises such option, or 5%, in the event the Master
Servicer or the Insurer exercises such option, 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 or the Insurer exercises 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 Servicers for unpaid Servicing
Fees and any unreimbursed advances and any amounts due to New Century, in its
capacity as Master Servicer for any unpaid Master Servicing Fees. In the event
the majority holder of the Class CE Certificates or the Master Servicer or the
Insurer exercises such option, the portion of the purchase price allocable to
the Offered Certificates will be, to the extent of available funds (including
funds paid under the Policy), (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 to which the holders of such Certificates are entitled. 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 Securities--Termination" in the Prospectus.
THE INSURER
The following information has been supplied by Financial Security Assurance
Inc. (the "Insurer") for inclusion in this Prospectus Supplement. No
representation is made by the Depositor or the Underwriter as to the accuracy
and completeness of such information.
GENERAL
The Insurer is a monoline insurance company incorporated in 1984 under the
laws of the State of New York. The Insurer is licensed to engage in the
financial guaranty insurance business in all 50 states, the District of Columbia
and Puerto Rico.
The Insurer and its subsidiaries are engaged in the business of writing
financial guaranty insurance, principally in respect of securities offered in
domestic and foreign markets. In general, financial guaranty insurance consists
of the issuance of a guaranty of scheduled payments of an issuer's
securities--thereby enhancing the credit rating of those securities--in
consideration for the
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payment of a premium to the insurer. The Insurer and its subsidiaries
principally insure asset-backed, collateralized and municipal securities.
Asset-backed securities are generally supported by residential mortgage loans,
consumer or trade receivables, securities or other assets having an
ascertainable cash flow or market value. Collateralized securities include
public utility first mortgage bonds and sale/leaseback obligation bonds.
Municipal securities consist largely of general obligation bonds, special
revenue bonds and other special obligations of state and local governments. The
Insurer insures both newly-issued securities sold in the primary market and
outstanding securities sold in the secondary market that satisfy the Insurer's
underwriting criteria.
The Insurer is a wholly-owned subsidiary of Financial Security Assurance
Holdings Ltd. ("Holdings"), a New York Stock Exchange Listed company. Major
shareholders of Holdings include Fund American Enterprises Holdings, Inc.,
MediaOne Capital Corporation, The Tokio Marine and Fire Insurance Co., Ltd. and
EXEL Limited. No shareholder of Holdings is obligated to pay any debt of the
Insurer or any claim under any insurance policy issued by the Insurer or to make
any additional contribution to the capital of the Insurer.
The principal executive offices of the Insurer are located at 350 Park
Avenue, New York, New York 10022, and its telephone number at that location is
(212) 826-0100.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the Insurer or any of its
domestic or Bermuda operating insurance company subsidiaries are generally
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, the Insurer reinsures a
portion of its liabilities under certain of its financial guaranty insurance
policies with other reinsurers under various treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by the Insurer as
a risk management device and to comply with certain statutory and rating agency
requirements; it does not alter or limit the Insurer's obligations under any
financial guaranty insurance policy.
RATINGS
The Insurer's insurance financial strength is rated "Aaa" by Moody's. The
Insurer's insurer financial strength is rated "AAA" by each of Standard & Poor's
and Standard & Poor's (Australia) Pty. Ltd. The Insurer's claims-paying ability
is rated "AAA" by Fitch IBCA, Inc. and Japan Rating and Investment Information,
Inc. Such ratings reflect only the views of the respective rating agencies, are
not recommendations to buy, sell or hold securities and are subject to revision
or withdrawal at any time by such rating agencies. See "Ratings".
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CAPITALIZATION
The following table sets forth the capitalization of the Insurer and its
wholly owned subsidiaries on the basis of generally accepted accounting
principles as of September 30, 1998, as well as such capitalization as adjusted
to give effect to certain transactions entered into during November 1998:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
ACTUAL AS ADJUSTED(1)
(UNAUDITED)
(IN THOUSANDS)
--------------------------------
<S> <C> <C>
Deferred Premium Revenue
(net of prepaid reinsurance premiums)..................... $480,089 $480,089
-------- --------
Surplus Notes.................................................. 50,000 130,000
Minority Interest.............................................. -- 20,000
Shareholder's Equity
Common Stock.............................................. 15,000 15,000
Additional Paid-In Capital................................ 614,787 684,787
Accumulated Other Comprehensive Income (net of 41,923 41,923
deferred income taxes)....................................
Accumulated Earnings...................................... 326,145 326,145
------- -------
Total Shareholder's Equity..................................... 997,855 1,067,855
------- ---------
Total Deferred Premium Revenue, Surplus Notes,
Minority Interest and Shareholder's Equity..................... $1,527,944 $1,697,944
========== ==========
</TABLE>
- ------------------
(1) Adjusted to give effect to the November 1998 (a) purchase by Holdings of $80
million of surplus notes from the Insurer in connection with the formation of a
new indirect Bermuda subsidiary of the Insurer, initially capitalized with $100
million, including a $20 million minority interest owned by EXEL limited, and
(b) contribution by Holdings to the capital of the Insurer of approximately $70
million, representing a portion of the proceeds from the sale by Holdings of
$100 million of 6.950% Senior Quarterly Income Debt Securities due 2098.
For further information concerning the Insurer, see the Consolidated
Financial Statements of the Insurer and subsidiaries, and the notes thereto,
incorporated by reference herein. The Insurer's financial statements are
included as exhibits in the Annual Reports on Form 10-K and the Quarterly
Reports on Form 10-Q filed with the Securities and Exchange Commission (the
"Commission") and may be reviewed at the EDGAR web site maintained by the
Commission and at Holding's website, HTTP://WWW.FSA.COM. Copies of the statutory
quarterly and annual financial statements filed with the State of New York
Insurance Department by the Insurer are available upon request to the State of
New York Insurance Department.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described under "Incorporation of Certain
Information by Reference" in the Prospectus, the consolidated financial
statements of the Insurer and subsidiaries included in or as exhibits to the
following documents which have been filed with the Securities and Exchange
Commission by Holdings, are hereby incorporated by reference in this Prospectus
Supplement, which together with the Prospectus, forms a part of the Depositor's
Registration Statement: (a) the Annual Report on Form 10-K for the year ended
December 31, 1997 and (b) the Quarterly Report on Form 10-Q for the period ended
September 30, 1998.
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All financial statements of the Insurer and subsidiaries included in
documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the
Offered Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
The Depositor will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon oral or written request of such person,
a copy of any or all of the foregoing financial statements incorporated by
reference. Requests for such copies should be directed to the Secretary, Salomon
Brothers Mortgage Securities VII, Inc., Seven World Trade Center, New York, New
York 10048.
INSURANCE REGULATION
The Insurer is licensed and subject to regulation as a financial guaranty
insurance corporation under the laws of the State of New York, its state of
domicile. In addition, the Insurer and its insurance subsidiaries are subject to
regulation by insurance laws of the various other jurisdictions in which they
are licensed to do business. As a financial guaranty insurance corporation
licensed to do business in the State of New York, the Insurer is subject to
Article 69 of the New York Insurance Law which, among other things, limits the
business of each such insurer to financial guaranty insurance and related lines,
requires that each such insurer maintain a minimum surplus to policyholders,
establishes contingency, loss and unearned premium reserve requirements for each
such insurer, and limits the size of individual transactions ("single risks")
and the volume of transactions ("aggregate risks") that may be underwritten by
each such insurer. Other provisions of the New York Insurance Law, applicable to
non-life insurance companies such as the Insurer, regulate, among other things,
permitted investments, payment of dividends, transactions with affiliates,
mergers, consolidations, acquisitions or sales of assets and incurrence of
liability for borrowings.
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 Offered Certificates, the Class CE
Certificates and the Class P Certificates will be the "regular interests" in,
and will be treated as debt instruments of, REMIC III. See "Federal Income Tax
Consequences--REMIC--Classification of REMICs" in the Prospectus.
For federal income tax reporting purposes, the Offered 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
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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
equal to 100% of the Prepayment Vector. No representation is made that the
Mortgage Loans will prepay at such rate or at any other rate. See "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. The OID
Regulations in some circumstances permit the holder of a debt instrument to
recognize original issue discount under a method that differs from that of the
issuer. Accordingly, it is possible that holders of Offered Certificates issued
with original issue discount may be able to select a method for recognizing
original issue discount that differs from that used in preparing reports to
Certificateholders and the IRS. Prospective purchasers of Offered Certificates
issued with original issue discount are advised to consult their tax advisors
concerning the tax treatment of such Certificates in this regard.
The Offered Certificates may be treated for federal income tax purposes as
having been issued at a premium. Whether any holder of a Offered 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 Offered Certificates should consult their own tax
advisors regarding the possibility of making an election to amortize such
premium. See "Federal Income Tax Consequences-- REMICs--Taxation of Owners of
REMIC Regular Certificates--Premium" in the Prospectus.
The Offered 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 Offered 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 Offered
Certificates are treated as "real estate assets" under Section 856(c)(4)(A) of
the Code. The Offered Certificates will also be treated as "qualified mortgages"
under Section 860G(a)(3) of the Code. See "Federal Income Tax Consequences--
REMICs--Characterization of Investments in REMIC Certificates" in the
Prospectus.
It is not anticipated that any of 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 Trust Administrator, if the Trust Administrator has breached
its obligations with respect to REMIC compliance under the Agreement, (ii) by
New Century, if New Century, in its capacity as Master Servicer or as a
Servicer, has breached its obligations with respect to REMIC compliance under
the Agreement, (iii) by Option One, if Option One, in its capacity as a Servicer
has breached its obligations with respect to REMIC compliance under the
Agreement, (iv) by the Trustee, if the Trustee has breached its obligations with
respect to REMIC compliance under the Agreement and (v) otherwise by the Trust
Fund, with a resulting reduction in amounts otherwise distributable to holders
of the related Offered Certificates. See "Description of the Securities--
General" and "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, the Trust Administrator or the Master
Servicer. See "Federal Income Tax Consequences--REMICs-- Reporting and Other
Administrative Matters" in the Prospectus.
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For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Federal Income Tax
Consequences--REMICs" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated December 18, 1998 (the "Underwriting Agreement"), the Depositor
has agreed to sell, and Salomon Smith Barney Inc. (the "Underwriter") has agreed
to purchase the Offered Certificates. The Underwriter is obligated to purchase
all Offered Certificates 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 99.50%
of the aggregate initial Certificate Principal Balance of the Offered
Certificates, plus accrued interest thereon. In connection with the 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 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 Offered Certificates will be made
through the facilities of DTC on or about the Closing Date.
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 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 or, if it does develop, that it will continue. The Underwriter
intends to establish a market in the Offered Certificates but it is not
obligated to do so. 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 Securities--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.
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LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be passed
upon for the Depositor and the Underwriter by Thacher Proffitt & Wood, New York,
New York.
EXPERTS
The consolidated balance sheets of the Insurer and subsidiaries as of
December 31, 1997 and 1996 and the related consolidated statements of income,
changes in shareholder's equity, and cash flows for each of the three years in
the period ended December 31, 1997, incorporated by reference in this Prospectus
Supplement, have been incorporated herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
RATINGS
It is a condition to the issuance of the Certificates that the Offered
Certificates be rated "Aaa" by Moody's Investors Service ("Moody's") and "AAA"
by Standard & Poor's Ratings Services ("Standard & Poor's").
The ratings of Moody's and Standard & Poor's assigned to mortgage
pass-through certificates address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled. The rating process addresses structural and legal aspects associated
with the Certificates, including the nature of the underlying mortgage loans.
The ratings assigned to mortgage pass-through certificates do not represent any
assessment of the likelihood that principal prepayments will be made by the
mortgagors or the degree to which such prepayments will differ from that
originally anticipated. The ratings assigned by Moody's and Standard & Poor's on
the Offered Certificates are based in part upon the Insurer's claims paying
ability. Any change in the ratings of the Insurer by Moody's or Standard &
Poor's may result in a change in the ratings on the Offered Certificates. The
ratings do not address the possibility that Certificateholders might suffer a
lower than anticipated yield due to non-credit events.
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 Offered Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
because the Mortgage Pool includes certain Mortgage Loans that are secured by
subordinate liens on the related Mortgaged Properties.
The Depositor makes no representations as to the proper characterization of
any class of Offered Certificates for legal investment or other purposes, or as
to the ability of particular investors to purchase any class of Offered
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Offered Certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent any class of Offered Certificates constitutes a legal
investment or is subject to investment, capital or other restrictions. On
December 1, 1998, the Office of Thrift Supervision (the "OTS") issued Thrift
Bulletin 13a, entitled "Management of Interest Rate Risk, Investment Securities,
and Derivatives Activities" ("TB 13a"), which is applicable to thrift
institutions regulated by the OTS. TB 13a should be reviewed by any such thrift
institution prior to investing 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 91-23 (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 Offered Certificates,
and the servicing and operation of asset pools such as the Mortgage Pool,
provided that certain conditions are satisfied. The purchase of the Offered
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 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 an Offered Certificate must make
its own determination that the conditions set forth in the Exemption will be
satisfied with respect to the Offered Certificates.
Before purchasing an Offered Certificate, a fiduciary of a Plan should
itself confirm (a) that the Offered 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. 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.
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$688,079,000 (APPROXIMATE)
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1998-NC7
PROSPECTUS SUPPLEMENT
DATED DECEMBER 18, 1998
NEW CENTURY MORTGAGE CORPORATION
MASTER SERVICER
SALOMON SMITH BARNEY
UNDERWRITER
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE CERTIFICATES OFFERED HEREBY IN ANY STATE WHERE THE OFFER
IS NOT PERMITTED.
WE DO NOT CLAIM THE ACCURACY OF THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS AS OF ANY DATE OTHER THAN THE DATES STATED ON
THEIR COVER PAGES.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
Offered Certificates, whether or not participating in this offering, may be
required to deliver a prospectus supplement and prospectus until March 18, 1999.
<PAGE>
MORTGAGE PASS-THROUGH CERTIFICATES
MORTGAGE-BACKED NOTES
(ISSUABLE IN SERIES)
Principal and interest with respect to the Certificates and the Notes (together,
the "Securities") 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 Securities 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, and each series of Notes will represent
indebtedness of certain assets deposited into a trust fund (the "Trust Fund" or
the "Trust Fund Assets"). The Trust Fund for any series of Securities will
consist of 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.
Each series of Securities will include one or more classes. Each class of
Securities 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 Securities, 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 Securities
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 Securities 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 Securities 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 Securities" and "Description of Credit Support".
The only obligations of the Depositor with respect to a series of Securities
will be pursuant to its representations and warranties. The Master Servicer with
respect to a series of Securities 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 Securities 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 Securities 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 Securities 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 (i) the related series of
Certificates pursuant to a Pooling and Servicing Agreement or a Trust Agreement
or (ii) the related series of Notes pursuant to an Indenture, each as more fully
described herein. If so provided in the related Prospectus Supplement, with
respect to each series of Certificates, 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 "Federal
Income Tax Consequences".
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS"
BEGINNING ON PAGE 16 HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT.
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 Securities 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 Securities 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 Securities 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 SMITH BARNEY
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 13, 1998
<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 SECURITIES OFFERED
HEREBY AND THEREBY OR AN OFFER OF THE SECURITIES 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>
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TABLE OF CONTENTS
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Available Information....................................................................................... 4
Reports to Securityholders.................................................................................. 4
Incorporation of Certain Information by Reference........................................................... 4
Summary of Prospectus....................................................................................... 5
Risk Factors................................................................................................ 16
The Trust Funds............................................................................................. 25
The Mortgage Loans..................................................................................... 25
Agency Securities...................................................................................... 30
Private Mortgage-Backed Securities..................................................................... 36
Funding Agreements..................................................................................... 37
Use of Proceeds............................................................................................. 38
Yield Considerations........................................................................................ 38
Maturity and Prepayment Considerations...................................................................... 40
The Depositor............................................................................................... 41
Mortgage Loan Program....................................................................................... 41
Underwriting Standards................................................................................. 41
Qualifications of Originators and Mortgage Loan Sellers................................................ 43
Representations by or on behalf of Mortgage Loan Sellers; Repurchases.................................. 43
Description of the Securities............................................................................... 45
General................................................................................................ 46
Assignment of Trust Fund Assets........................................................................ 47
Deposits to Certificate Account........................................................................ 51
Payments on Mortgage Loans............................................................................. 52
Payments on Agency Securities and Private Mortgage-Backed Securities................................... 53
Distributions.......................................................................................... 54
Available Distribution Amount.......................................................................... 54
Interest on the Securities............................................................................. 55
Principal of the Securities............................................................................ 55
Pre-Funding Account.................................................................................... 56
Allocation of Losses................................................................................... 56
Advances in Respect of Delinquencies................................................................... 57
Reports to Securityholders............................................................................. 58
Collection and Other Servicing Procedures.............................................................. 59
Sub-Servicing.......................................................................................... 60
Realization Upon Defaulted Mortgage Loans.............................................................. 61
Retained Interest; Servicing or Administration Compensation and Payment
of Expenses............................................................................................ 62
Evidence as to Compliance.............................................................................. 63
Certain Matters Regarding the Master Servicer and the Depositor........................................ 64
Events of Default and Rights Upon Events of Default.................................................... 65
Amendment.............................................................................................. 68
Termination............................................................................................ 68
Optional Purchase of Defaulted Mortgage Loans.......................................................... 69
Duties of the Trustee.................................................................................. 70
The Trustee............................................................................................ 70
Description of Credit Support............................................................................... 70
Subordination.......................................................................................... 70
Letter of Credit....................................................................................... 72
Mortgage Pool Insurance Policy......................................................................... 73
Special Hazard Insurance Policy........................................................................ 75
Bankruptcy Bond........................................................................................ 76
Financial Guarantee Insurance.......................................................................... 77
Reserve Fund........................................................................................... 77
Cash Flow Agreements................................................................................... 77
Description of Primary Insurance Policies................................................................... 77
Primary Mortgage Insurance Policies.................................................................... 78
Primary Hazard Insurance Policies...................................................................... 78
FHA Insurance.......................................................................................... 79
VA Guarantees.......................................................................................... 80
</TABLE>
2
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<TABLE>
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Certain Legal Aspects of Mortgage Loans..................................................................... 80
General................................................................................................ 81
Single-Family Loans and Multifamily Loans.............................................................. 81
Leases and Rents....................................................................................... 82
Cooperative Loans...................................................................................... 82
Contracts.............................................................................................. 83
Foreclosure on Mortgages............................................................................... 85
Foreclosure on Cooperative Shares...................................................................... 86
Repossession with respect to Contracts................................................................. 87
Louisiana Law.......................................................................................... 88
Rights of Redemption with respect to Single-Family Properties and
Multifamily Properties...................................................................................... 89
Notice of Sale; Redemption Rights with respect to Manufactured Homes................................... 89
Anti-Deficiency Legislation and Other Limitations on Lenders........................................... 89
Junior Mortgages....................................................................................... 91
Consumer Protection Laws with respect to Contracts..................................................... 91
Other Limitations...................................................................................... 92
Enforceability of Certain Provisions................................................................... 93
Subordinate Financing.................................................................................. 94
Applicability of Usury Laws............................................................................ 95
Alternative Mortgage Instruments....................................................................... 95
Formaldehyde Litigation with respect to Contracts...................................................... 96
Soldiers' and Sailors' Civil Relief Act of 1940........................................................ 96
Environmental Legislation.............................................................................. 97
Forfeitures in Drug and RICO Proceedings............................................................... 98
Negative Amortization Loans............................................................................ 98
Federal Income Tax Consequences............................................................................. 98
General................................................................................................ 98
REMICs................................................................................................. 99
Notes.................................................................................................. 117
Grantor Trust Funds.................................................................................... 117
Partnership Trust Funds................................................................................ 127
State and Other Tax Consequences............................................................................ 134
ERISA Considerations........................................................................................ 134
Representation from Plans Investing in Notes with "Substantial Equity
Features"
or Certain Securities.................................................................................. 139
Tax Exempt Investors................................................................................... 140
Consultation with Counsel.............................................................................. 140
Legal Investment............................................................................................ 140
Methods of Distribution..................................................................................... 141
Legal Matters............................................................................................... 142
Financial Information....................................................................................... 142
Index of Principal Definitions.............................................................................. 143
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES 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 SECURITIES 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 Securityholders (as
defined herein).
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 SECURITYHOLDERS
The Trustee will mail monthly reports concerning each Trust Fund to all
registered holders of Securities (the "Securityholders") of the related series.
With respect to each series of Certificates or Notes, Securityholders will be
referred to as the "Certificateholders" or the "Noteholders", respectively. See
"Description of the Securities--Reports to Securityholders".
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 Securities offered hereby 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 Securities offered hereby, 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 Securities, 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 Securities offered hereby.
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 Securities 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 Securities.........................Mortgage Pass-Through Certificates,
issuable in series (the
"Certificates") or Mortgage-Backed
Notes, issuable in series (the
"Notes," and together with the
Certificates, the "Securities").
Depositor...................................Salomon Brothers Mortgage Securities
VII, Inc., an indirect wholly-owned
subsidiary of Salomon Smith Barney
Holdings Inc. and an affiliate of
Salomon Smith Barney Inc. See "The
Depositor".
Master Servicer.............................The Master Servicer (the "Master
Servicer") for each series of
Securities 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
Securities--Certain Matters
Regarding the Master Servicer and
the Depositor".
Issuer......................................With respect to each series of
Notes, the Issuer (the "Issuer")
will be the Depositor or an owner
trust established by it for the
purpose of issuing such series of
Notes. Each such owner trust will be
created pursuant to a trust
agreement (the "Owner Trust
Agreement") between the Depositor,
acting as depositor and the Owner
Trustee. Each series of Notes will
represent indebtedness of the Issuer
and will be issued pursuant to an
indenture (the "Indenture") between
the Issuer and the Trustee whereby
the Issuer will pledge the Trust
Fund to secure the Notes under the
lien of the Indenture. As to each
series of Notes where the Issuer is
an owner trust, the ownership of the
Trust Fund will be evidenced by
certificates (the "Equity
Certificates") issued under the
Owner Trust Agreement, which are not
offered hereby. The Notes will
represent nonrecourse obligations
solely of the Issuer, and the
proceeds of the Trust Fund will be
the sole source of payments on the
Notes, except as described herein
under "Description of Credit
Support" and in the related
Prospectus Supplement.
Trustees....................................The Trustee or Indenture Trustee
(each, the "Trustee") for each
series of Certificates and each
series of Notes, respectively, will
be named in the related Prospectus
Supplement. The Owner Trustee (the
"Owner Trustee") for each series of
Notes will be named in the related
Prospectus Supplement.
5
<PAGE>
Description of Securities...................Each series of Securities will
include one or more classes. Each
series of Securities (including any
class or classes of Securities of
such series not offered hereby) will
represent either (i) with respect to
each series of Certificates, in the
aggregate the entire beneficial
ownership interest in, or (ii) with
respect to each series of Notes,
indebtedness of, 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 Securities
(other than certain Strip Securities
as defined below) will have a stated
principal amount (a "Principal
Balance") and will be entitled to
payments of interest thereon based
on a fixed, variable or adjustable
interest rate (a "Security Interest
Rate"). The Security Interest Rate
of each Security offered hereby will
be stated in the related Prospectus
Supplement as the "Pass- Through
Rate" with respect to a Certificate
and the "Note Interest Rate" with
respect to a Note. The related
Prospectus Supplement will specify
the Security Interest Rate for each
class or, in the case of a variable
or adjustable Security Interest
Rate, the method for determining the
Security Interest Rate.
A series of Securities may include
one or more classes of Securities
(collectively, the "Senior
Securities") that are senior to one
or more classes of Securities
(collectively, the "Subordinate
Securities") in respect of certain
distributions of principal and
interest and allocation of losses on
the Mortgage Loans. In addition,
certain classes of Senior (or
Subordinate) Securities may be
senior to other classes of Senior
(or Subordinate) Securities in
respect of such distribution or
losses. With respect to any series
of Notes, the related Equity
Certificates, insofar as they
represent the beneficial ownership
interest in the Issuer, will be
subordinate to the related Notes.
Credit enhancement also may be
provided with respect to any series
by means of various pool insurance
policies, letters of credit, reserve
funds or other types of credit
support, or any combination of the
foregoing, as described herein and
in the related Prospectus
Supplement. See "Description of
Credit Support".
A series may include one or more
classes of Securities 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
Securities"). In addition, a series
may include two or more classes of
Securities which differ as to
6
<PAGE>
timing, sequential order, priority
of payment, security interest 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 Securities ("Accrual
Securities"), 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.
With respect to each series of
Certificates, 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 of Certificates, 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 Securities will not represent an
interest in or obligation of the
Depositor or any affiliate thereof
except as set forth herein, nor will
the Securities or any Mortgage Loans
be insured or guaranteed by any
governmental agency or
instrumentality. Although payment of
principal and interest on Agency
Securities will be guaranteed as
described herein and in the related
Prospectus Supplement by GNMA, FNMA
or FHLMC, the Securities 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)
7
<PAGE>
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 Securities.
Unless otherwise provided in the
related Prospectus Supplement, each
Trust Fund will contain one of the
following types of Mortgage Loans:
(1) Fully amortizing Mortgage Loans
with a fixed rate of interest (an
"Interest Rate") and level monthly
payments to maturity;
(2) Fully amortizing Mortgage Loans
with an Interest Rate adjusted
periodically (with corresponding
adjustments in the amount of monthly
payments) to equal the sum (which
may be rounded) of a fixed
percentage amount and an index ("ARM
Loans"), as described in the related
Prospectus Supplement;
(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
8
<PAGE>
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 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
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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 Securities 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
Securities--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
Securityholders 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
Securities--Deposits to Certificate
Account".
Credit Support..............................If so specified in the related
Prospectus Supplement, one or more
classes of Securities of a series
evidencing interests in a Trust Fund
that includes Mortgage Loans or
Private Mortgage-Backed Securities
may be provided
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partial or full protection against
certain defaults and losses on such
assets in the form of subordination
of one or more other classes of
Securities 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"). With respect to any
series of Notes, the related Equity
Certificates, insofar as they
represent the beneficial ownership
interest in the Issuer, will be
subordinate to the related Notes.
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 Securities. See
"Description of Credit Support".
Interest on Securities......................Interest on each class of Securities
(other than certain classes of Strip
Securities) of each series will
accrue at the applicable Security
Interest Rate on the outstanding
Principal Balance thereof and will
be distributed to Securityholders 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 Securities with no
or, in certain cases, a nominal
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 Securities may be reduced
to the extent of certain
delinquencies and other
contingencies described herein and
in the related Prospectus
Supplement. See "Yield
Considerations" and "Description of
the Securities--Interest on the
Securities".
Principal of Securities.....................The Securities of each series (other
than certain Strip Securities)
initially will have an aggregate
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
Principal Balance of a Security
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 Principal Balance of
each class of Securities offered
thereby. Unless otherwise
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<PAGE>
provided in the related Prospectus
Supplement, distributions of
principal will be made on each
Distribution Date to the class or
classes of Securities entitled
thereto until the Principal Balance
of such class has been reduced to
zero. Distributions of principal of
any class of Securities will be made
on a pro rata basis among all of the
Securities of such class. Strip
Securities with no Principal Balance
will not receive distributions in
respect of principal. See
"Description of the
Securities--Principal of the
Securities".
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
Securities--Advances in respect of
Delinquencies".
Optional Termination........................If so specified in the related
Prospectus Supplement, a series of
Securities may be subject to
optional early termination through
the repurchase of the assets in the
related Trust Fund by the party
specified therein, 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 Trust Fund Assets at the Cut-off
Date for that series specified in
the related Prospectus Supplement,
which percentage will be between 25%
and 0% (the "Clean-up Call"). In
addition to the repurchase of the
assets in the related Trust Fund at
the Clean-up Call, if so specified
in the related Prospectus
Supplement, a holder of a
non-offered class of Securities (the
"Call Class") will have the right,
solely at its discretion, to
terminate the related Trust Fund on
any Distribution Date after the 12th
Distribution Date following the date
of initial issuance of the related
series of Securities and until such
date as the Clean-up Call becomes
exercisable and thereby effect early
retirement of the Securities of such
series. Any such call will be of the
entire Trust Fund at one time;
multiple calls with respect to any
series of Securities will not be
permitted. In such case, the holders
of the Securities
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<PAGE>
offered hereby will be paid a price
equal to 100% of the Principal
Balance of the Securities offered
hereby as of the day of such
purchase plus accrued interest
thereon at the applicable Security
Interest Rate to the first day of
the month following such purchase
(the "Call Price"). Further, the
Call Class must remit to the related
Trustee for distribution to the
Securityholders funds equal to the
Call Price. If such funds are not
deposited with the related Trustee,
the Securities will remain
outstanding. There will not be any
additional remedies available to
Securityholders. In addition, in the
case of a Trust Fund for which a
REMIC election or elections have
been made, such termination will
constitute a "qualified liquidation"
under Section 860F of the Code. In
connection with a call by the Call
Class, the final payment to the
Securityholders will be made upon
surrender of the related Securities
to the Trustee. Once the Securities
have been surrendered and paid in
full, there will not be any
continuing liability from the
Securityholders or from the Trust
Fund to Securityholders. See
"Description of the
Securities--Termination".
Tax Status of the Securities................Each series of Certificates 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. Each
series of Notes offered hereby will
represent indebtedness of the
related Trust Fund.
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
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<PAGE>
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. In
addition, transfers of certain REMIC
Residual Certificates may be
disregarded under some circumstances
for all federal income tax purposes.
See "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
Principal Balance and a Pass-
Through Rate ("Grantor Trust
Fractional Interest Certificates")
or Strip Securities ("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.
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<PAGE>
Investors are advised to consult
their tax advisors and to review
"Federal Income Tax Consequences"
herein and in the related Prospectus
Supplement.
Rating......................................At the date of issuance, as to each
series, each class of Securities
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 Securities will specify
which classes of Securities 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 Securities
that is not rated in one of the two
highest rating categories by one or
more nationally recognized
statistical rating agencies or that
represents an interest in a Trust
Fund that includes junior mortgage
loans will not constitute "mortgage
related securities" for purposes of
SMMEA. See "Legal Investment".
ERISA Considerations........................A fiduciary of an employee benefit
plan and certain other retirement
plans and arrangements, including
individual retirement accounts,
annuities, Keogh plans, and 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 Securities 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 91-23 (the
"Exemption"), to Salomon Smith
Barney Inc. ("Salomon Smith Barney")
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 Smith Barney
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 Securities may not
be acquired by or on behalf of, or
with the assets of, a Plan unless
the party acquiring such Securities
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>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities offered hereby:
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Securities of any
series will develop or, if it does develop, that it will provide Securityholders
with liquidity of investment or that it will continue for the life of the
Securities of any series. The Prospectus Supplement for any series of Securities
may indicate that an underwriter specified therein intends to establish a
secondary market in such Securities, however no underwriter will be obligated to
do so. The Securities offered hereby will not be listed on any securities
exchange.
LIMITED OBLIGATIONS
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their respective affiliates. The only
obligations of the foregoing entities with respect to the Securities, any
Mortgage Loan or any other Trust Fund Asset will be the obligations (if any) of
the Depositor pursuant to certain limited representations and warranties made
with respect to the Mortgage Loans or other Trust Fund Asset, the Master
Servicer's servicing obligations under the related Pooling and Servicing
Agreement or Servicing Agreement, as applicable (including, if and to the extent
described in the related Prospectus Supplement, its limited obligation to make
certain advances in the event of delinquencies on the Mortgage Loans) and
pursuant to the terms of any other Trust Fund Assets, and, if and to the extent
expressly described in the related Prospectus Supplement, certain limited
obligations of the Master Servicer in connection with a purchase obligation or
an agreement to purchase. Unless otherwise specified in the related Prospectus
Supplement, neither the Securities nor the underlying Mortgage Loans or other
Trust Fund Assets will be guaranteed or insured by any governmental agency or
instrumentality, by the Depositor, the Master Servicer or any of their
respective affiliates or by any other person. Proceeds of the assets included in
the related Trust Fund for each series of Securities (including the Mortgage
Loans or other Trust Fund Assets and any form of credit enhancement) will be the
sole source of payments on the Securities, and there will be no recourse to the
Depositor, the Master Servicer or any other entity in the event that such
proceeds are insufficient or otherwise unavailable to make all payments provided
for under the Securities.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT SUPPORT
With respect to each series of Securities, Credit Support will be provided
in limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit Support will be provided in one or more of the forms referred to
herein. See "Description of Credit Support" herein. Regardless of the form of
Credit Support provided, the amount of coverage will be limited in amount and in
most cases will be subject to periodic reduction in accordance with a schedule
or formula. Furthermore, such Credit Support may provide only very limited
coverage as to certain types of losses or risks, and may provide no coverage as
to certain other types of losses or risks. In the event losses exceed the amount
of coverage provided by any Credit Support or losses of a type not covered by
any Credit Support occur, such losses will be borne by the holders of the
related Securities (or certain classes thereof). The Depositor, the Master
Servicer or other specified person will generally be permitted to reduce,
terminate or substitute all or a portion of the Credit Support for any series of
Securities, if each applicable Rating Agency indicates that the then-current
rating(s) thereof will not be adversely affected. The rating(s) of any series of
Securities by any applicable Rating Agency may be lowered following the initial
issuance thereof as a result of the downgrading of the obligations of any
applicable credit support provider, or as a result of losses on the related
Mortgage Loans in excess of the levels contemplated by such Rating Agency at the
time of its initial rating analysis. Neither the Depositor, the Master Servicer
nor any of their
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<PAGE>
respective affiliates will have any obligation to replace or supplement any
Credit Support, or to take any other action to maintain any rating(s) of any
series of Securities.
RISKS OF DECLINING PROPERTY VALUES AND HIGH LOAN-TO-VALUE RATIOS
An investment in securities such as the Securities which generally
represent interests in mortgage loans and/or manufactured housing, conditional
sales contracts and installment loan agreements may be affected by, among other
things, a decline in real estate values and changes in the borrowers' financial
condition. No assurance can be given that values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding 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 actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. Mortgaged Properties subject to high Loan-to-Value Ratios are at
greater risk since such properties initially have less equity than Mortgaged
Properties with low Loan-to-Value ratios and therefore a decline in property
values could dissipate equity more quickly. Delinquencies, foreclosures and
losses due to declining values of Mortgaged Properties, especially those with
high Loan-to-Value Ratios, would cause losses to the Trust Fund and, to the
extent not covered by Credit Support, would adversely affect the yield to
maturity on the Securities.
RISKS OF NEGATIVELY AMORTIZING LOANS
In the case of Mortgage Loans that are subject to negative amortization,
the principal balances of such Mortgage Loans could be increased to an amount
equal to or in excess of the value of the underlying Mortgaged Properties,
thereby increasing the likelihood of default. To the extent that such losses are
not covered by any reserve fund or instrument of Credit Support in the related
Trust Fund, holders of Securities of the series evidencing interests in the
related Mortgage Pool will bear all risk of loss resulting from default by
mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans. Certain of the types of loans which may be included in
the Mortgage Pools may involve additional uncertainties not present in
traditional types of loans.
RISKS OF BUYDOWN MORTGAGE LOANS
Certain of the Mortgage Loans contained in a Mortgage Pool may be subject
to temporary buydown plans ("Buydown Mortgage Loans") pursuant to which the
monthly payments made by the Mortgagor during 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
(such amount, exclusive of investment earnings thereon, being hereinafter
referred to as "Buydown Funds") contributed by the borrower, the seller of the
Mortgaged Property or another source and placed in a custodial account (the
"Buydown Account"), (ii) if the Buydown Funds are contributed on a present value
basis, investment earnings on such Buydown Funds or (iii) additional buydown
funds to be contributed over time by the mortgagor's employer or another source.
See "Description of the Securities--Deposits to Certificate Account" herein.
Generally, the mortgagor under each Buydown Mortgage Loan will be qualified at
the applicable lower monthly payment. Accordingly, the repayment of a Buydown
Mortgage Loan is dependent on the ability of the Mortgagor to make larger level
monthly payments after the Buydown Funds have been depleted and, for certain
Buydown Mortgage Loans, during the Buydown Period. The inability of a Mortgagor
to make such larger monthly payments could lead to losses on the Mortgage Loans,
and to the extent not covered by Credit Support, may adversely affect the yield
to maturity on the Securities.
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<PAGE>
GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency than will be
experienced on mortgage loans generally. For example, a region's economic
condition and housing market may be directly, or indirectly, adversely affected
by natural disasters or civil disturbances such as earthquakes, hurricanes,
floods, eruptions or riots. The economic impact of any of these types of events
may also be felt in areas beyond the region immediately affected by the disaster
or disturbance. The Mortgage Loans underlying certain series of Securities may
be concentrated in these regions, and such concentration may present risk
considerations in addition to those generally present for similar
mortgage-backed securities without such concentration. Moreover, as described
below, any Mortgage Loan for which a breach of a representation or warranty
exists will remain in the related Trust Fund in the event that a Mortgage Loan
Seller is unable, or disputes its obligation, to repurchase such Mortgage Loan
and such a breach does not also constitute a breach of any representation made
by any other person. In such event, any resulting losses will be borne by the
related form of Credit Support, to the extent available.
RISKS OF LOANS WITH BALLOON PAYMENTS
Certain of the Mortgage Loans included in a Trust Fund, particularly those
secured by Multifamily Properties, may not be fully amortizing (or may not
amortize at all) over their terms to maturity and, thus, will require
substantial payments of principal and interest (that is, balloon payments) at
their stated maturity. Mortgage Loans of this type involve a greater degree of
risk than self-amortizing loans because the ability of a Mortgagor to make a
balloon payment typically will depend upon its ability either to fully refinance
the loan or to sell the related Mortgaged Property at a price sufficient to
permit the mortgagor to make the balloon payment. The ability of a mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the value of the related Mortgaged Property, the level of available
mortgage rates at the time of sale or refinancing, the mortgagor's equity in the
related Mortgaged Property, prevailing general economic conditions, the
availability of credit for loans secured by comparable real properties and, in
the case of Multifamily Properties, the financial condition and operating
history of the mortgagor and the related Mortgaged Property, tax laws and rent
control laws.
RISKS OF LENDING ON NON-OWNER-OCCUPIED PROPERTIES
It is anticipated that some or all of the Mortgage Loans included in any
Trust Fund, particularly Mortgage Loans secured by Multifamily Properties, will
be nonrecourse loans or loans for which recourse may be restricted or
unenforceable. As to those Mortgage Loans, recourse in the event of mortgagor
default will be limited to the specific real property and other assets, if any,
that were pledged to secure the Mortgage Loan. However, even with respect to
those Mortgage Loans that provide for recourse against the mortgagor and its
assets generally, there can be no assurance that enforcement of such recourse
provisions will be practicable, or that the other assets of the mortgagor will
be sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property.
Mortgage Loans made on the security of Multifamily Properties may entail
risks of delinquency and foreclosure, and risks of loss in the event thereof,
that are greater than similar risks associated with loans made on the security
of Single Family Properties. The ability of a borrower to repay a loan secured
by an income-producing property typically is dependent primarily upon the
successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an
income-producing property is directly related to the net operating income
derived from such property. If the net operating income of the property is
reduced (for example, if rental or occupancy rates decline or real estate tax
rates or other operating expenses increase), the borrower's ability to repay the
loan may be impaired. In addition, the concentration
18
<PAGE>
of default, foreclosure and loss risk for a pool of Mortgage Loans secured by
Multifamily Properties may be greater than for a pool of Mortgage Loans secured
by Single Family Properties of comparable aggregate unpaid principal balance
because the pool of Mortgage Loans secured by Multifamily Properties is likely
to consist of a smaller number of higher balance loans.
RISKS OF NON-CONFORMING LOANS
Mortgage Loans to be included in a Mortgage Pool may be non-conforming
Mortgage Loans. Non-conforming Mortgage Loans are Mortgage Loans that do not
qualify for purchase by government sponsored agencies such as FNMA and FHLMC due
to credit characteristics that to not satisfy such FNMA and FHLMC guidelines,
including mortgagors whose creditworthiness and repayment ability do not satisfy
such FNMA and FHLMC underwriting guidelines and mortgagors who may have a record
of credit write-offs, outstanding judgments, prior bankruptcies and other
derogatory credit items. Accordingly, non-conforming Mortgage Loans are likely
to experience rates of delinquency, foreclosure and loss that are higher, and
that may be substantially higher, than mortgage loans originated in accordance
with FNMA or FHLMC underwriting guidelines. The principal differences between
conforming Mortgage Loans and non-conforming Mortgage Loans include the
applicable Loan-to-Value Ratios, the credit and income histories of the related
Mortgagors, the documentation required for approval of the related Mortgage
Loans, the types of properties securing the Mortgage Loans, the loan sizes and
the Mortgagors' occupancy status with respect to the Mortgaged Properties. As a
result of these and other factors, the interest rates charged on non-conforming
Mortgage Loans are often higher than those charged for conforming Mortgage
Loans. The combination of different underwriting criteria and higher rates of
interest may also lead to higher delinquency, foreclosure and losses on
non-conforming Mortgage Loans as compared to conforming Mortgage Loans.
RISKS OF HIGH LTV LOANS
Some or all of the Mortgage Loans included in any Trust Fund may be High
LTV Loans. High LTV Loans with combined Loan-to-Value Ratios in excess of 100%
may have been originated with a limited expectation of recovering any amounts
from the foreclosure of the related Mortgaged Property and are underwritten with
an emphasis on the creditworthiness of the related borrower. If such Mortgage
Loans go into foreclosure and are liquidated, there may be no amounts recovered
from the related Mortgaged Property unless the value of the property increases
or the principal amount of the related senior liens have been reduced such as to
reduce the current combined Loan-to-Value Ratio of the related Mortgage Loan to
below 100%. Any such losses, to the extent not covered by credit enhancement,
may affect the yield to maturity of the Securities.
RISKS OF UNDERWRITING STANDARDS OF UNAFFILIATED MORTGAGE LOAN SELLERS
Mortgage Loans to be included in a Mortgage Pool will have been purchased
by the Depositor, either directly or indirectly from Mortgage Loan Sellers. Such
Mortgage Loans will generally have been originated in accordance with
underwriting standards acceptable to the Depositor and generally described
herein under "Mortgage Loan Program--Underwriting Standards" as more
particularly described in the underwriting criteria included in the related
Prospectus Supplement. Nevertheless, in some cases, particularly those involving
unaffiliated Mortgage Loan Sellers, the Depositor may not be able to establish
the underwriting standards used in the origination of the related Mortgage
Loans. In those cases, the related Prospectus Supplement will include a
statement to such effect and will reflect what, if any, re-underwriting of the
related Mortgage Loans was completed by the Depositor or any of its affiliates.
To the extent the Mortgage Loans cannot be re-underwritten or the underwriting
criteria cannot be verified, the Mortgage Loans might suffer losses greater than
they would had they been directly underwritten by the Depositor or an affiliate
thereof. Any such losses, to the extent not covered by Credit Support, may
adversely affect the yield to maturity of the Securities.
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RISKS ASSOCIATED WITH JUNIOR LIEN MORTGAGE LOANS
Certain of the Mortgage Pools may contain Mortgage Loans secured by junior
liens and the related senior liens may not be included in the Mortgage Pool. An
overall decline in the residential real estate market could adversely affect the
values of the Mortgaged Properties securing the Mortgage Loans with junior liens
such that the outstanding principal balances, together with any senior financing
thereon, exceeds the value of the Mortgaged Properties. Since Mortgage Loans
secured by junior liens are subordinate to the rights of the beneficiaries under
the related senior deeds of trust or senior mortgages, such a decline would
adversely affect the position of the related junior beneficiary or junior
mortgagee before having such an effect on the position of the related senior
beneficiaries or senior mortgagees. A rise in interest rates over a period of
time, the general condition of the Mortgaged Property and other factors may also
have the effect of reducing the value of the Mortgaged Property from the value
at the time the junior lien Mortgage Loan was originated. As a result, the
Loan-to-Value Ratio may exceed the ratio in effect at the time the Mortgage Loan
was originated. Such an increase may reduce the likelihood that, in the event of
a default by the related mortgagor, liquidation or other proceeds will be
sufficient to satisfy the junior lien Mortgage Loan after satisfaction of any
senior liens and the payment of any liquidation expenses.
Other factors may affect the prepayment rate of junior lien Mortgage Loans,
such as the amounts of, and interest on, the related senior mortgage loans and
the use of senior lien mortgage loans as long-term financing for home purchases
and junior lien mortgage loans as shorter-term financing for a variety of
purposes, such as home improvement, educational expenses and purchases of
consumer durable such as automobiles. Accordingly, junior lien Mortgage Loans
may experience a higher rate of prepayments that traditional senior lien
mortgage loans. In addition, any future limitations on the rights of borrowers
to deduct interest payments on junior lien Mortgage Loans for federal income tax
purposes may further increase the rate of prepayments on such junior lien
Mortgage Loans.
RISKS OF NONPERFECTION OF SECURITY INTERESTS
Any Contract included in a Mortgage Pool will be secured by a security
interest in a Manufactured Home. Perfection of security interests in
Manufactured Homes and enforcement of rights to realize upon the value of the
Manufactured Homes as collateral for the Contracts are subject to a number of
federal and state laws, including the UCC as adopted in each state and each
state's certificate of title statutes. The steps necessary to perfect the
security interest in a Manufactured Home will vary from state to state. In the
event the Master Servicer fails, due to clerical errors or otherwise, to take
the appropriate steps to perfect such a security interest, the Trustee may not
have a first priority security interest in the Manufactured Home securing a
Contract. Additionally, 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. The failure to properly perfect
a valid, first priority security interest in a Manufactured Home securing a
Contract could lead to losses that may adversely affect the yield to maturity of
the Securities.
RISKS RELATING TO LIQUIDATION OF MORTGAGED PROPERTIES
Substantial delays can be encountered in connection with the liquidation of
defaulted Mortgage Loans and corresponding delays in the receipt of related
proceeds by the Securityholders could occur. An action to foreclose on a
Mortgaged Property securing a Mortgage Loan is regulated by state statutes,
rules and judicial decisions and is subject to many of the delays and expenses
of other lawsuits if defenses or counterclaims are interposed, sometimes
requiring several years to complete. Furthermore, in some states an action to
obtain a deficiency judgment is not permitted following a nonjudicial sale of a
Mortgaged Property. In the event of a default by a Mortgagor, these
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restrictions, among other things, may impede the ability of the Master Servicer
to foreclose on or sell the Mortgaged Property or to obtain Liquidation Proceeds
sufficient to repay all amounts due on the related Mortgage Loan. The Master
Servicer will be entitled to deduct from Liquidation Proceeds all expenses
reasonably incurred in attempting to recover amounts due on the related
Liquidated Mortgage Loan and not yet repaid, including payments to prior
lienholders, accrued Servicing Fees, legal fees and costs of legal action, real
estate taxes, and maintenance and preservation expenses. In the event that any
Mortgaged Properties fail to provide adequate security for the related Mortgage
Loans and insufficient funds are available from any applicable Credit Support,
Securityholders could experience a loss on their investment.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
ENVIRONMENTAL RISKS
The Mortgaged Properties are subject to certain environmental risks. Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner of real property may be liable for the costs of
removal or remediation of hazardous or toxic substances on, under or in such
property. Such laws often impose liability whether or not the owner or operation
knew of, or was responsible for, the presence of such hazardous or toxic
substances. A lender also risks such liability on foreclosure of the mortgage on
such property. In addition, the presence of hazardous or toxic substances, or
the failure to properly remediate such property, may adversely affect the
owner's or operator's ability to sell such property. Although the incidence of
environmental contamination of residential properties is less common than that
for commercial properties, Mortgage Loans contained in a Mortgage Pool may be
secured by Mortgaged Properties in violation of environmental laws, ordinances
or regulations. The Master Servicer is generally prohibited from foreclosing on
a Mortgaged Property unless it has taken adequate steps to ensure environmental
compliance with respect to such Mortgaged Property. However, to the extent the
Master Servicer errs and forecloses on Mortgaged Property that is subject to
environmental law violations, and to the extent a Mortgage Loan Seller does not
provide adequate representations and warranties against such violations, or is
unable to honor such obligations, including the obligation to repurchase a
Mortgage Loan upon the breach of a representation or warranty, a Mortgage Pool
could experience losses.
LIMITED NATURE OF RATINGS
It is a condition to the issuance of the Securities that each series of
Securities be rated in one of the four highest rating categories by a nationally
recognized statistical rating agency. A security rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time. No person is obligated to maintain the rating on any Security, and
accordingly, there can be no assurance that the ratings assigned to any Security
on the date on which such Security is originally issued will not be lowered or
withdrawn by a Rating Agency at any time thereafter. In the event any rating is
revised or withdrawn, the liquidity or the market value of the related Security
may be adversely affected. See "Rating" in the related Prospectus Supplement.
LIMITED REPRESENTATIONS BY AND AGAINST THE MORTGAGE LOAN SELLER
Each Mortgage Loan Seller will have made representations and warranties in
respect of the Mortgage Loans sold by such Mortgage Loan Seller and evidenced by
a series of Securities. In the event of a breach of a Mortgage Loan Seller's
representation or warranty that materially adversely
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affects the interests of the Securityholders in a Mortgage Loan, unless
otherwise specified in the related Prospectus Supplement, the related Mortgage
Loan Seller will be obligated to cure the breach or repurchase or, if permitted,
replace such Mortgage Loan as described below. However, there can be no
assurance that a Mortgage Loan Seller will honor its obligation to cure,
repurchase or, if permitted, replace any Mortgage Loan as to which such a breach
of a representation or warranty arises. A Mortgage Loan Seller's failure or
refusal to honor its repurchase obligation could lead to losses that, to the
extent not covered by Credit Enhancement, may adversely affect the yield to
maturity of the Securities.
In instances where a Mortgage Loan Seller is unable, or disputes its
obligation, to purchase affected Mortgage Loans, the Master Servicer may
negotiate and enter into one or more settlement agreements with such Mortgage
Loan Seller that could provide for, among other things, the purchase of only a
portion of the affected Mortgage Loans. Any such settlement could lead to losses
on the Mortgage Loans which would be borne by the related Securities. Neither
the Depositor nor the Master Servicer will be obligated to purchase a Mortgage
Loan if a Mortgage Loan Seller defaults on its obligation to do so, and no
assurance can be given that the Mortgage Loan Sellers will carry out such
purchase obligations. Such a default by a Mortgage Loan Seller is not a default
by the Depositor or by the Master Servicer. Any Mortgage Loan not so purchased
or substituted for shall remain in the related Trust Fund and any losses related
thereto shall be allocated to the related Credit Support, to the extent
available, and otherwise to one or more classes of the related series of
Securities.
All of the representations and warranties of a Mortgage Loan Seller in
respect of a Mortgage Loan will have been made as of the date on which such
Mortgage Loan was purchased from the Mortgage Loan Seller by or on behalf of the
Depositor; the date as of which such representations and warranties were made
will be a date prior to the date of initial issuance of the related series of
Securities. A substantial period of time may have elapsed between the date as of
which the representations and warranties were made and the later date of initial
issuance of the related series of Securities. Accordingly, the Mortgage Loan
Seller's purchase obligation (or, if specified in the related Prospectus
Supplement, limited replacement option) will not arise if, during the period
commencing on the date of sale of a Mortgage Loan by the Mortgage Loan Seller,
an event occurs that would have given rise to such an obligation had the event
occurred prior to sale of the affected Mortgage Loan. The occurrence of events
during this period that are not covered by a Mortgage Loan Seller's purchase
obligation could lead to losses that, to the extent not covered by Credit
Support, may adversely affect the yield to maturity of the Securities.
SUBORDINATION OF CERTAIN CLASSES OF SECURITIES
Credit Support for a particular series of Securities may be provided in the
form of subordination of one or more classes of Securities in a series under
which losses are first allocated to any Subordinate Securities up to a specified
limit. Losses not covered by any form of Credit Support will be borne by the
holders of the related Securities (or certain classes thereof). Therefore, in
the event of substantial losses in any Mortgage Pool, such losses may be borne
by such holders.
BOOK-ENTRY REGISTRATION MAY AFFECT LIQUIDITY
Because transfers and pledges of DTC Registered Securities can be effected
only through book entries at DTC through participants, the liquidity of the
secondary market for DTC Registered Securities may be reduced to the extent that
some investors are unwilling to hold Securities in book entry form in the name
of DTC and the ability to pledge DTC Registered Securities may be limited due to
the lack of a physical certificate. Beneficial owners of DTC Registered
Securities may, in certain cases experience delay in the receipt of payments of
principal and interest such payments will be forwarded by the related Trustee to
DTC who will then forward payment to the participants who will thereafter
forward payment to beneficial owners. In the event of the insolvency of DTC or
a participant in whose name DTC Registered Securities are recorded, the ability
of beneficial
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owners to obtain timely payment and (if the limits of applicable insurance
coverage is otherwise unavailable) ultimate payment of principal and interest on
DTC Registered Securities may be impaired.
YIELD CONSIDERATIONS
The yield to maturity of the Securities of each series offered hereby will
depend on, among other things, the rate and timing of principal payments
(including prepayments, liquidations due to defaults and repurchases) on the
related Mortgage Loans and the price paid by Securityholders. Such yield may be
adversely affected by a higher or lower than anticipated rate of prepayments on
the related Mortgage Loans. In addition, if a party exercises its right to
repurchase the Trust Fund Assets and effect early retirement of the Securities
of that Series (including the right to repurchase the Trust Fund Assets after
the 12th Distribution Date following the date of the initial issuance of the
related series of Securities and until such date as the Clean-up Call becomes
exercisable), the yield to maturity of such Securities will be affected by the
occurrence of such termination. The yield to maturity on Strip Securities will
be extremely sensitive to the rate of prepayments on the related Mortgage Loans
and, if applicable, to the occurrence of an early retirement of the Securities.
In addition, the yield to maturity on certain other types of classes of
Securities, including Accrual Securities, Securities with a Security Interest
Rate which fluctuates inversely with an index or certain other classes in a
series including more than one class of Securities, may be relatively more
sensitive to the rate of prepayment on the related Mortgage Loans than other
classes of Securities and, if applicable, to the occurrence of an early
retirement of the Securities. Prepayments are influenced by a number of factors,
including prevailing mortgage market interest rates, local and regional economic
conditions and homeowner mobility. In addition, to the extent amounts in any
Pre-Funding Account have not been used to purchase additional Mortgage Loans,
holders of the Securities may receive an additional prepayment. See "Yield
Considerations" and "Maturity and Prepayment Considerations" herein.
ERISA CONSIDERATIONS
Generally, ERISA applies to investments made by employee benefit plans and
transactions involving the assets of such plans. Due to the complexity of
regulations that govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of the Securities of any series
offered hereby. See "ERISA Considerations."
FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their receipt
of cash payments, as described under "Federal Income Tax Consequences--REMICs"
herein. Accordingly, under certain circumstances, holders of Certificates
offered hereby that constitute REMIC Residual Certificates may have taxable
income and tax liabilities arising from such investment during a taxable year in
excess of the cash received during such period. The requirement that holders of
REMIC Residual Certificates report their pro rata share of the taxable income
and net loss of the REMIC will continue until the principal balances of all
classes of Certificates of the related series have been reduced to zero, even
though holders of REMIC Residual Certificates have received full payment of
their stated interest and principal. A portion (or, in certain circumstances,
all) of such Certificateholder's share of the REMIC taxable income may be
treated as "excess inclusion" income to such holder, which (i) generally will
not be subject to offset by losses from other activities, (ii) for a tax-exempt
holder, will be treated as unrelated business taxable income and (iii) for a
foreign holder, will not qualify for exemption from withholding tax. Individual
holders of REMIC Residual Certificates may be limited in their ability to deduct
servicing fees and other expenses of the REMIC. In addition, REMIC Residual
Certificates are subject to certain restrictions on transfer. Because of the
special tax treatment of
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REMIC Residual Certificates, the taxable income arising in a given year on a
REMIC Residual Certificate will not be equal to the taxable income associated
with investment in a corporate bond or stripped instrument having similar cash
flow characteristics and pre-tax yield. Therefore, the after-tax yield on a
REMIC Residual Certificate may be significantly less than that of a corporate
bond or stripped instrument having similar cash flow characteristics.
RISKS OF OPTIONAL TERMINATION
If so specified in the related Prospectus Supplement, certain parties will
have the option to purchase, in whole but not in part, the Securities specified
in the related Prospectus Supplement in the manner set forth in the related
Prospectus Supplement. Upon the purchase of such Securities or at any time
thereafter, at the option of the party entitled to such termination, the assets
of the Trust Fund may be sold, thereby effecting a retirement of the Securities
and the termination of the Trust Fund, or the Securities so purchased may be
held or resold.
Any such purchase of Mortgage Loans and underlying property subject to the
Mortgage Loans evidenced by a series of Securities shall be made at the option
of the party and at the price specified in the related Prospectus Supplement.
The exercise of such right will effect early retirement of the Securities of
that series, and will be subject to the aggregate principal balance of the
Mortgage Loans and/or other Trust Fund Assets in the Trust Fund for that series
as of the Distribution Date on which the purchase proceeds are to be distributed
to Securityholders being less than the percentage specified in the related
Prospectus Supplement of the aggregate principal balance of such Mortgage Loans
and/or other Trust Fund Assets at the Cut-off Date for that series (the
"Clean-up Call"). Such percentage will be between 25% and 0%. The Prospectus
Supplement for each series of Securities will set forth the amounts that the
holders of such Securities will be entitled to receive upon such early
retirement.
In addition to the repurchase of the assets in the related Trust Fund
at the Clean-up Call, if so specified in the related Prospectus Supplement, a
holder of a non-offered class of Securities (the "Call Class") will have the
right, solely at its discretion, to terminate the related Trust Fund on any
Distribution Date after the 12th Distribution Date following the date of initial
issuance of the related series of Securities and until such date as the Clean-up
Call becomes exercisable and thereby effect early retirement of the Securities
of such series. Any such call will be of the entire Trust Fund at one time;
multiple calls with respect to any series of Securities will not be permitted.
In such case, the holders of the Securities offered hereby will be paid a price
equal to 100% of the Principal Balance of the Securities offered hereby as of
the day of such purchase plus accrued interest thereon at the applicable
Security Interest Rate to the first day of the month following such purchase
(the "Call Price"). Further, the Call Class must remit to the related Trustee
for distribution to the Securityholders funds equal to the Call Price. If such
funds are not deposited with the related Trustee, the Securities will remain
outstanding. There will not be any additional remedies available to
Securityholders. In addition, in the case of a Trust Fund for which a REMIC
election or elections have been made, such termination will constitute a
"qualified liquidation" under Section 860F of the Code. In connection with a
call by the Call Class, the final payment to the Securityholders will be made
upon surrender of the related Securities to the Trustee. Once the Securities
have been surrendered and paid in full, there will not be any continuing
liability from the Securityholders or from the Trust Fund to Securityholders.
A Trust Fund may also be terminated and the Certificates retired upon
the Master Servicer's determination, based upon an opinion of counsel, that the
REMIC status of the Trust Fund has been lost or that a substantial risk exists
that such status will be lost for the then current taxable year.
The termination of a Trust Fund and the early retirement of Securities by
any party may adversely affect the yield to holders of certain classes of such
Securities.
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THE TRUST FUNDS
THE MORTGAGE LOANS
GENERAL
The Mortgage Loans may consist of mortgage loans secured by first or junior
liens on by one- to four-family residential properties ("Single Family
Properties" and the related loans, "Single Family Loans"), mortgage loans
secured by rental apartments or projects (including apartment buildings owned by
cooperative housing corporations) containing five or more dwelling units
("Multifamily Properties" and the related loans, "Multifamily Loans"), mortgage
loans secured by shares in a private cooperative housing corporation (a
"Cooperative" and the related loans, "Cooperative Loans") that give the owner
thereof the right to occupy a particular dwelling unit (each, a "Cooperative
Unit") in the Cooperative or conditional sales contracts and installment loan
agreements with respect to new or used Manufactured Homes (as defined herein,
and the related contracts or agreements, the "Contracts"), or beneficial
interests therein, or real property acquired upon foreclosure or comparable
conversion of such Mortgage Loans. The Single-Family Properties, Cooperative
shares (together with the right to occupy a particular Cooperative Unit
evidenced thereby) and Manufactured Homes (collectively, the "Mortgaged
Properties") may be located in any one of the fifty states or the District of
Columbia. The Mortgaged Properties may include leasehold interests in
residential properties, the title to which is held by third party lessors. The
term of any such leasehold will exceed the term of the Mortgage Note by at least
five years. Each Mortgage Loan will have been originated by a person (the
"Originator") not affiliated with Salomon Brothers Mortgage Securities VII, Inc.
(the "Depositor"). Each Mortgage Loan will be selected by the Depositor for
inclusion in a Mortgage Pool from among those purchased, either directly or
indirectly, from a prior holder thereof (a "Mortgage Loan Seller"), which prior
holder may not be the Originator thereof and may be an affiliate of the
Depositor. See "Mortgage Loan Program--Underwriting Standards".
Unless otherwise specified below or in the related Prospectus Supplement,
all of the Mortgage Loans in a Mortgage Pool will (i) have individual principal
balances at origination of not less than $25,000 or more than $5,000,000, (ii)
have monthly payments due on the first day of each month, (iii) have original
terms to maturity of not more than 40 years and (iv) be one of the following
types of mortgage loans:
(1) Fully amortizing Mortgage Loans with a fixed rate of interest (an
"Interest Rate") and level monthly payments to maturity;
(2) Fully amortizing Mortgage Loans with an Interest Rate adjusted
periodically (with corresponding adjustments in the amount of monthly
payments) to equal the sum (which may be rounded) of a fixed percentage
amount and an index ("ARM Loans"), as described in the related Prospectus
Supplement;
(3) ARM Loans that provide for an election, at the borrower's option,
to convert the adjustable Interest Rate to a fixed interest rate, as
described in the related Prospectus Supplement;
(4) ARM Loans that provide for negative amortization or accelerated
amortization resulting from delays in or limitations on the payment
adjustments necessary to amortize fully the outstanding principal balance
of the loan at its then applicable Interest Rate over its remaining term;
(5) Fully amortizing Mortgage Loans with a fixed Interest Rate and
level monthly payments, or payments of interest only, during the early
years of the term, followed by periodically increasing monthly payments of
principal and interest for the duration of the term or for a specified
number of years, as described in the related Prospectus Supplement;
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(6) Fixed Interest Rate Mortgage Loans providing for level payment of
principal and interest on the basis of an assumed amortization schedule and
a balloon payment at the end of a specified term; and
(7) Another type of Mortgage Loan described in the related Prospectus
Supplement.
If provided in the related Prospectus Supplement, certain of the Mortgage
Pools may contain Mortgage Loans secured by junior liens, and the related senior
liens ("Senior Liens") may not be included in the Mortgage Pool. The primary
risk to holders of Mortgage Loans secured by junior liens is the possibility
that adequate funds will not be received in connection with a foreclosure of
the related Senior Liens to satisfy fully both the Senior Liens and the Mortgage
Loan. In the event that a holder of a Senior Lien forecloses on a Mortgaged
Property, the proceeds of the foreclosure or similar sale will be applied first
to the payment of court costs and fees in connection with the foreclosure,
second to real estate taxes, third in satisfaction of all principal, interest,
prepayment or acceleration penalties, if any, and any other sums due and owing
to the holder of the Senior Liens. The claims of the holders of the Senior Liens
will be satisfied in full out of proceeds of the liquidation of the Mortgage
Loan, if such proceeds are sufficient, before the Trust Fund as holder of the
junior lien receives any payments in respect of the Mortgage Loan. If the Master
Servicer were to foreclose on any Mortgage Loan, it would do so subject to any
related Senior Liens. In order for the debt related to the Mortgage Loan to be
paid in full at such sale, a bidder at the foreclosure sale of such Mortgage
Loan would have to bid an amount sufficient to pay off all sums due under the
Mortgage Loan and the Senior Liens or purchase the Mortgaged Property subject to
the Senior Liens. In the event that such proceeds from a foreclosure or similar
sale of the related Mortgaged Property are insufficient to satisfy all Senior
Liens and the Mortgage Loan in the aggregate, the Trust Fund, as the holder of
the junior lien, and, accordingly, holders of one or more classes of the
Securities bear (i) the risk of delay in distributions while a deficiency
judgment against the borrower is obtained and (ii) the risk of loss if the
deficiency judgment is not realized upon. Moreover, deficiency judgments may not
be available in certain jurisdictions. In addition, a junior mortgagee may not
foreclose on the property securing a junior mortgage unless it forecloses
subject to the senior mortgages.
Liquidation expenses with respect to defaulted junior mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that the Master Servicer took the same steps in
realizing upon a defaulted junior mortgage loan having a small remaining
principal balance as it would in the case of a defaulted junior mortgage loan
having a large remaining principal balance, the amount realized after expenses
of liquidation would be smaller as a percentage of the outstanding principal
balance of the small junior mortgage loan than would be the case with the
defaulted junior mortgage loan having a large remaining principal balance.
Because the average outstanding principal balance of the Mortgage Loans is
smaller relative to the size of the average outstanding principal balance of the
loans in a typical pool of first priority mortgage loans, liquidation proceeds
may also be smaller as a percentage of the principal balance of a Mortgage Loan
than would be the case in a typical pool of first priority mortgage loans.
Unless otherwise specified in the related Prospectus Supplement, the
following requirements as to the Loan-to-Value Ratio of each Mortgage Loan of
the type described above shall apply. The "Loan-to-Value Ratio" of a Mortgage
Loan at any given time is the ratio (expressed as a percentage) of the then
outstanding principal balance of the Mortgage Loan, plus, in the case of a
Mortgage Loan secured by a junior lien, the outstanding principal balance of the
related Senior Liens, to the Value of the related Mortgaged Property. The Value
of a Single-Family Property, Multifamily Property or Cooperative Unit, other
than with respect to Refinance Loans, is the lesser of (a) the appraised value
determined in an appraisal obtained by the originator at origination of such
loan and (b) the sales price for such property. Refinance Loans are loans made
to refinance existing loans. The Value of the Mortgaged Property securing a
Refinance Loan is the appraised value thereof determined in an appraisal
obtained at the time of origination of the Refinance Loan.
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Unless otherwise specified in the related Prospectus Supplement, for purposes of
calculating the Loan-to-Value Ratio of a Contract relating to a new Manufactured
Home, the Value is no greater than the sum of a fixed percentage of the list
price of the unit actually billed by the manufacturer to the dealer (exclusive
of freight to the dealer site) including "accessories" identified in the invoice
(the "Manufacturer's Invoice Price"), plus the actual cost of any accessories
purchased from the dealer, a delivery and set-up allowance, depending on the
size of the unit, and the cost of state and local taxes, filing fees and up to
three years prepaid hazard insurance premiums. Unless otherwise specified in the
related Prospectus Supplement, with respect to a used Manufactured Home, the
Value is the least of the sale price, the appraised value, and the National
Automobile Dealer's Association book value plus prepaid taxes and hazard
insurance premiums. The appraised value of a Manufactured Home is based upon the
age and condition of the manufactured housing unit and the quality and condition
of the mobile home park in which it is situated, if applicable.
A Mortgaged Property may have been subject to secondary financing at
origination of the Mortgage Loan, but, unless otherwise specified in the related
Prospectus Supplement, the total amount of primary and secondary financing at
the time of origination of the Mortgage Loan did not produce a combined
Loan-to-Value Ratio in excess of (i) 90% in the case of a Mortgage Loan secured
by an owner-occupied primary residence or (ii) 80% in the case of a Mortgage
Loan secured by a vacation or second home.
If so provided in the related Prospectus Supplement certain or all of the
Single Family Loans may have Loan-to-Value Ratios in excess of 80% and as high
as 125% that are not insured by primary mortgage insurance policies (such
Mortgage Loans, "High LTV Loans").
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
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Loan Sellers; Repurchases" herein for a description of certain other
representations made by or on behalf of Mortgage Loan Sellers at the time
Mortgage Loans are sold.
If provided in the related Prospectus Supplement, certain of the Mortgage
Pools may contain Mortgage Loans subject to temporary buydown plans ("Buydown
Mortgage Loans"), pursuant to which the monthly payments made by the borrower in
the early years of the Mortgage Loan (the "Buydown Period") will be less than
the scheduled monthly payments on the Mortgage Loan, the resulting difference to
be made up from (i) an amount contributed by the borrower, the seller of the
Mortgaged Property, or another source (such amount, exclusive of investment
earnings thereon, being hereinafter referred to as "Buydown Funds") and placed
in a custodial account and (ii) unless otherwise specified in the Prospectus
Supplement, investment earnings on the Buydown Funds. See "Description of the
Securities--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.
Except in the case of High LTV Loans and as 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 Securities 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
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purchasers of the related Securities at or before the initial issuance thereof
and will be filed, together with the related Pooling and Servicing Agreement or
Trust Agreement, with respect to each series of Certificates, or the related
Servicing Agreement, Trust Agreement and Indenture, with respect to each series
of Notes, as part of a report on Form 8-K with the Securities and Exchange
Commission within fifteen days after such initial issuance.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the respective dates of origination
of the related Mortgage Loans. If the residential real estate market should
experience an overall decline in property values such that the outstanding
principal balances of the Mortgage Loans, and any secondary financing on the
Mortgaged Properties, in a particular Mortgage Pool become equal to or greater
than the value of the Mortgaged Properties, the rates of delinquencies,
foreclosures or repossessions and losses could be higher than those now
generally experienced by institutional lenders. Manufactured Homes are less
likely to experience appreciation in value and more likely to experience
depreciation in value over time than other types of housing properties. In
addition, adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by borrowers of scheduled payments of
principal and interest on the Mortgage Loans and, accordingly, the rates of
delinquencies, foreclosures or repossessions and losses with respect to any
Mortgage Pool. To the extent that such losses are not covered by Credit Support,
such losses will be borne, at least in part, by the holders of one or more
classes of the Securities 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 Securities 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 or 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 Securities". 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 or 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 Securities-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 or 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 Securities--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 Securities--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,
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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 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.
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GNMA CERTIFICATES
Each GNMA Certificate held in a Trust Fund (which may be issued under
either the GNMA I program or the GNMA II program) will be a "fully modified
pass-through" mortgaged-backed certificate issued and serviced by a mortgage
banking company or other financial concern ("GNMA Issuer") approved by GNMA or
approved by FNMA as a seller-servicer of FHA Loans and/or VA Loans. The mortgage
loans underlying the GNMA Certificates will consist of FHA Loans and/or VA
Loans. Each such mortgage loan is secured by a one- to four-family residential
property. GNMA will approve the issuance of each such GNMA Certificate in
accordance with a guaranty agreement (a "Guaranty Agreement") between GNMA and
the GNMA Issuer. Pursuant to its Guaranty Agreement, a GNMA Issuer will be
required to advance its own funds in order to make timely payments of all
amounts due on each such GNMA Certificate, even if the payments received by the
GNMA Issuer on the FHA Loans or VA Loans underlying each such GNMA Certificate
are less than the amounts due on each such GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by 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).
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Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or "buydown" mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-"buydown"
mortgage loans are available in respect of graduated payment or "buydown"
mortgages. GNMA Certificates related to a series of Certificates may be held in
book-entry form.
If specified in a Prospectus Supplement, GNMA Certificates may be backed by
multifamily mortgage loans having the characteristics specified in such
Prospectus Supplement.
FEDERAL HOME LOAN MORTGAGE CORPORATION
FHLMC is a corporate instrumentality of the United States created pursuant
to Title III of the Emergency Home Finance Act of 1970, as amended (the "FHLMC
Act"). The common stock of FHLMC is owned by the Federal Home Loan Banks. FHLMC
was established primarily for the purpose of increasing the availability of
mortgage credit for the financing of urgently needed housing. It seeks to
provide an enhanced degree of liquidity for residential mortgage investments
primarily by assisting in the development of secondary markets for conventional
mortgages. The principal activity of FHLMC currently consists of the purchase of
first lien conventional mortgage loans or participation interests in such
mortgage loans and the sale of the mortgage loans or participations so purchased
in the form of mortgage securities, primarily FHLMC Certificates. FHLMC is
confined to purchasing, so far as practicable, mortgage loans that it deems to
be of such quality, type and class as to meet generally the purchase standards
imposed by private institutional mortgage investors.
FHLMC CERTIFICATES
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
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may include whole loans, participation interests in whole loans and undivided
interests in whole loans and/or participations comprising another FHLMC
Certificate group. Under the Guarantor Program, any such FHLMC Certificate group
may include only whole loans or participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
collection by such holder of all principal on the underlying mortgage loans,
without any offset or deduction, to the extent of such holder's pro rata share
thereof, but does not, except if and to the extent specified in the Prospectus
Supplement for a series of Certificates, guarantee the timely payment of
scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees the timely
payment of principal based on the difference between the pool factor, published
in the month preceding the month of distribution and the pool factor published
in such month of distribution. Pursuant to its guarantees, FHLMC indemnifies
holders of FHLMC Certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. FHLMC may remit the
amount due on account of its guarantee of collection of principal at any time
after default on an underlying mortgage loan, but not later than (i) 30 days
following foreclosure sale, (ii) 30 days following payment of the claim by any
mortgage insurer, or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial repayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit 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
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purchased, results in the yield (expressed as a percentage) required by FHLMC.
The required yield, which includes a minimum servicing fee retained by the
servicer, is calculated using the outstanding principal balance. The range of
interest rates on the mortgage loans and participations in a FHLMC Certificate
group under the Cash Program will vary since mortgage loans and participations
are purchased and assigned to a FHLMC Certificate group based upon their yield
to FHLMC rather than on the interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC Certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the FHLMC Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
FEDERAL NATIONAL MORTGAGE ASSOCIATION
FNMA is a federally chartered and privately owned corporation organized and
existing under the Federal National Mortgage Association Charter Act (the
"Charter Act"). FNMA was originally established in 1938 as a United States
government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder-owned and 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
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FNMA Certificate will be between 50 basis points and 250 basis points greater
than in its annual pass-through rate and under a special servicing option
(pursuant to which FNMA assumes the entire risk for foreclosure losses), the
annual interest rates on the mortgage loans underlying a FNMA Certificate will
generally be between 55 basis points and 255 basis points greater than the
annual FNMA Certificate pass-through rate. If specified in the Prospectus
Supplement, FNMA Certificates may be backed by adjustable rate mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guarantees are obligations solely of FNMA and are not backed by, nor
entitled to, the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's operations or to assist
FNMA in any other manner. If FNMA were unable to satisfy its obligations,
distributions to holders of FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans formed on
or after May 1, 1985 (other than FNMA Certificates backed by pools containing
graduated payment mortgage loans or mortgage loans secured by multifamily
projects) are available in book-entry form only. Distributions of principal and
interest on each FNMA Certificate will be made by FNMA on the 25th day of each
month to the persons in whose name the FNMA Certificate is entered in the books
of the Federal Reserve Banks (or registered on the FNMA Certificate register in
the case of fully registered FNMA Certificates) as of the close of business on
the last day of the preceding month. With respect to FNMA Certificates issued in
book-entry form, distributions thereon will be made by wire, and with respect to
fully registered FNMA Certificates, distributions thereon will be made by check.
STRIPPED MORTGAGE-BACKED SECURITIES
Agency Securities may consist of one or more stripped mortgage-backed
securities, each as described herein and in the related Prospectus Supplement.
Each such Agency Security will represent an undivided interest in all or part of
either the principal distributions (but not the interest distributions) or the
interest distributions (but not the principal distributions), or in some
specified portion of the principal and interest distributions (but not all of
such distributions) on certain FHLMC, FNMA or GNMA Certificates. The underlying
securities will be held under a trust agreement by FHLMC, FNMA or GNMA, each as
trustee, or by another 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.
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PRIVATE MORTGAGE-BACKED SECURITIES
GENERAL
Private Mortgage-Backed Securities may consist of (a) mortgage pass-through
certificates evidencing an undivided interest in a pool of mortgage loans or (b)
collateralized mortgage obligations secured by mortgage loans. Private
Mortgage-Backed Securities will have been issued pursuant to a pooling and
servicing agreement, an indenture or similar agreement (a "PMBS Agreement"). The
seller/servicer of the underlying mortgage loans will have entered into the PMBS
Agreement with the trustee under such PMBS Agreement (the "PMBS Trustee"). The
PMBS Trustee or its agent, or a custodian, will possess the mortgage loans
underlying such Private Mortgage-Backed Security. Mortgage loans underlying a
Private Mortgage-Backed Security will be serviced by a servicer (the "PMBS
Servicer") directly or by one or more subservicers who may be subject to the
supervision of the PMBS Servicer. The PMBS Servicer will be a FNMA or FHLMC
approved servicer and, if FHA Loans underlie the Private Mortgage-Backed
Securities, approved by HUD as an FHA mortgagee.
The issuer of the Private Mortgage-Backed Securities (the "PMBS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for the
purpose of among other things, establishing trusts and acquiring and selling
housing loans to such trusts and selling beneficial interests in such trusts. If
so specified in the Prospectus Supplement, the PMBS Issuer may be an affiliate
of the Depositor. The obligations of the PMBS Issuer will generally be limited
to certain representations and warranties with respect to the assets conveyed by
it to the related trust. Unless otherwise specified in the related Prospectus
Supplement, the PMBS Issuer will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Mortgage-Backed Securities issued
under the PMBS Agreement. Additionally, although the mortgage loans underlying
the Private Mortgage-Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private 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% (except in the case of High LTV Loans), (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
(except in the case of High LTV Loans), (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)
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will be required to be covered by a standard hazard insurance policy (which may
be a blanket policy) and (vi) each mortgage loan (other than a cooperative loan
or a Contract secured by a manufactured home) will be covered by a title
insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE MORTGAGE-BACKED SECURITIES
Credit support in the form of reserve funds, subordination of other private
mortgage-backed securities issued under the PMBS Agreement, letters of credit,
insurance policies or other types of credit support may be provided with respect
to the mortgage loans underlying the Private Mortgage-Backed Securities or with
respect to the Private Mortgage-Backed Securities themselves.
ADDITIONAL INFORMATION
The Prospectus Supplement for a series for which the Trust Fund includes
Private Mortgage- Backed Securities will specify (i) the aggregate approximate
principal amount and type of the Private Mortgage-Backed Securities to be
included in the Trust Fund, (ii) certain characteristics of the mortgage loans
which comprise the underlying assets for the Private Mortgage-Backed Securities
including (A) the payment features of such mortgage loans, (B) the approximate
aggregate principal balance, if known, of underlying mortgage loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range of servicing
fees with respect to the mortgage loans and (D) the minimum and maximum stated
maturities of the underlying mortgage loans at origination, (iii) the maximum
original term-to-stated maturity of the Private Mortgage-Backed Securities, (iv)
the weighted average term-to-stated maturity of the Private Mortgage-Backed
Securities, (v) the pass-through or certificate rate of the Private
Mortgage-Backed Securities, (vi) the weighted average pass-through or
certificate rate of the Private Mortgage-Backed Securities, (vii) the PMBS
Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS Trustee
for such Private Mortgage-Backed Securities, (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies, letters of
credit or guarantees relating to the mortgage loans underlying the Private
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 Securities 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 Securities 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
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additional collateral to secure the loan pursuant to a Funding Agreement
subsequent to the issuance of the Securities 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 Securities 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
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
Securities, 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
Securities should make their investment decisions on the basis that the
Securities of a series have rights solely with respect to the assets transferred
to the Trust Fund for that series of Securities.
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 Securities 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 Securities 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 Securities from time to time,
but the timing and amount of offerings of Securities 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 Securities (other than certain classes of Strip Securities)
of each series will be similarly calculated for the applicable period, as
one-twelfth of the applicable Security Interest Rate multiplied by the
outstanding Principal Balance thereof, except as provided below with respect to
prepayments. In the case of Strip Securities with no or, in certain
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cases, a nominal 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 Securityholders will be lower than the yield
otherwise produced by the applicable Security Interest Rate (or, as to a Strip
Security, 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 Securities 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 Mortgage- Backed
Securities or Funding Agreements and in the case of a series of Securities
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
Securityholders. 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 Securityholders 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
Securities--General".
In addition, if so specified in the related Prospectus Supplement, a
holder of a non-offered class of Securities (the "Call Class") will have the
right, solely at its discretion, to terminate the related Trust Fund on any
Distribution Date after the 12th Distribution Date following the date of initial
issuance of the related series of Securities and until such date as the Clean-up
Call becomes exercisable and thereby effect early retirement of the Securities
of such series. Any such call will be of the entire Trust Fund at one time;
multiple calls with respect to any series of Securities will not be permitted.
Such termination would result in the concurrent retirement of all outstanding
Securities of the related series and would decrease the average lives of such
Securities, perhaps significantly. The earlier after the Closing Date that such
termination occurs, the greater would be such effect.
The Prospectus Supplement for each series of Securities may set forth
additional information regarding yield considerations.
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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 Securities. 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 Securities of a series will be influenced by the
rate at which principal on the mortgage loans underlying or comprising the Trust
Fund Assets included in the related Trust Fund is paid, which payments may be in
the form of scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes prepayments, in whole or in part, and liquidations due to
default and hazard or condemnation losses). The rate of prepayment with respect
to fixed rate mortgage loans has fluctuated significantly in recent years. In
general, if interest rates fall below the Interest Rates on the mortgage loans
underlying or comprising the Trust Fund Assets, the rate of prepayment would be
expected to increase. There can be no assurance as to the rate of prepayment of
the mortgage loans underlying or comprising the Trust Fund Assets in any Trust
Fund. The Depositor is not aware of any publicly available statistics relating
to the principal prepayment experience of diverse portfolios of mortgage loans
over an extended period of time. All statistics known to the Depositor that have
been compiled with respect to prepayment experience on mortgage loans indicates
that while some mortgage loans may remain outstanding until their stated
maturities, a substantial number will be paid prior to their respective stated
maturities.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates, the terms
of the mortgage loans (as affected by the existence of lockout provisions,
due-on-sale and due-on-encumbrance clauses and prepayment fees), the quality of
management of the mortgaged properties, possible changes in tax laws and the
availability of mortgage funds, may affect prepayment experience. Unless
otherwise provided in the related Prospectus Supplement, all Mortgage Loans,
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.
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With respect to a series of Securities 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
Securities--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
Securities--Termination" for a description of the possible early termination of
any series of Securities. See also "Mortgage Loan Program--Representations by or
on behalf of Mortgage Loan Sellers; Repurchases" and "Description of the
Securities--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 Securities 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
Securities--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 Securities of such series.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on January 27, 1987
as an indirect wholly-owned subsidiary of Salomon Smith Barney Holdings 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
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description of the borrower's financial condition, the borrower is
required to provide a current balance sheet describing assets and liabilities
and a statement of income and expenses, as well as an authorization to apply for
a credit report that summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In addition, an employment
verification is obtained that reports the borrower's current salary and may
contain information regarding length of employment and whether it is expected
that the borrower will continue such employment in the future. If a prospective
borrower is self-employed, the borrower is required to submit copies of signed
tax returns. The borrower may also be required to authorize verification of
deposits at financial institutions where the borrower has demand or savings
accounts. In the case of a Multifamily Loan, the borrower is also required to
provide certain information regarding the related Multifamily Property,
including a current rent schedule, the type and length of leases and pro forma
operating income statements. In addition, the Depositor will consider the
location of the Multifamily Property, the availability of competitive lease
space and rental income of comparable properties in the relevant market area,
the overall economy and demographic features of the geographic area and the
mortgagor's prior experience in owning and operating properties similar to the
Multifamily Properties.
In determining the adequacy of the property as collateral, an appraisal is
made of each property considered for financing, except in the case of new
Manufactured Homes, as described under "The Trust Funds". Each appraiser is
selected in accordance with predetermined guidelines established for appraisers.
The appraiser is required to inspect the property and verify that it is in good
condition and that construction, if new, has been completed. With respect to
properties other than Multifamily Properties, the appraisal is based on the
market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the home. With respect to
Multifamily Properties, the appraisal must specify whether an income analysis, a
market analysis or a cost analysis was used. An appraisal employing the income
approach to value analyzes a property's cash flow, expenses, capitalization and
other operational information in determining the property's value. The market
approach to value analyzes the prices paid for the purchase of similar
properties in the property's area, with adjustments made for variations between
these other properties and the property being appraised. The cost approach
requires the appraiser to make an estimate of land value and then determine the
current cost of reproducing the building less any accrued depreciation. In any
case, the value of the property being financed, as indicated by the appraisal,
must be such that it currently supports, and is anticipated to support in the
future, the outstanding loan balance.
In the case of Single Family Loans and Contracts, once all applicable
employment, credit and property information is received, a determination is made
as to whether the prospective borrower has sufficient monthly income available
(i) to meet the borrower's monthly obligations on the proposed mortgage loan
(determined on the basis of the monthly payments due in the year of origination)
and other expenses related to the home (such as property taxes and hazard
insurance) and (ii) to meet monthly housing expenses and other financial
obligations and monthly living expenses. Unless otherwise provided in the
related Prospectus Supplement, the underwriting standards to be applied to the
Single Family Loans will be generally similar to the traditional underwriting
guidelines used by FNMA and FHLMC which are in effect at the time of origination
of each Single Family Loan, except that the ratios at 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.
High LTV Loans are underwritten with an emphasis on the creditworthiness of
the related mortgagor. Such Mortgage Loans are underwritten with a limited
expectation of recovering any amounts from the foreclosure of the related
Mortgaged Property.
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In the case of a Single Family Loan or Multifamily Loan secured by a
leasehold interest in a residential property, the title to which is held by a
third party lessor, the Mortgage Loan Seller, or another party on its behalf, is
required to warrant, among other things, that the remaining term of the lease
and any sublease be at least five years longer than the remaining term of the
Mortgage Loan.
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a residential property may not seek a deficiency
judgment against the mortgagor but rather must look solely to the property for
repayment in the event of foreclosure. The underwriting standards to be applied
to the Mortgage Loans in all states (including anti-deficiency states) require
that the value of the property being financed, as indicated by the appraisal,
currently supports and is anticipated to support in the future the outstanding
principal balance of the Mortgage Loan.
With respect to any FHA Loan the Mortgage Loan Seller is required to
represent that the FHA Loan complies with the applicable underwriting policies
of the FHA. See "Description of Primary Insurance Policies--FHA Insurance". With
respect to any VA Loan, the Mortgage Loan Seller is required to represent that
the VA Loan complies with the applicable underwriting policies of the VA. See
"Description of Primary Insurance Policies-VA Guarantee".
The recent foreclosure or repossession and delinquency experience with
respect to loans serviced by the Master Servicer or, if applicable, a
significant Sub-Servicer will be provided in the related Prospectus Supplement.
Certain of the types of loans that may be included in the Mortgage Pools
are recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such Mortgage Loans may
provide for escalating or variable payments by the borrower. These types of
Mortgage Loans are underwritten on the basis of a judgment that borrowers will
have the ability to make larger monthly payments in subsequent years. In some
instances, however, a borrower's income may not be sufficient to make loan
payments as such payments increase. Unless otherwise specified in the related
Prospectus Supplement, the Multifamily Loans will be nonrecourse loans, as to
which, in the event of mortgagor default, recourse may only be had against the
specific Multifamily Property pledged to secure that Multifamily Loan, and not
against the mortgagor's assets.
QUALIFICATIONS OF ORIGINATORS AND MORTGAGE LOAN SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Originator and Mortgage Loan Seller will be required to satisfy the
qualifications set forth herein. Each Originator must be an institution
experienced in originating and servicing conventional mortgage loans in
accordance with accepted practices and prudent guidelines, and must maintain
satisfactory facilities to originate and service those loans. Each Originator
and Mortgage Loan Seller must be a seller/servicer approved by either FNMA or
FHLMC. Each Originator and Mortgage Loan Seller must be a HUD-approved mortgagee
or an institution the deposit accounts in which are insured by the Bank
Insurance Fund ("BIF") or Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation (the "FDIC"). In addition, with respect to
FHA Loans or VA Loans, each Originator must be approved to originate such
Mortgage Loans by the FHA or VA, as applicable. In addition, each Originator and
Mortgage Loan Seller must satisfy certain criteria as to financial stability
evaluated on a case by case basis by the Depositor.
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
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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 Securities 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
Securities 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 Securities.
The only representations and warranties to be made for the benefit of
holders of Securities 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
Securities--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
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of the Securityholders. 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 Securities--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 Securities, 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 Securities--Assignment of the Mortgage
Loans". The Master Servicer will be required under the applicable Pooling and
Servicing Agreement or 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 Securities, 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 Securities or the Trustee for a breach of representation by a
Mortgage Loan Seller. See "Description of the Securities--General".
The "Stated Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts, including
advances by the Master Servicer, allocable to principal that are distributed to
Securityholders 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 Securities 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 Securities--Assignment of Trust Fund Assets".
DESCRIPTION OF THE SECURITIES
The Securities will be issued in series. Each series of Certificates
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. Each series of Notes evidencing indebtedness
of a Trust Fund consisting of Mortgage Loans will be issued pursuant to an
Indenture
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between the related Issuer and the Trustee named in the Prospectus Supplement.
Such Trust Fund will be created pursuant to an Owner Trust Agreement between the
Depositor and the Owner Trustee. Each series of Securities 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, Owner Trust Agreement,
Indenture, Servicing Agreement or Pooling and Servicing Agreement, an
"Agreement"). The provisions of each Agreement will vary depending upon the
nature of the Securities to be issued thereunder and the nature of the related
Trust Fund. Various forms of Pooling and Servicing Agreement, Servicing
Agreement, Owner Trust Agreement, Trust Agreement and Indenture 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 Securities 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 related Agreements for each Trust
Fund and the related Prospectus Supplement. As used herein with respect to any
series, the term "Certificate" or the term "Note" refers to all of the
Certificates or Notes 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. The Notes of each series (including any class of Notes
not offered hereby) will be issued in fully registered form only and will
represent indebtedness of the Trust Fund created pursuant to the related
Agreement. If so provided in the Prospectus Supplement, any class of Securities
of any series may be represented by a certificate or note (the "DTC Registered
Securities") registered in the name of a nominee of The Depository Trust Company
("DTC"). The interests of beneficial owners of such Securities will be
represented by such entries on the records of participating members of DTC.
Definitive certificates or notes will be available for such Securities only
under limited circumstances as provided in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, each Trust Fund
will consist of (i) such Trust Fund Assets, or interests therein, exclusive of
any portion of interest payments (the "Retained Interest") on a Trust Fund Asset
retained by the Depositor or any previous owner thereof, as from time to time
are subject to the related 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 Securityholders; (iii) with respect to Trust
Funds that include Mortgage Loans, (a) property acquired on behalf of
Securityholders 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 Securities will be transferable and exchangeable for like
Securities 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 Securities, 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.
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Each series of Securities may consist of either (i) a single class of
Securities evidencing the entire beneficial ownership of or indebtedness of the
related Trust Fund; (ii) two or more classes of Securities evidencing the entire
beneficial ownership of or indebtedness of the related Trust Fund, one or more
classes of which ("Senior Securities") will be senior in right of payment to one
or more of the other classes ("Subordinate Securities") to the extent described
in the related Prospectus Supplement (any such series, a "Senior/Subordinate
Series"); or (iii) other types of classes of Securities, as described in the
related Prospectus Supplement. A series may include one or more classes of
Securities entitled to (i) principal distributions, with disproportionate,
nominal or no interest distributions or (ii) interest distributions, with
disproportionate, nominal or no principal distributions ("Strip Securities").
With respect to any series of Notes, the Equity Certificates, insofar as they
represent the beneficial ownership interest in the Issuer, will be subordinate
to the related Notes. 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 Securities or to one or more classes of Securities in
such series in the form of subordination of one or more other classes of
Securities 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 Securities (other than certain Strip Securities) will have a
Principal Balance and, unless otherwise provided in the related Prospectus
Supplement, will be entitled to payments of interest thereon based on a
specified Security Interest Rate. See "Interest on the Securities" and
"Principal of the Securities" below. The specific percentage ownership interest
of each class of Securities and the minimum denomination for each Security will
be set forth in the related Prospectus Supplement.
As to each series of Certificates, 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 Securityholders not otherwise described herein. If such an
election is made with respect to a series of Certificates, one of the classes of
Certificates comprising such series will be designated as evidencing all
"residual interests" in the related REMIC as defined under the Code. All other
classes of Certificates in such a series will constitute "regular interests" in
the related REMIC as defined in the Code. As to each series of Certificates 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 Securityholder. 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 Securityholders. See "Federal
Income Tax Consequences--REMICs--Prohibited Transactions Tax and Other Taxes".
As to each series, the Securities 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").
ASSIGNMENT OF TRUST FUND ASSETS
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of any series of Securities, the Depositor will
cause the Mortgage Loans comprising the Mortgage Pool included in the related
Trust Fund to be assigned to the Trustee,
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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. The Trustee will, concurrently with such assignment,
deliver the Securities to the Depositor in exchange for the Trust Fund. Each
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
related Pooling and Servicing Agreement or Servicing 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.
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.
(2) With respect to each Cooperative Loan, the Cooperative Note, the
original security agreement, the proprietary lease or occupancy agreement,
the related stock certificate and related stock powers endorsed in blank,
and a copy of the original filed financing statement together with an
assignment thereof to the Trustee in a form sufficient for filing. Unless
otherwise provided in the related Prospectus Supplement, the Depositor will
promptly cause the assignment and financing statement of each related
Cooperative Loan to be filed in the appropriate public office, except in
states where in the opinion of counsel acceptable to the Trustee, such
filing is not required to protect the Trustee's interest in the Cooperative
Loan against the claim of any subsequent transferee or any successor to or
creditor of the Depositor, the Master Servicer, the relevant Mortgage Loan
Seller or any prior holder of the Cooperative Loan.
(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 Securityholders 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.
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
Securityholders. Unless otherwise specified in the related
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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 Securityholders or the Trustee for omission of, or a material defect in,
a constituent document.
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 Securities, 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 Securityholders
therein, the Depositor will be obligated either to cure the breach in all
material respects, repurchase the Mortgage Loan at the Purchase Price or
substitute for such Mortgage Loan as described below.
Unless otherwise provided in the related Prospectus Supplement, if the
Depositor discovers or receives notice of any breach of its representations or
warranties with respect to a Mortgage Loan, the Depositor may, rather than
repurchase the Mortgage Loan as provided above, remove such Mortgage Loan from
the Trust Fund (a "Deleted Mortgage Loan") and substitute in its place one or
more Mortgage Loans (each, a "Substitute Mortgage Loan"), but only if (i) with
respect to a Trust Fund for which a REMIC election is to be made, such
substitution is effected within two years of the date of initial issuance of the
Certificates (plus permissible extensions) or (ii) with respect to a Trust Fund
for which no REMIC election is to be made, such substitution is effected within
120 days of the date of initial issuance of the Securities. 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 Securityholders on the first Distribution
Date following the
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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 Securities 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
Securityholders in a Mortgage Loan, the Depositor or the Mortgage Loan Seller,
as the case may be, will be obligated either to cure the breach in all material
respects or to purchase such Mortgage Loan at the Purchase Price, subject to the
limitations specified in the related Prospectus Supplement. The related
Prospectus Supplement may provide that the performance of an obligation to
repurchase Mortgage Loans following a breach of an insurability representation
will be ensured in the manner specified therein.
The obligation to repurchase or, other than with respect to the
insurability representation if applicable, to substitute Mortgage Loans as
described above constitutes the sole remedy available to the Securityholders or
the Trustee for any breach of the above described representations.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Pooling and Servicing Agreement or Servicing Agreement.
Upon a breach of any such representation of the Master Servicer which materially
and adversely affects the interests of the Securityholders, the Master Servicer
will be obligated to cure the breach in all material respects.
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 Securities. Each Agency Security will be identified
in a schedule appearing as an exhibit to the related 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,
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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 Securities 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 Securityholders 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 related Pooling and Servicing
Agreement or the related Servicing Agreement and Indenture ("Permitted
Investments"). 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.
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
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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.
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 related Pooling and Servicing Agreement
or the related Servicing Agreement and Indenture 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 Securityholders by
foreclosure or by deed in lieu of foreclosure or otherwise;
(iv) any amounts required to be paid under any letter of credit, as
described below under "Description of Credit Support--Letter of Credit";
(v) any advances made as described below under "Advances in respect
of Delinquencies";
(vi) if applicable, all amounts required to be transferred to the
Certificate Account from a reserve fund, as described below under
"Description of Credit Support--Reserve Funds";
(vii) any Buydown Funds (and, if applicable, investment earnings
thereon) required to be deposited in the Certificate Account as described
below;
(viii) all proceeds of any Mortgage Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any Sub-Servicer or any
Mortgage Loan Seller as described under "Mortgage Loan
Program-Representations by or on behalf of Mortgage Loan Sellers;
Repurchases" or "--Assignment of Trust Fund Assets" above, exclusive of the
Retained Interest, if any, in respect of such Mortgage Loan, and all
proceeds of any Mortgage Loan repurchased as described under "Termination"
below;
(ix) all payments required to be deposited in the Certificate Account
with respect to any deductible clause in any blanket insurance policy
described under "Description of Primary Insurance Policies--Primary Hazard
Insurance Policies"; and
(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.
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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 Securityholders will be affected. With respect to
each Buydown Mortgage Loan, the Master Servicer will deposit in the Certificate
Account the amount, if any, of the Buydown Funds (and, if applicable, investment
earnings thereon) for each Buydown Mortgage Loan that, when added to the amount
due from the borrower on such Buydown Mortgage Loan, equals the full monthly
payment which would be due on the Buydown Mortgage Loan if it were not subject
to the buydown plan.
Unless otherwise specified in the related Prospectus Supplement, in the
event a Buydown Mortgage Loan is prepaid in full or liquidated, the related
Buydown Funds will be applied as follows. If the mortgagor on a Buydown Mortgage
Loan prepays such loan in its entirety during the Buydown Period, the Master
Servicer will withdraw from the Buydown Account and remit to the mortgagor in
accordance with the related buydown plan any Buydown Funds remaining in the
Buydown Account. If a prepayment by a mortgagor during the Buydown Period
together with Buydown Funds will result in a prepayment in full, the Master
Servicer will withdraw from the Buydown Account for deposit in the Certificate
Account the Buydown Funds and investment earnings thereon, if any, which
together with such prepayment will result in a prepayment in full. If the
mortgagor defaults during the Buydown Period with respect to a Buydown Mortgage
Loan and the Mortgaged Property is sold in liquidation (either by the Master
Servicer or the insurer under any related insurance policy), the Master Servicer
will withdraw from the Buydown Account the Buydown Funds and all investment
earnings thereon, if any, for deposit in the Certificate Account or remit the
same to the insurer if the Mortgaged Property is transferred to such insurer and
such insurer pays all of the loss incurred in respect of such default. In the
case of any such prepaid or defaulted Buydown Mortgage Loan the Buydown Funds in
respect of which were supplemented by investment earnings, the Master Servicer
will withdraw from the Buydown Account and either deposit in the Certificate
Account or remit to the borrower, depending upon the terms of the buydown plan,
any investment earnings remaining in the related Buydown Account.
Any Buydown Funds, and any investment earnings thereon, deposited in the
Certificate Account in connection with a full prepayment of the related Mortgage
Loan will be deemed to reduce the amount that would be required to be paid by
the borrower to repay fully the related Mortgage Loan if the Mortgage Loan were
not subject to the buydown plan.
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 related 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).
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DISTRIBUTIONS
Distributions allocable to principal and interest on the Securities 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 Securities 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 Securities on each Distribution Date will be allocated pro rata
among the outstanding Securities in such class. Payments to the holders of
Securities of any class on each Distribution Date will be made to the
Securityholders 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
Securities. Payments will be made either by wire transfer in immediately
available funds to the account of a Securityholder at a bank or other entity
having appropriate facilities therefor, if such Securityholder 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 Securities in the requisite amount specified therein), or by check mailed
to the address of the person entitled thereto as it appears on the Security
Register (the "Security Register"); provided, however, that the final
distribution in retirement of the Securities will be made only upon presentation
and surrender of the Securities at the office or agency of the Depositor or its
agent specified in the notice to Securityholders of such final distribution.
With respect to each series of Certificate or Notes, the Security Register will
be referred to as the "Certificate Register" or "Note Register", respectively.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement. Unless
provided otherwise in the related Prospectus Supplement, the "Available
Distribution Amount" for each Distribution Date equals the sum of the following
amounts:
(i) the total amount of all cash on deposit in the related
Certificate Account as of the corresponding Determination Date, exclusive
of:
(a) all scheduled payments of principal and interest collected
but due on a date subsequent to the related Due Period (unless the
related Prospectus Supplement provides otherwise, a "Due Period" with
respect to any Distribution Date will commence on the second day of the
month in which the immediately preceding Distribution Date occurs, or
the day after the Cut-off Date in the case of the first Due Period, and
will end on the first day of the month of the related Distribution
Date),
(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;
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(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 Securities (including any Securities 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 SECURITIES
Each class of Securities (other than certain classes of Strip Securities)
may have a different Security Interest Rate, which may be a fixed, variable or
adjustable Security Interest Rate. The related Prospectus Supplement will
specify the Security Interest Rate for each class, or, in the case of a variable
or adjustable Security Interest Rate, the method for determining the Security
Interest Rate. Unless otherwise specified in the related Prospectus Supplement,
interest on the Securities will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
With respect to each series of Securities and each Distribution Date, the
"Accrued Security Interest" distributable on each Security, other than certain
classes of Strip Securities, will be equal to one month's interest on the
outstanding Principal Balance thereof immediately prior to the Distribution
Date, at the applicable Security Interest Rate, subject to the following. With
respect to each series of Certificates or Notes, the Accrued Security Interest
will be referred to as the "Accrued Certificate Interest" or "Accrued Note
Interest", respectively. As to each Strip Security with no or, in certain cases,
a nominal Principal Balance, the Accrued Security Interest with respect to any
Distribution Date will equal one month's Stripped Interest. Unless otherwise
specified in the related Prospectus Supplement, the Accrued Security Interest on
each Security 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 Securities of that series in the manner
specified in the related Prospectus Supplement. See "Yield Considerations".
PRINCIPAL OF THE SECURITIES
Unless the related Prospectus Supplement provides otherwise, each Security
will have a "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. The Principal Balance of each Security offered hereby
will be stated in the related Prospectus Supplement as the "Certificate
Principal Balance" with respect to a Certificate and the "Note Balance" with
respect to a Note. With respect to each such Security, distributions generally
will be applied to undistributed accrued interest thereon, and thereafter to
principal. The outstanding Principal Balance of a Security will be reduced to
the extent of distributions of principal thereon, and in the case of Securities
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 Principal Balance of all classes of
Securities 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 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 Securities entitled thereto until
the 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
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of a class of Securities will be based on the percentage interest in the related
Trust Fund evidenced by such class (with respect to the Senior Securities, the
"Senior Percentage"), which in turn will be based on the Principal Balance of
such class as compared to the Principal Balance of all classes of Securities of
such series. Distributions of principal of any class of Securities will be made
on a pro rata basis among all of the Securities of such class. Strip Securities
with no 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 Securities 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 Securities. 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 security 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 Securities or,
in the case of a series guaranteed or supported by a security insurer, will not
adversely affect the capital requirements of such security 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 Securities 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 Securities on a pro rata basis.
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ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Securities 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 Securities and Strip
Securities, 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 Securityholders 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 Principal Balance of the
Subordinate Securities 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 Securities entitled
thereto, rather than to guarantee or insure against losses. Unless otherwise
provided in the related Prospectus Supplement, advances of the Master Servicer's
funds will be reimbursable only out of related recoveries on the Mortgage Loans
(including amounts received under any form of Credit Support) respecting which
such advances were made (as to any Mortgage Loan, "Related Proceeds") and, in
the case of a Senior/Subordinate Series, out of any amounts otherwise
distributable on the Subordinate Securities 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 Principal Balance of the
Subordinate Securities 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 Securityholders
on such date. 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.
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REPORTS TO SECURITYHOLDERS
With each distribution to holders of any class of Securities (the
"Securityholders") 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 Securities of
such class applied to reduce the Principal Balance thereof;
(ii) the amount of such distribution to holders of Securities of
such class allocable to Accrued Security 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 Securityholder reasonably requests,
to enable Securityholders 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
Securityholders 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 Securityholders 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 Principal Balance of each class of Securities
(including any class of Securities not offered hereby) at the close of
business on such Distribution Date, separately identifying any reduction in
such Principal Balance due to the allocation of any Realized Loss;
(x) the Special Hazard Subordination Amount, if any, at the
close of business on such Distribution Date;
(xi) the aggregate amount of principal prepayments made and
Realized Losses incurred during the related Prepayment Period;
(xii) the amount deposited in the Reserve Fund, if any, on such
Distribution Date;
(xiii) the amount remaining in the Reserve Fund, if any, as of the
close of business on such Distribution Date;
(xiv) the aggregate unpaid Accrued Security Interest, if any, on
each class of Securities at the close of business on such Distribution
Date;
(xv) in the case of Securities with a variable Security Interest
Rate, the Security Interest Rate applicable to such Distribution Date, as
calculated in accordance with the method specified in the related
Prospectus Supplement;
(xvi) in the case of Securities with an adjustable Security
Interest Rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable
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Security Interest 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 Securities or for such other specified portion thereof. With
respect to each series of Certificates or Notes, Securityholders will be
referred to as the "Certificateholders" or the "Noteholders", respectively.
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 Security 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 Securityholder. 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.
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
related Pooling and Servicing Agreement or Servicing 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.
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 Securityholders, 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 Securities.
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.
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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.
With respect to Multifamily Loans, the related mortgagor's failure to make
required payments may reflect inadequate operating income or the diversion of
that income from the service of payments due under the Multifamily Loan, and may
call into question such mortgagor's ability to make timely payment of taxes and
to pay for necessary maintenance of the related Mortgaged Property. The Master
Servicer will monitor any Multifamily Loan which is in default, contact the
mortgagor concerning the default, evaluate whether the causes of the default can
be cured over a reasonable period without significant impairment of the value of
the Mortgaged Property, initiate corrective action in cooperation with the
mortgagor if cure is likely, inspect the Mortgaged Property and take such other
actions as it would normally take with respect to similar loans serviced for its
own portfolio. A significant period of time may elapse before the Master
Servicer is able to assess the success of such corrective action or the need for
additional initiatives. Alternatively, the Master Servicer may determine to
institute foreclosure proceedings with respect to a Multifamily Loan soon after
default.
SUB-SERVICING
Any Master Servicer may delegate its servicing obligations in respect of
the Mortgage Loans to third-party servicers (each, a "Sub-Servicer"), but such
Master Servicer will remain obligated under the related Pooling and Servicing
Agreement or Servicing 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,
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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 or Servicing Agreement and will not result in a
withdrawal or downgrading of any class of Securities issued pursuant to such
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 Securities is issued will provide that, if for any reason the
Master Servicer for such series of Securities 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 the related Pooling and Servicing Agreement or
Servicing Agreement. See "Description of the Securities--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 Securityholders, will present claims to the insurer
under each Insurance Instrument, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Mortgage Loans. As set forth above, all collections by or on behalf of
the Master Servicer under any Insurance Instrument, other than amounts to be
applied to the restoration of a Mortgaged Property or released to the mortgagor,
are to be deposited in the Certificate Account for the related Trust Fund,
subject to withdrawal as heretofore described. Unless otherwise provided in the
Prospectus Supplement relating to a series of Securities, 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.
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
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determines (i) that such restoration will increase the proceeds to
Securityholders 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.
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. 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 Securityholders, 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.
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 Securityholders, 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.
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. Because Insurance Proceeds cannot exceed deficiency
claims and certain expenses incurred by the Master Servicer, no such payment or
recovery will result in a recovery to the Trust Fund which exceeds the principal
balance of the defaulted Mortgage Loan together with accrued interest thereon at
the Net Interest Rate. In addition, when property securing a defaulted Mortgage
Loan can be resold for an amount exceeding the outstanding principal balance of
the related Mortgage Loan together with accrued interest and expenses, it may be
expected that, if retention of any such amount is legally permissible, the
insurer will exercise its right under any related mortgage pool insurance policy
to purchase such property and realize for itself any excess proceeds. See
"Description of Primary Insurance Policies" and "Description of Credit Support".
With respect to collateral securing a Cooperative Loan, any prospective
purchaser will generally have to obtain the approval of the board of directors
of the relevant Cooperative before purchasing the shares and acquiring rights
under the proprietary lease or occupancy agreement securing the Cooperative
Loan. See "Certain Legal Aspects of Mortgage 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 Securities 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
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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 Securities 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
Securities 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.
With respect to a series of Securities 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
Securityholders, and payment of any other expenses described in the related
Prospectus Supplement.
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 Securityholders 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 Securities relating to Agency Securities, the Trustee shall pay all
expenses incurred in administration thereof, subject to the limitations
described in the related Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Pooling and Servicing Agreement and each Servicing Agreement with
respect to a series of Securities 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 servicing agreements substantially
similar to each other (including the related Pooling and Servicing Agreement or
Servicing 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
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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.
Each Pooling and Servicing Agreement and each Servicing 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 related
Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of the Master Servicer may be obtained by Securityholders 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 Pooling and Servicing Agreement and each
Servicing 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 Pooling and Servicing Agreement and each Servicing Agreement will
provide that the Master Servicer may resign from its obligations and duties
under the related Agreement only if such resignation, and the appointment of a
successor, will not result in a downgrading of any class of Securities or upon a
determination that its duties under the related 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 related Agreement.
Each Pooling and Servicing Agreement and each Servicing 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 Securityholders for any
action taken, or for refraining from the taking of any action, in good faith
pursuant to the related 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 Pooling and Servicing Agreement and each Servicing 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 related Agreement or the Securities, 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 related 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 Pooling and Servicing Agreement and each Servicing
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 related 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 related
Agreement and the rights and duties of the parties thereto and the interests of
the Securityholders 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 Securityholders, and the Master Servicer or the Depositor, as
the case may be, will
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be entitled to be reimbursed therefor and to charge the Certificate Account.
Except in the case of a series of Senior/Subordinate Securities, any such
obligation of the Securityholders will be borne among them on a pro rata basis
in proportion to the Accrued Security Interest payable thereto, and,
notwithstanding any other provision, their respective distributions will be
reduced accordingly.
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.
EVENTS OF DEFAULT AND RIGHTS UPON EVENTS OF DEFAULT
POOLING AND SERVICING AGREEMENT
Unless otherwise provided in the related Prospectus Supplement for a series
of Certificates that includes Mortgage Loans, Events of Default under each
Pooling and Servicing Agreement will consist of (i) any failure by the Master
Servicer to distribute or cause to be distributed to Securityholders, 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.
So long as an Event of Default under a Pooling and Servicing 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 Pooling and Servicing 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 such Agreement (except that
if the Trustee is prohibited by law from obligating itself to make advances
regarding delinquent mortgage loans, then the Trustee will not be so obligated)
and will be entitled to similar compensation arrangements. In the event that the
Trustee is unwilling or unable so to act, it may or, at the written request of
the holders of Certificates entitled to at least 51% of the Voting Rights, it
shall appoint, or petition a court of competent jurisdiction for the appointment
of, a housing loan servicing institution acceptable to the Rating Agency with a
net worth at the time of such appointment of at least $15,000,000 (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 related Agreement.
No Certificateholder will have the right under any Pooling and Servicing
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
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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. The Trustee, however, is under no obligation to exercise any of the
trusts or powers vested in it by any Pooling and Servicing 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.
SERVICING AGREEMENT
Unless otherwise provided in the related Prospectus Supplement for a series
of Notes, a "Servicing Default" under the related Servicing Agreement generally
will include: (i) any failure by the Master Servicer to make a required deposit
to the Certificate Account or, if the Master Servicer is so required, to
distribute to the holders of any class of Notes or Equity Certificates of such
series any required payment which continues unremedied for five business days
(or other period of time described in the related Prospectus Supplement) after
the giving of written notice of such failure to the Master Servicer by the
Trustee or the Issuer; (ii) any failure by the Master Servicer duly to observe
or perform in any material respect any other of its covenants or agreements in
the Servicing Agreement with respect to such series of Notes which continues
unremedied for 45 days after the giving of written notice of such failure to the
Master Servicer by the Trustee or the Issuer; (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings regarding the Master Servicer and certain actions by the
Master Servicer indicating its insolvency or inability to pay its obligations
and (iv) any other Servicing Default as set forth in the Servicing Agreement.
So long as a Servicing Default remains unremedied, either the Depositor or
the Trustee may, by written notification to the Master Servicer and to the
Issuer or the Trustee or Trust Fund, as applicable, terminate all of the rights
and obligations of the Master Servicer under the Servicing Agreement (other than
any right of the Master Servicer as Noteholder or as holder of the Equity
Certificates and other than the right to receive servicing compensation and
expenses for servicing the Mortgage Loans during any period prior to the date of
such termination), whereupon the Trustee will succeed to all responsibilities,
duties and liabilities of the Master Servicer under such Servicing Agreement
(other than the obligation to purchase Mortgage Loans under certain
circumstances) and will be entitled to similar compensation arrangements. In the
event that the Trustee would be obligated to succeed the Master Servicer but is
unwilling so to act, it may appoint (or if it is unable so to act, it shall
appoint) or petition a court of competent jurisdiction for the appointment of an
approved mortgage servicing institution with a net worth of at least $15,000,000
to act as successor to the Master Servicer under the Servicing Agreement (unless
otherwise set forth in the Servicing Agreement). Pending such appointment, the
Trustee is obligated to act in such capacity. The Trustee and such successor may
agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the initial Master Servicer under the Servicing
Agreement.
INDENTURE
Unless otherwise provided in the related Prospectus Supplement for a series
of Notes, an Event of Default under the Indenture generally will include: (i) a
default for five days or more (or other period of time described in the related
Prospectus Supplement) in the payment of any principal of or interest on any
Note of such series; (ii) failure to perform any other covenant of the Depositor
or the Trust Fund in the Indenture which continues for a period of thirty days
after notice thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iii) any representation or warranty made by the
Depositor or the Trust Fund in the Indenture or in any certificate or other
writing delivered pursuant thereto or in connection therewith with respect to or
affecting such series having been incorrect in a material respect as of the time
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made, and such breach is not cured within thirty days after notice thereof is
given in accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or (v) any other Event of
Default provided with respect to Notes of that series.
If an Event of Default with respect to the Notes of any series at the time
outstanding occurs and is continuing, the Trustee or the holders of a majority
of the then aggregate outstanding amount of the Notes of such series may declare
the principal amount (or, if the Notes of that series are Accrual Securities,
such portion of the principal amount as may be specified in the terms of that
series, as provided in the related Prospectus Supplement) of all the Notes of
such series to be due and payable immediately. Such declaration may, under
certain circumstances, be rescinded and annulled by the holders of a majority in
aggregate outstanding amount of the related Notes.
If following an Event of Default with respect to any series of Notes, the
Notes of such series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such series and to continue
to apply payments on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a series following an Event of Default, unless (a) the holders of 100% of the
then aggregate outstanding amount of the Notes of such series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the outstanding Notes
of such series at the date of such sale or (c) the Trustee determines that such
collateral would not be sufficient on an ongoing basis to make all payments on
such Notes as such payments would have become due if such Notes had not been
declared due and payable, and the Trustee obtains the consent of the holders of
66 2/3% of the then aggregate outstanding amount of the Notes of such series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default, the Indenture provides that the Trustee will have a prior
lien on the proceeds of any such liquidation for unpaid fees and expenses. As a
result, upon the occurrence of such an Event of Default, the amount available
for payments to the Noteholders would be less than would otherwise be the case.
However, the Trustee may not institute a proceeding for the enforcement of its
lien except in connection with a proceeding for the enforcement of the lien of
the Indenture for the benefit of the Noteholders after the occurrence of such an
Event of Default.
In the event the principal of the Notes of a series is declared due and
payable, as described above, the holders of any such Notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount that is unamortized.
No Noteholder or holder of an Equity Certificate generally will have any
right under an Owner Trust Agreement or Indenture to institute any proceeding
with respect to such Agreement unless (a) such holder previously has given to
the Trustee written notice of default and the continuance thereof, (b) the
holders of Notes or Equity Certificates of any class evidencing not less than
25% of the aggregate Percentage Interests constituting such class (i) have made
written request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and (ii) have offered to the Trustee reasonable indemnity,
(c) the Trustee has neglected or refused to institute any such proceeding for 60
days after receipt of such request and indemnity and (d) no direction
inconsistent with such written request has been given to the Trustee during such
60 day period by the Holders of a majority of the Note Balances of such class.
However, the Trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the applicable Agreement 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 Notes or Equity Certificates covered by such
Agreement, unless
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such holders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
AMENDMENT
With respect to each series of Certificates, each related Pooling and
Servicing Agreement or Trust 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. 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.
With respect to each series of Notes, each related Servicing Agreement or
Indenture may be amended by the parties thereto without the consent of any of
the holders of the Notes covered by such 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 Notes covered by the Agreement. Each Agreement may also be amended by
the parties thereto with the consent of the holders of Notes 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 Note without the consent of the holder of such Note, (ii) adversely affect
in any material respect the interests of the holders of any class of Notes in a
manner other than as described in (i), without the consent of the holders of
Notes 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
Notes covered by such Agreement then outstanding. The Voting Rights evidenced by
any Note will be the portion of the voting rights of all of the Notes in the
related series allocated in the manner described in the related Prospectus
Supplement.
TERMINATION
The obligations created by the related Agreements for each series of
Securities will terminate upon the payment to Securityholders of that series of
all amounts held in the Certificate Account or by the Master Servicer and
required to be paid to them pursuant to such Agreements following the earlier of
(i) the final payment or other liquidation of the last Trust Fund Asset subject
thereto or the disposition of all underlying property subject to the Trust Fund
Assets acquired upon
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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 related
Agreements continue beyond the date specified in the related Prospectus
Supplement. Written notice of termination of the related Agreements will be
given to each Securityholder, and the final distribution will be made only upon
surrender and cancellation of the Securities at an office or agency appointed by
the Trustee which will be specified in the notice of termination.
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 Securities 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 underlying property subject to the Mortgage Loans
acquired for the benefit of Securityholders, and (ii) the aggregate fair market
value of all of the assets in the Trust Fund (as determined by the Trustee, the
Master 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 Securities 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 Securities 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 Trust Fund Assets at the Cut-off Date for
that series specified in the related Prospectus Supplement, which percentage
will be between 25% and 0% (the "Clean-up Call").
In addition to the repurchase of the assets in the related Trust Fund
at the Clean-up Call, if so specified in the related Prospectus Supplement, a
holder of a non-offered class of Securities (the "Call Class") will have the
right, solely at its discretion, to terminate the related Trust Fund on any
Distribution Date after the 12th Distribution Date following the date of initial
issuance of the related series of Securities and until such date as the Clean-up
Call becomes exercisable and thereby effect early retirement of the Securities
of such series. Any such call will be of the entire Trust Fund at one time;
multiple calls with respect to any series of Securities will not be permitted.
In such case, the holders of the Securities offered hereby will be paid a price
equal to 100% of the Principal Balance of the Securities offered hereby as of
the day of such purchase plus accrued interest thereon at the applicable
Security Interest Rate to the first day of the month following such purchase
(the "Call Price"). Further, the Call Class must remit to the related Trustee
for distribution to the Securityholders funds equal to the Call Price. If such
funds are not deposited with the related Trustee, the Securities will remain
outstanding. There will not be any additional remedies available to
Securityholders. In addition, in the case of a Trust Fund for which a REMIC
election or elections have been made, such termination will constitute a
"qualified liquidation" under Section 860F of the Code. In connection with a
call by the Call Class, the final payment to the Securityholders will be made
upon surrender of the related Securities to the Trustee. Once the Securities
have been surrendered and paid in full, there will not be any continuing
liability from the Securityholders or from the Trust Fund to Securityholders.
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
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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 Securities 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 Securities 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.
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
related Agreement.
THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement, Trust Agreement or
Indenture 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 Securities may include Credit Support for such series or for one or
more classes of Securities 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 Securities, 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 Securities
or with respect to one or more classes of Securities comprising such series, and
the obligors on such Credit Support, will be set forth in the related Prospectus
Supplement. See "Description of the Securities".
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 Securityholders to receive distributions with respect
to the Mortgage Loans will be subordinate to the rights of the Senior
Securityholders to the extent described in the related Prospectus Supplement.
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All Realized Losses will be allocated to the Subordinate Securities of the
related series (or, if such series includes more than one class of Subordinated
Securities, to the outstanding class of Subordinate Securities having the first
priority for allocation of Realized Losses and then to additional outstanding
classes of Subordinate Securities, if any), until the Principal Balance thereof
has been reduced to zero. Any additional Realized Losses will be allocated to
the Senior Securities (or, if such series includes more than one class of Senior
Securities, either on a pro rata basis among all of the Senior Securities in
proportion to their respective outstanding 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 Securities 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
Securities of the related series, on a pro rata basis in proportion to their
respective outstanding Principal Balances, regardless of whether any Subordinate
Securities remain outstanding, or as otherwise provided in the related
Prospectus Supplement.
Any allocation of a Realized Loss to a Security will be made by reducing
the Principal Balance thereof as of the Distribution Date following the
Prepayment Period in which such Realized Loss was incurred. 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 Securities--Principal of the
Securities", the rights of holders of the various classes of Securities of any
series to receive distributions of principal and interest is determined by the
aggregate Principal Balance of each such class. The Principal Balance of any
Security will be reduced by all amounts previously distributed on such Security
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 Securities of any series to
future distributions would not change. However, to the extent so provided in the
related Prospectus Supplement, holders of Senior Securities may be entitled to
receive a disproportionately larger amount of prepayments received, which will
have the effect of accelerating the amortization of the Senior Securities and
increasing the respective percentage interest in future distributions evidenced
by the Subordinate Securities 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 Securities. In addition, as set
forth above, Realized Losses will be first allocated to Subordinate Securities
by reduction of the Principal Balance thereof, which will have the effect of
increasing the respective interest in future distributions evidenced by the
Senior Securities 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 Securities
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 Securities of a Senior/Subordinate Series may include, in addition to
the subordination of the Subordinate Securities 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
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below is maintained solely for the benefit of the Senior Securities of a
Senior/Subordinate Series, then the coverage described below as being provided
by such Credit Support with respect to a series of Securities may be limited to
the extent necessary to make required distributions on such Senior Securities 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 Securities of a
Senior/Subordinate Series may be reimbursed for amounts paid thereunder out of
amounts otherwise payable on the Subordinate Securities.
LETTER OF CREDIT
As to any series of Securities 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
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(iii) to the extent of any Bankruptcy Amount, with respect to any
Mortgage Loan that has been subject to bankruptcy proceedings as described
above, the amount of any debt service reduction or Deficient Valuation.
If the related Prospectus Supplement so provides, at such time as the
Letter of Credit Bank makes a payment as described above with respect to a
Liquidated Loan, or a payment of the full amount owing on a Mortgage Loan as to
which the Mortgaged Property has been damaged (as described in (ii)(B) above),
the Liquidated Loan will be removed from the related Trust Fund in accordance
with the terms set forth in the related Prospectus Supplement and will no longer
be subject to the Agreement. Unless otherwise provided in the related Prospectus
Supplement, Mortgage Loans that have been subject to bankruptcy proceedings as
described above, or as to which payment under the Letter of Credit has been made
for the purpose of restoring the related Mortgaged Property (as described in
(ii)(A) above), will remain part of the related Trust Fund. Any Defaulted
Mortgage Amount, Special Hazard Amount and Bankruptcy Amount covered by any
Letter of Credit will each be reduced to the extent of related unreimbursed
draws thereunder.
In the event that the Letter of Credit Bank ceases to be a duly organized
commercial bank, or its debt obligations are rated lower than the highest rating
on any class of the Securities 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 Securities 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
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Mortgage Pool Insurance Policy, subject to reasonable wear and tear; and (iv)
the insured has acquired good and merchantable title to the Mortgaged Property,
free and clear of all liens and encumbrances, except permitted encumbrances,
including any right of redemption by or on behalf of the mortgagor, and if
required by the insurer, has sold the property with the approval of the insurer.
Assuming the satisfaction of these conditions, the insurer has the option
to either (i) acquire the property securing the defaulted Mortgage Loan for a
payment equal to the principal balance thereof plus accrued and unpaid interest
at the Interest Rate to the date of acquisition and certain expenses described
above advanced by or on behalf of the insured, on condition that the insurer
must be provided with good and merchantable title to the Mortgaged Property
(unless the property has been conveyed pursuant to the terms of the applicable
primary mortgage insurance policy) or (ii) pay the amount by which the sum of
the principal balance of the defaulted Mortgage Loan and accrued and unpaid
interest at the Interest Rate to the date of the payment of the claim and such
expenses exceed the proceeds received from a sale of the Mortgaged Property
which the insurer has approved. In both (i) and (ii), the amount of payment
under a Mortgage Pool Insurance Policy will be reduced by the amount of such
loss paid under the primary mortgage insurance policy.
Unless earlier directed by the insurer, a claim under a Mortgage Pool
Insurance Policy must be filed (i) in the case when a primary mortgage insurance
policy is in force, within a specified number of days (typically, 60 days) after
the claim for loss has been settled or paid thereunder, or after acquisition by
the insured or a sale of the property approved by the insurer, whichever is
later, or (ii) in the case when a primary mortgage insurance policy is not in
force, within a specified number of days (typically, 60 days) after acquisition
by the insured or a sale of the 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 Securities, the amount of coverage under each Mortgage Pool Insurance
Policy will be reduced over the life of the Securities 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 Securityholders 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
etermining whether recoveries under the Mortgage Pool Insurance Policy are
jeopardized for reasons related to the financial condition of the insurer. If
the Master Servicer
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determines that recoveries are so jeopardized, it will exercise its best
reasonable efforts to obtain from another Qualified Insurer a replacement policy
as described above, subject to the same cost limitation.
Because each Mortgage Pool Insurance Policy will require that the property
subject to a defaulted Mortgage Loan be restored to its original condition prior
to claiming against the insurer, such policy will not provide coverage against
hazard losses. As set forth below, the primary hazard insurance policies
covering the Mortgage Loans typically exclude from coverage physical damage
resulting from a number of causes and, even when the damage is covered, may
afford recoveries that are significantly less than the full replacement cost of
such losses. Further, a special hazard insurance policy (or a Letter of Credit
to the extent of the Special Hazard Amount) will not cover all risks, and the
coverage thereunder will be limited in amount. Certain hazard risks will, as a
result, be uninsured and will therefore be borne by Securityholders.
SPECIAL HAZARD INSURANCE POLICY
As to any series of Securities 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 Securities 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
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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 Securityholders, 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
Securityholders.
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 Securities 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
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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".
FINANCIAL GUARANTEE INSURANCE
Financial guarantee insurance ("Financial Guarantee Insurance"), if any,
with respect to a series of Securities will be provided by one or more insurance
companies. Such Financial Guarantee Insurance will guarantee, with respect to
one or more classes of Securities of the related series, timely distributions of
interest and full distributions of principal on the basis of a schedule of
principal distributions set forth in or determined in the manner specified in
the related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Financial Guarantee Insurance will also guarantee against any
payment made to a Securityholder that is subsequently recovered as a "voidable
preference" payment under federal bankruptcy law. A copy of the Financial
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 Securities 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 Securities. Amounts in a Reserve Fund may be distributed to
Securityholders, 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 Securities. 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 Securities.
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 Securities--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 theprimary 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
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insurers under different state laws in accordance with different applicable
state forms, and therefore will not contain identical terms and conditions, the
basic terms thereof are dictated by respective state laws, and most such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. When a
Mortgaged Property is located at origination in a federally designated flood
area, each Agreement requires the Master Servicer to cause the borrower to
acquire and maintain flood insurance in an amount equal in general to the lesser
of (i) the amount necessary to fully compensate for any damage or loss to the
improvements which are part of the Mortgaged Property on a replacement cost
basis and (ii) the maximum amount of insurance available under the federal flood
insurance program, whether or not the area is participating in the program.
The hazard insurance policies covering the Mortgaged Properties typically
contain a co-insurance clause that in effect requires the insured at all times
to carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause generally provides that the insurer's
liability in the event of partial loss does not exceed the lesser of (i) the
replacement cost of the improvements less physical depreciation and (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
The Master Servicer will not require that a hazard or flood insurance
policy be maintained for any Cooperative Loan. Generally, the Cooperative is
responsible for maintenance of hazard insurance for the property owned by the
Cooperative, and the tenant-stockholders of that Cooperative do not maintain
individual hazard insurance policies. To the extent, however, that a Cooperative
and the related borrower on a Cooperative Note do not maintain such insurance or
do not maintain adequate coverage or any insurance proceeds are not applied to
the restoration of the damaged property, damage to such borrower's Cooperative
apartment or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Note.
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 Securityholders,
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.
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 Securities, 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 Securityholders. 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 Securityholders, 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 Securityholders, 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 Securityholders 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
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or undertake the obligation to make payments on the senior mortgages in the
event the mortgagor is in default thereunder, in either event adding the amounts
expended to the balance due on the junior loan, and may be subrogated to the
rights of the senior mortgagees. In addition, in the event that the foreclosure
of a junior mortgage triggers the enforcement of a "due-on-sale" clause 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.
Certain tax liens arising under the Code, may in certain circumstances
provide priority over the lien of a mortgage or deed of trust. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of single family mortgage loans by numerous
federal and some state consumer protection laws. These laws include the Federal
Truth-in-Lending Act, Regulation "Z", Real Estate Settlement Procedures Act,
Regulation "X", Equal Credit Opportunity Act, Regulation "B", Fair Credit
Billing Act, Fair Credit Housing 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.
In particular, the originators' failure to comply with certain requirements of
the Federal Truth-in-Lending Act, as implemented by Regulation Z, could subject
both originators and assignees of such obligations to monetary penalties and
could result in obligors' rescinding loans against either originators or
assignees.
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In addition, certain of the Mortgage Loans are also subject to the Home
Ownership and Equity Protection Act of 1994 (the "Homeownership Act") (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. The Homeownership Act requires certain additional
disclosures, specifies the timing of such disclosures and limits or prohibits
inclusion of certain provisions in mortgages subject to the Homeownership Act.
Remedies available to the mortgagor include monetary penalties, as well as
recission rights if the appropriate disclosures were not given as required or if
the particular mortgage includes provisions prohibited by law. The Homeownership
Act also provides that any purchaser or assignee of a mortgage covered by the
Homeownership Act is subject to all of the claims and defenses to loan payment,
whether under the Federal Truth-in-Lending Act, as amended by the Homeownership
Act or other law, which the borrower could assert against the original lender
unless the purchaser or assignee did not know and could not with reasonable
diligence have determined that the Mortgage Loan was subject to the provisions
of the Homeownership Act. The maximum damages that may be recovered under the
Homeownership Act from an assignee is the remaining amount of indebtedness plus
the total amount paid by the borrower in connection with the Mortgage Loan.
FOR COOPERATIVE LOANS
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are junior to senior mortgages or deeds of trust which are not part
of the Trust Fund. The rights of the Securityholders 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, the
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Real Estate Settlement Procedures Act, Regulation "X", the Fair Housing 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 particular,
the originators' failure to comply with certain requirements of the Federal
Truth-in- Lending Act, as implemented by Regulation Z, could subject both
originators and assignees of such obligations to monetary penalties and could
result in obligors' rescinding the Contracts against either the originators or
assignees. Further if such Contracts are deemed High Cost Loans within the
meaning of the Homeownership Act, they would be subject to the same provisions
of the Homeownership Act as Mortgage Loans as described in "--Anti-Deficiency
Legislation and Other Limitations on Lenders" above.
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 Securityholders.
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,
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in a Chapter 13 proceeding under the federal bankruptcy law, a court may prevent
a lender from repossessing a home, and, as part of the rehabilitation plan,
reduce the amount of the secured indebtedness to the market value of the home at
the time of bankruptcy (as determined by the court), leaving the party providing
financing as a general unsecured creditor for the remainder of the indebtedness.
A bankruptcy court may also reduce the monthly payments due under a contract or
change the rate of interest and time of repayment of the indebtedness.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, all the related
Mortgage Loans will contain due-on-sale clauses. These clauses permit the lender
to accelerate the maturity of the loan if the borrower sells, transfers, or
conveys the property without the prior consent of the lender. The enforceability
of these clauses has been impaired in various ways in certain states by statute
or decisional law. The ability of lenders and their assignees and transferees to
enforce due-on-sale clauses was addressed by the Garn-St Germain Depository
Institutions Act of 1982 (the "Garn-St Germain Act"), which was enacted on
October 15, 1982. This legislation, subject to certain exceptions, preempts
state constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses. The Garn-St Germain Act does "encourage" lenders to permit
assumptions of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
SINGLE-FAMILY LOANS AND MULTIFAMILY LOANS
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
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also prohibit the imposition of a prepayment penalty upon the acceleration of a
loan pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a Mortgage Loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the Mortgage Loans related to a series and the number of such Mortgage
Loans which may be outstanding until maturity.
TRANSFER OF MANUFACTURED HOMES
Generally, manufactured housing contracts contain provisions prohibiting
the sale or transfer of the related manufactured homes without the consent of
the obligee on the contract and permitting the acceleration of the maturity of
such contracts by the obligee on the contract upon any such sale or transfer
that is not consented to. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will, to the extent it has knowledge of such
conveyance or proposed conveyance, exercise or cause to be exercised its rights
to accelerate the maturity of the related Contracts through enforcement of
due-on-sale clauses, subject to applicable state law. In certain cases, the
transfer may be made by a delinquent obligor in order to avoid a repossession
proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the due-on-sale clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement 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.
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APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision that expressly
rejects application of the federal law. In addition, even where Title V is not
so rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor has been advised by counsel that a court interpreting Title V
would hold that mortgage loans originated on or after January 1, 1980 are
subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no Mortgage
Loans originated after the 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
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originate alternative mortgage instruments in accordance with the regulations
promulgated by the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision with respect to origination of alternative mortgage
instruments by federal savings and loan associations. Title VIII further
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
The Depositor has been advised by its counsel that it is their opinion that
a court interpreting Title VIII would hold that ARM Loans that were originated
by state-chartered lenders before the date of enactment of any state law or
constitutional provision rejecting applicability of Title VIII would not be
subject to state laws imposing restrictions or prohibitions on the ability of
state-chartered lenders to originate alternative mortgage instruments.
All of the ARM Loans that were originated by a state-chartered lender after
the enactment of a state law or constitutional provision rejecting the
applicability of Title VIII complied with applicable state law. All of the ARM
Loans that were originated by federally chartered lenders or that were
originated by state-chartered lenders prior to enactment of a state law or
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 Securityholders 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 Securityholders 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
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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 Securities, 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 Securities. 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.
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
Securities. 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
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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 Securityholders of the related Series.
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.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the material federal income tax
consequences of the purchase, ownership and disposition of the Certificates
offered hereunder 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. In addition, the following discussion represents an
interpretation of the law at the time of this Prospectus, and does not represent
an opinion of Thacher Proffitt & Wood, counsel to the Depositor, except with
respect to the first paragraph under "--REMICs--Classification of REMICs", the
first paragraph under "--REMICs--Tiered REMIC Structures", the first paragraph
under "--Notes", the first paragraph under --Grantor Trust Funds--Classification
of Grantor Trust Funds", the first paragraph under "--Partnership Trust
Funds--Classification of Partnership Trust Funds" and the first paragraph under
"--Partnership
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Trust Funds--Taxation of Debt Certificateholders--Treatment of the Debt
Certificates as Indebtedness" herein.
Further, the authorities on which this discussion, and the opinions
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, it is recommended that taxpayers 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." It is recommended that Certificateholders consult their own tax
advisors concerning the federal, state, local or other tax consequences to them
of the purchase, ownership and disposition of the Certificates offered
hereunder.
The following discussion addresses securities of four general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, that the Trustee will elect to have treated as a real estate
mortgage investment conduit ("REMIC") under Sections 860A through 860G (the
"REMIC Provisions") of the Internal Revenue Code of 1986 (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.
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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 inadvertently 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 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 any 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 of the Code. If
so, the related Prospectus Supplement will describe the Mortgage Loans that may
not be so treated. The REMIC Regulations do provide, however, that cash received
from payments on Mortgage Loans held pending distribution is 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
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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.
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 "constant yield" 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 reasonable 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" is interest that is unconditionally payable at least
annually (during the entire term of the instrument) at a single fixed rate, or
at a "qualified floating rate," an "objective rate," a combination
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of a single fixed rate and one or more "qualified floating rates" or one
"qualified inverse floating rate," or a combination of "qualified floating
rates" that does not operate in a manner that accelerates or defers interest
payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the Internal Revenue Service
(the "IRS").
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined below) for original issue discount is each monthly period that ends on
the day prior to each Distribution Date, in some cases, as a consequence of this
"long first accrual period," some or all interest payments may be required to be
included in the stated redemption price of the REMIC Regular Certificate and
accounted for as original issue discount. Because interest on REMIC Regular
Certificates must in any event be accounted for under an accrual method,
applying this analysis would result in only a slight difference in the timing of
the inclusion in income of the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns to the
Certificateholders and the IRS will be based on the position that the portion of
the purchase price paid for the interest accrued with respect to periods prior
to the Closing Date is treated as part of the overall cost of such REMIC Regular
Certificate (and not as a separate asset the cost of which is recovered entirely
out of interest received on the next Distribution Date) and that portion of the
interest paid on the first Distribution Date in excess of interest accrued for a
number of days corresponding to the number of days from the Closing Date to the
first Distribution Date should be included in the stated redemption price of
such REMIC Regular Certificate. However, the OID Regulations state that all or
some portion of such accrued interest may be treated as a separate asset the
cost of which is recovered entirely out of interest paid on the first
Distribution Date. It is unclear how an election to do so would be made under
the OID Regulations and whether such an election could be made unilaterally by a
Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
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
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REMIC Regular Certificates--Market Discount" for a description of such election
under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to the day prior to each Distribution Date and begins on the first day following
the immediately preceding accrual period (or in the case of the first such
period, begins on the Closing Date), a calculation will be made of the portion
of the original issue discount that accrued during such accrual period. The
portion of original issue discount that accrues in any accrual period will equal
the excess, if any, of (i) the sum of (A) the present value, as of the end of
the accrual period, of all of the distributions remaining to be made on the
REMIC Regular Certificate, if any, in future periods and (B) the distributions
made on such REMIC Regular Certificate during the accrual period of amounts
included in the stated redemption price, over (ii) the adjusted issue price of
such REMIC Regular Certificate at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence will be calculated (i) assuming that distributions on the REMIC Regular
Certificate will be received in future periods based on the Mortgage Loans being
prepaid at a rate equal to the Prepayment Assumption, (ii) using a discount rate
equal to the original yield to maturity of the Certificate and (iii) taking into
account events (including actual prepayments) that have occurred before the
close of the accrual period. 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
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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) in income as interest,
and to amortize premium, based on a constant yield method. If such an election
were made with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "Taxation of Owners of REMIC
Regular Certificates--Premium" below. Each of these elections to accrue
interest, discount and premium with respect to a Certificate on a constant yield
method or as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that 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.
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To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
PREMIUM
A REMIC Regular Certificate purchased at a cost (excluding any portion of
such cost attributable to accrued qualified stated interest) greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of such a REMIC Regular Certificate may elect under Section
171 of the Code to amortize such premium under the constant yield method over
the life of the Certificate. If made, such an election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related debt instrument, rather than as a separate interest deduction. The
OID Regulations also permit Certificateholders to elect to include all interest,
discount and premium in income based on a constant yield method, further
treating the Certificateholder as having made the election to amortize premium
generally. See "Taxation of Owners of REMIC Regular Certificates--Market
Discount" above. The Committee Report states that the same rules that apply to
accrual of market discount (which rules will require use of a Prepayment
Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether such Certificates have original issue
discount) will also apply in amortizing bond premium under Section 171 of the
Code.
REALIZED LOSSES
Under Section 166 of the Code, both corporate holders of the REMIC Regular
Certificates and noncorporate holders of the REMIC Regular Certificates that
acquire such Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses 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
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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
Although a REMIC is a separate entity for federal income tax purposes, a
REMIC generally is not subject to entity-level taxation, except with regard to
prohibited transactions and certain other transactions. See "--Prohibited
Transactions Tax and Other Possible REMIC Taxes" below. Rather, the taxable
income or net loss of a REMIC is generally taken into account by the holder of
the REMIC Residual Certificates. Accordingly, the REMIC Residual Certificates
will be subject to tax rules that differ significantly from those that would
apply if the REMIC Residual Certificates were treated for federal income tax
purposes as direct ownership interests in the Mortgage Loans or as debt
instruments issued by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
regard to the timing or amount of cash distributions by the REMIC. Ordinary
income derived from REMIC Residual Certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Code on the deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations, however,
do not provide for any such modifications.
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.
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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. Such disparity between income and distributions may not be offset by
corresponding losses or reductions of income attributable to the REMIC Residual
Certificateholder until subsequent tax years and, then, may not be completely
offset due to changes in the Code, tax rates or character of the income or loss.
TAXABLE INCOME OF THE REMIC
The taxable income of the REMIC will equal the income from the Mortgage
Loans and other assets of the REMIC plus any cancellation of indebtedness income
due to the allocation of realized losses to REMIC Regular Certificates, less the
deductions allowed to the REMIC for interest (including original issue discount
and reduced by any premium on issuance) on the REMIC Regular Certificates (and
any other class of REMIC Certificates constituting "regular interests" in the
REMIC not offered hereby), amortization of any premium on the Mortgage Loans,
bad debt losses with respect to the Mortgage Loans and, except as described
below, for servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount."
The issue price of a REMIC Certificate received in exchange for an interest in
the Mortgage Loans or other property will equal the fair market value of such
interests in the Mortgage Loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold, the
Trustee may be required to estimate the fair market value of such interests in
order to determine the basis of the REMIC in the Mortgage Loans and other
property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant yield basis. See "--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Mortgage Loans
with market discount that it holds.
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
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amortize any premium on the Mortgage Loans. Premium on any Mortgage Loan to
which such election applies may be amortized under a constant yield method,
presumably taking into account a Prepayment Assumption. Further, such an
election would not apply to any Mortgage Loan originated on or before September
27, 1985. Instead, premium on such a Mortgage Loan should be allocated among the
principal payments thereon and be deductible by the REMIC as those payments
become due or upon the prepayment of such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount," except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess "Issue Premium"), the net
amount of interest deductions that are allowed the REMIC in each taxable year
with respect to the REMIC Regular Certificates of such class will be reduced by
an amount equal to the portion of the Issue Premium that is considered to be
amortized or repaid in that year. Although the matter is not entirely certain,
it is likely that Issue Premium would be amortized under a constant yield method
in a manner analogous to the method of accruing original issue discount
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of a REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions Tax and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income) will not be applied at the REMIC level so that the REMIC will be allowed
deductions for servicing, administrative and other non-interest expenses in
determining its taxable income. All such expenses will be allocated as a
separate item to the holders of REMIC Certificates, subject to the limitation of
Section 67 of the Code. See "--Possible Pass-Through of Miscellaneous Itemized
Deductions" below. If the deductions allowed to the REMIC exceed its gross
income for a calendar quarter, such excess will be the net loss for the REMIC
for that calendar quarter.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS
The adjusted basis of a REMIC Residual Certificate will be equal to the
amount paid for such REMIC Residual Certificate, increased by amounts included
in the income of the REMIC Residual Certificateholder and decreased (but not
below zero) by distributions made, and by net losses allocated, to such REMIC
Residual Certificateholder.
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
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of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the REMIC. However, such bases increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may
not amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder, see "--Taxation of Owners of REMIC
Residual Certificates--General" above.
EXCESS INCLUSIONS
Any "excess inclusions" with respect to a REMIC Residual Certificate will
be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, 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
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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, excess inclusions
will not be permitted to be offset by the alternative tax net operating loss
deduction and 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.
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
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"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.
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. Except as 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.
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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 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
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interest in a REMIC or any similar interest in a "taxable mortgage pool" (as
defined in Section 7701(i) of the Code) during the period beginning six months
before, and ending six months after, the date of such sale, such sale will be
subject to the "wash sale" rules of Section 1091 of the Code. In that event, any
loss realized by the REMIC Residual Certificateholder on the sale will not be
deductible, but instead will be added to such REMIC Residual Certificateholder's
adjusted basis in the newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (a "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions a prohibited transaction means the
disposition of a Mortgage Loan, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the REMIC Certificates. It is not anticipated that any REMIC
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would be
subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property," determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer or Trustee in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling and Servicing Agreement 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
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corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents. Such a tax generally would
be imposed on the transferor of the REMIC Residual Certificate, except that
where such transfer is through an agent for a disqualified organization, the tax
would instead be imposed on such agent. However, a transferor of a REMIC
Residual Certificate would in no event be liable for such tax with respect to a
transfer if the transferee furnishes to the transferor an affidavit that the
transferee is not a disqualified organization and, as of the time of the
transfer, the transferor does not have actual knowledge that such affidavit is
false. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in such
entity are not held by disqualified organizations and (ii) information necessary
for the application of the tax described herein will be made available.
Restrictions on the transfer of REMIC Residual Certificates and certain other
provisions that are intended to meet this requirement will be included in the
Pooling and Servicing Agreement, and will be discussed more fully in any
Prospectus Supplement relating to the offering of any REMIC Residual
Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (ii) a statement under penalties of perjury that such record
holder is not a disqualified organization. For 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
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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.
The Trustee, as the tax matters person or as agent for the tax matters
person, subject to certain notice requirements and various restrictions and
limitations, generally will have the authority to act on behalf of the REMIC and
the REMIC Residual Certificateholders in connection with the administrative and
judicial review of items of income, deduction, gain or loss of the REMIC, as
well as the REMIC's classification. REMIC Residual Certificateholders generally
will be required to report such REMIC items consistently with their treatment on
the REMIC's tax return and may in some circumstances be bound by a settlement
agreement between the Trustee, as the tax matters person or 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. 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.
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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.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new regulations (the "New Withholding
Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Withholding
Regulations attempt to unify certification requirements and modify reliance
standards. The New Withholding Regulations will generally be effective for
payments made after December 31, 1999, subject to certain transition rules.
Prospective investors are urged to consult their tax advisors regarding the New
Withholding Regulations.
FOREIGN INVESTORS IN REMIC CERTIFICATES
A REMIC Regular Certificateholder that is not a "United States person" (as
defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not, unless otherwise disclosed in the
related Prospectus Supplement, be subject to United States federal income or
withholding tax in respect of a distribution on a REMIC Regular Certificate,
provided that the holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States person and providing the name and
address of such Certificateholder). For these purposes, "United States person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in, or under the laws of, the United States or
any political subdivision thereof (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.
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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.
NOTES
On or prior to the date of the related Prospectus Supplement with respect
to the proposed issuance of each series of Notes, Thacher Proffitt & Wood,
counsel to the Depositor, will deliver its opinion to the effect that, assuming
compliance with all provisions of the Indenture, Owner Trust Agreement and
certain related documents and upon issuance of the Notes, for federal income tax
purposes (i) the Notes will be treated as indebtedness and (ii) the Issuer, as
created pursuant to the terms and conditions of the Owner Trust Agreement, will
not be characterized as an association (or publicly traded partnership) taxable
as a corporation or as a taxable mortgage pool. The following discussion is
based in part upon the OID 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 Notes. For purposes of this tax
discussion, references to a "Noteholder" or a "holder" are to the beneficial
owner of a Note.
STATUS AS REAL PROPERTY LOANS
Notes held by 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); and (ii) Notes held by a real estate investment trust
will not constitute "real estate assets" within the meaning of Code section
856(c)(4)(A) and interest on Notes will not be considered "interest on
obligations secured by mortgages on real property" within the meaning of Code
section 856(c)(3)(B).
TAXATION OF NOTEHOLDERS
Notes 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 the Notes is not required to be reported under the accrual
method unless the holder otherwise used 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 the Notes. See "--REMICs
- --Taxation of Owners of REMIC Regular Certificates" and "-- Sales of REMIC
Certificates."
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
On or prior to the date of the related Prospectus Supplement with respect
to the proposed issuance of 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 and upon issuance of such Grantor Trust Certificates, 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.
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
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holders of Grantor Trust Fractional Interest Certificates issued with respect to
such Grantor Trust Fund will be referred to as a "Grantor Trust Strip
Certificate." A Grantor Trust Strip Certificate may also evidence a nominal
ownership interest in the principal of the Mortgage Loans constituting the
related Grantor Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
In the case of Grantor Trust Fractional Interest Certificates, unless
otherwise disclosed in the related Prospectus Supplement and subject to the
discussion below with respect to Buydown Mortgage Loans, counsel to the
Depositor will deliver an opinion that, in general, Grantor Trust Fractional
Interest Certificates will represent interests in (i) "loans . . . secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code; (ii) "obligation[s] (including any participation or Certificate of
beneficial ownership therein) which . . .[are] principally secured by an
interest in real property" within the meaning of Section 860G(a)(3) of the Code;
and (iii) "real estate assets" within the meaning of Section 856(c)(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
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Mortgage Loans (including amounts used to pay reasonable servicing fees and
other expenses) and will be entitled to deduct their shares of any such
reasonable servicing fees and other expenses. Because of stripped interests,
market or original issue discount, or premium, the amount includible in income
on account of a Grantor Trust Fractional Interest Certificate may differ
significantly from the amount distributable thereon representing interest on the
Mortgage Loans. Under Section 67 of the Code, an individual, estate or trust
holding a Grantor Trust Fractional Interest Certificate directly or through
certain pass-through entities will be allowed a deduction for such reasonable
servicing fees and expenses only to the extent that the aggregate of such
holder's miscellaneous itemized deductions exceeds two percent of such holder's
adjusted gross income. In addition, Section 68 of the Code provides that the
amount of itemized deductions otherwise allowable for an individual whose
adjusted gross income exceeds a specified amount will be reduced by the lesser
of (i) 3% of the excess of the individual's adjusted gross income over such
amount or (ii) 80% of the amount of itemized deductions otherwise allowable for
the taxable year. The amount of additional taxable income reportable by holders
of Grantor Trust Fractional Interest Certificates who are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Further, Certificateholders (other than corporations) subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining such
holder's alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple classes of Grantor Trust
Certificates (including Grantor Trust Strip Certificates) are issued, such fees
and expenses should be allocated among the classes of Grantor Trust Certificates
using a method that recognizes that each such class benefits from the related
services. In the absence of statutory or administrative clarification as to the
method to be used, it currently is intended to base information returns or
reports to the IRS and Certificateholders on a method that allocates such
expenses among classes of Grantor Trust Certificates with respect to each period
based on the distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates or
(ii) the Depositor or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a 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" is 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. The determination as to
whether original issue discount will be considered to be de minimis will be
calculated using the same test described in the REMIC discussion. See --Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount" above.
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 Master
Servicer or the Trustee in preparing information returns to the
Certificateholders and the IRS.
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 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 Master Servicer or the Trustee,
except as 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
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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 under rules similar to those described in "--Taxation of Owners of
REMIC Regular Certificates--Market Discount" above.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report will apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
Certificateholder's option: (i) on the basis of a constant yield method, (ii) in
the case of a Mortgage Loan issued without original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the Mortgage Loan as of the beginning of the accrual period, or
(iii) in the case of a Mortgage Loan issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
original issue discount accrued in the accrual period bears to the total
original issue discount remaining at the beginning of the accrual period. The
prepayment assumption, if any, used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. The effect
of using a prepayment assumption could be to accelerate the reporting of such
discount income. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a Mortgage Loan purchased at a discount in the
secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans may be considered to be de
minimis and, if so, will be includible in income under de minimis rules similar
to those described in "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above, with the exception that it is less
likely that a prepayment assumption will be used for purposes of such rules with
respect to the Mortgage Loans.
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
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under Section 171 of the Code to amortize using a constant yield method the
portion of such premium allocable to Mortgage Loans originated after September
27, 1985. Amortizable premium is treated as an offset to interest income on the
related debt instrument, rather than as a separate interest deduction. However,
premium allocable to Mortgage Loans originated before September 28, 1985 or to
Mortgage Loans for which an amortization election is not made, should be
allocated among the payments of stated redemption price on the Mortgage Loan and
be allowed as a deduction as such payments are made (or, for a Certificateholder
using the accrual method of accounting, when such payments of stated redemption
price are due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss, equal to the difference between
the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a prepayment assumption
is used to amortize such premium, it appears that such a loss would be
unavailable. Instead, if a prepayment assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption used, and the actual rate of prepayments.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES
The "stripped coupon" rules of Section 1286 of the Code will apply to the
Grantor Trust Strip Certificates. Except as described above in "--Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules
Apply," no regulations or published rulings under Section 1286 of the Code have
been issued and some uncertainty exists as to how it will be applied to
securities such as the Grantor Trust Strip Certificates. Accordingly, holders of
Grantor Trust Strip Certificates should consult their own tax advisors
concerning the method to be used in reporting income or loss with respect to
such Certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "Possible Application of 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
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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 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
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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, and would add to, or subtract from, such income any variation
between the payment actually received in such month and payment originally
projected to be made in such month.
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 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 or exchange of a Grantor Trust Certificate and its adjusted basis,
recognized on such sale or exchange of a Grantor Trust Certificate by an
investor who holds such Grantor Trust Certificate as a capital asset, will be
capital gain or loss, except to the extent of accrued and unrecognized market
discount, which will be treated as ordinary income, and (in the case of banks
and other financial institutions) except as provided under Section 582(c) of the
Code. The adjusted basis of a Grantor Trust Certificate generally will equal its
cost, increased by any income reported by the seller (including original issue
discount and market discount income) and reduced (but not below zero) by any
previously reported losses, any amortized premium and by any distributions with
respect to such Grantor Trust Certificate.
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.
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GRANTOR TRUST REPORTING
Except as set forth in the related Prospectus Supplement, the Master
Servicer or 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 Master Servicer or 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
Master Servicer or 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 IRS 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 IRS will agree with the Trust Fund's information reports of such
items of income and expense. Moreover, such information reports, even if
otherwise accepted as accurate by the IRS, 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.
Except as disclosed in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the Master Servicer or the Trustee.
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, except as 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
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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).
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
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as a partnership for purposes of federal and state income tax, franchise tax and
any other tax measured in whole or in part by income, with the assets of the
partnership being the assets held by the Partnership Trust Fund, the partners of
the partnership being the Certificateholders (including the Depositor), and the
Debt Certificates (if any) being debt of the partnership. However, the proper
characterization of the arrangement involving the Partnership Trust Fund, the
Partnership Certificates, the Debt Certificates, and the Depositor is not clear,
because there is no authority on transactions closely comparable to that
contemplated herein.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Certificates have certain
features characteristic of debt, the Partnership Certificates might be
considered debt of the Depositor or the Partnership Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Partnership Certificates as equity in a partnership, described below. The
following discussion assumes that the Partnership Certificates represent equity
interests in a partnership.
PARTNERSHIP TAXATION.
As a partnership, the Partnership Trust Fund will not be subject to federal
income tax. Rather, each Certificateholder will be required to separately take
into account such holder's allocated share of income, gains, losses, deductions
and credits of the Partnership Trust Fund. It is anticipated that the
Partnership Trust Fund's income will consist primarily of interest earned on the
Mortgage Loans (including appropriate adjustments for market discount, original
issue discount and bond premium) as described above under "-- Grantor Trust
Funds -- Taxation of Owners of Grantor Trust Fractional Interest Certificates -
If Stripped Bond Ruled Do Not Apply--", "-- Market Discount" and "--Premium")
and any gain upon collection or disposition of Mortgage Loans. The Partnership
Trust Fund's deductions will consist primarily of interest accruing with respect
to the Debt Certificates, servicing and other fees, and losses or deductions
upon collection or disposition of Debt Certificates.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Pooling and Servicing Agreement and related documents). The Pooling and
Servicing Agreement will provide, in general, that the Certificateholders will
be allocated taxable income of the Partnership Trust Fund for each Due Period
equal to the sum of (i) the interest that accrues on the Partnership
Certificates in accordance with their terms for such Due Period, including
interest accruing at the applicable pass-through rate for such Due Period and
interest on amounts previously due on the Partnership Certificates but not yet
distributed; (ii) any Partnership Trust Fund income attributable to discount on
the Mortgage Loans that corresponds to any excess of the principal amount of the
Partnership Certificates over their initial issue price; and (iii) any other
amounts of income payable to the Certificateholders for such Due Period. Such
allocation will be reduced by any amortization by the Partnership Trust Fund of
premium on Mortgage Loans that corresponds to any excess of the issue price of
Partnership Certificates over their principal amount. All remaining taxable
income of the Partnership Trust Fund will be allocated to the Depositor. Based
on the economic arrangement of the parties, this approach for allocating
Partnership Trust Fund income should be permissible under applicable Treasury
regulations, although no assurance can be given that the IRS would not require a
greater amount of income to be allocated to Certificateholders. Moreover, even
under the foregoing method of allocation, Certificateholders may be allocated
income equal to the entire pass-through rate plus the other items described
above even though the Trust Fund might not have sufficient cash to make current
cash distributions of such amount. Thus, cash basis holders will in effect be
required to report income from the Partnership Certificates on the 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.
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All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of the
Master Servicer but not interest expense) allocable to an individual, estate or
trust Certificateholder would be miscellaneous itemized deductions subject to
the limitations described above under "--Grantor Trust Funds -- Taxation of
Owners of Grantor Trust Fractional Interest Certificates." Accordingly, such
deductions might be disallowed to the individual in whole or in part and might
result in such holder being taxed on an amount of income that exceeds the amount
of cash actually distributed to such holder over the life of the Partnership
Trust Fund.
Discount income or premium amortization with respect to each Mortgage Loan
would be calculated in a manner similar to the description above under "--
Grantor Trust Funds -- Taxation of Owners of Grantor Trust Fractional Interest
Certificates - If Stripped Bond Rules Do Not Apply." Notwithstanding such
description, it is intended that the Partnership Trust Fund will make all tax
calculations relating to income and allocations to Certificateholders on an
aggregate basis with respect to all Mortgage Loans held by the Partnership Trust
Fund rather than on a Mortgage Loan-by-Mortgage Loan basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Partnership Trust Fund might be required to incur additional expense, but it is
believed that there would not be a material adverse effect on
Certificateholders.
DISCOUNT AND PREMIUM.
Unless indicated otherwise in the applicable Prospectus Supplement, it is
not anticipated that the Mortgage Loans will have been issued with original
issue discount and, therefore, the Partnership Trust Fund should not have
original issue discount income. However, the purchase price paid by the
Partnership Trust Fund for the Mortgage Loans may be greater or less than the
remaining principal balance of the Mortgage Loans at the time of purchase. If
so, the Mortgage Loans will have been acquired at a premium or discount, as the
case may be. See "--Grantor Trust Funds -- Taxation of Owners of Grantor Trust
Fractional Interest Certificates -- Market Discount" and "Premium." (As
indicated above, the Partnership Trust Fund will make this calculation on an
aggregate basis, but might be required to recompute it on a Mortgage
Loan-by-Mortgage Loan basis).
If the Partnership Trust Fund acquires the Mortgage Loans at a market
discount or premium, the Partnership Trust Fund will elect to include any such
discount in income currently as it accrues over the life of the Mortgage Loans
or to offset any such premium against interest income on the Mortgage Loans. As
indicated above, a portion of such market discount income or premium deduction
may be allocated to Certificateholders.
SECTION 708 TERMINATION.
Under Section 708 of the Code, the Partnership Trust Fund will be deemed to
terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, the Partnership Trust Fund will
be considered to distribute its assets to the partners, who would then be
treated as recontributing those assets to the Partnership Trust Fund, as a new
partnership. The Partnership Trust Fund will not comply with certain technical
requirements that might apply when such a constructive termination occurs. As a
result, the Partnership Trust Fund may be subject to certain tax penalties and
may incur additional expenses if it is required to comply with those
requirements. Furthermore, the Partnership Trust Fund might not be able to
comply due to 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
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Trust Fund (the "new partnership") in exchange for interests in the new
partnership. Such interests would be deemed distributed to the partners of the
old partnership in liquidation thereof, which would not constitute a sale or
exchange. It is not known when or whether such proposed Treasury regulations
will be adopted in final (or temporary) form.
DISPOSITION OF CERTIFICATES.
Generally, capital gain or loss will be recognized on a sale of Partnership
Certificates in an amount equal to the difference between the amount realized
and the seller's tax basis in the Partnership Certificates sold. A
Certificateholder's tax basis in an Partnership Certificate will generally equal
the holder's cost increased by the holder's share of Partnership Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Partnership Certificate. In addition, both the tax basis in the
Partnership Certificates and the amount realized on a sale of an Partnership
Certificate would include the holder's share of the Debt Certificates and other
liabilities of the Partnership Trust Fund. A holder acquiring Partnership
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Partnership Certificates, and, upon sale or other
disposition of some of the Partnership Certificates, allocate a portion of such
aggregate tax basis to the Partnership Certificates sold (rather than
maintaining a separate tax basis in each Partnership Certificate for purposes of
computing gain or loss on a sale of that Partnership Certificate).
Any gain on the sale of an Partnership Certificate attributable to the
holder's share of unrecognized accrued market discount on the Mortgage Loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Partnership Certificates that exceeds the
aggregate cash distributions with respect thereto, such excess will generally
give rise to a capital loss upon the retirement of the Partnership Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES.
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will be
apportioned among the Certificateholders in proportion to the principal amount
of Partnership Certificates owned by them as of the close of the last day of
such Due Period. As a result, a holder purchasing Partnership Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
The use of such a Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the Certificateholders.
The Depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
SECTION 731 DISTRIBUTIONS.
In the case of any distribution to a Certificateholder, no gain will be
recognized to that Certificateholder to the extent that the amount of any money
distributed with respect to such Certificate exceeds the adjusted basis of such
Certificateholder's interest in the Certificate. To the extent that the amount
of money distributed exceeds such Certificateholder's adjusted basis, gain will
be currently recognized. In the case of any distribution to a Certificateholder,
no loss will be
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recognized except upon a distribution in liquidation of a Certificateholder's
interest. Any gain or loss recognized by a Certificateholder will be capital
gain or loss.
SECTION 754 ELECTION.
In the event that a Certificateholder sells its Partnership Certificates at
a profit (loss), the purchasing Certificateholder will have a higher (lower)
basis in the Partnership Certificates than the selling Certificateholder had.
The tax basis of the Partnership Trust Fund's assets would not be adjusted to
reflect that higher (or lower) basis unless the Partnership Trust Fund were to
file an election under Section 754 of the Code. In order to avoid the
administrative complexities that would be involved in keeping accurate
accounting records, as well as potentially onerous information reporting
requirements, the Partnership Trust Fund will not make such election. As a
result, Certificateholder might be allocated a greater or lesser amount of
Partnership Trust Fund income than would be appropriate based on their own
purchase price for Partnership Certificates.
ADMINISTRATIVE MATTERS.
The Trustee is required to keep or have kept complete and accurate books of
the Partnership Trust Fund. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Partnership Trust Fund and will report each Certificateholder's
allocable share of items of Partnership Trust Fund income and expense to holders
and the IRS on Schedule K-1. The Trustee will provide the Schedule K-1
information to nominees that fail to provide the Partnership Trust Fund with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Partnership
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Partnership Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Certificates as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership
Certificates so held. Such information includes (i) the name, address and
taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly-owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Partnership Certificates that were held, bought or sold on behalf of such person
throughout the year. In addition, brokers and financial institutions that hold
Partnership Certificates through a nominee are required to furnish directly to
the Trustee information as to themselves and their ownership of Partnership
Certificates. A clearing agency registered under Section 17A of the Exchange Act
is not required to furnish any such information statement to the Partnership
Trust Fund. The information referred to above for any calendar year must be
furnished to the Partnership Trust Fund on or before the following January 31.
Nominees, brokers and financial institutions that fail to provide the
Partnership Trust Fund with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in the Pooling
and Servicing Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may be
precluded from separately litigating a proposed adjustment to the items of the
Partnership Trust
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Fund. An adjustment could also result in an audit of a Certificateholder's
returns and adjustments of items not related to the income and losses of the
Partnership Trust Fund.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS.
It is not clear whether the Partnership Trust Fund would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to non-U.S. persons, because there is no clear
authority dealing with that issue under facts substantially similar to those
described herein. Although it is not expected that the Partnership Trust Fund
would be engaged in a trade or business in the United States for such purposes,
the Partnership Trust Fund will withhold as if it were so engaged in order to
protect the Partnership Trust Fund from possible adverse consequences of a
failure to withhold. The Partnership Trust Fund expects to withhold on the
portion of its taxable income that is allocable to foreign Certificateholders
pursuant to Section 1446 of the Code, as if such income were effectively
connected to a U.S. trade or business, at a rate of 35% for foreign holders that
are taxable as corporations and 39.6% for all other foreign holders. Amounts
withheld will be deemed distributed to the foreign certificateholders.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Partnership Trust Fund to change
its withholding procedures. In determining a holder's withholding status, the
Partnership Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Partnership Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit that
number to the Partnership Trust Fund on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign holder generally would be entitled to
file with the IRS a claim for refund with respect to taxes withheld by the
Partnership Trust Fund, taking the position that no taxes were due because the
Partnership Trust Fund was not engaged in a U.S. trade or business. However,
interest payment made (or accrued) to a Certificateholder who is a foreign
person generally will be considered guaranteed payments to the extent such
payments are determined without regard to the income of the Partnership Trust
Fund. If these interest payments are properly characterized as guaranteed
payments, then the interest will not be considered "portfolio interest." As a
result, Certificateholders who are foreign persons will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
BACKUP WITHHOLDING.
Distributions made on the Partnership Certificates and proceeds from the
sale of the Partnership Certificates will be subject to a "backup" withholding
tax of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A CERTIFICATEHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF REMIC CERTIFICATES, GRANTOR TRUST CERTIFICATES, PARTNERSHIP
CERTIFICATES AND DEBT CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences", potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
Securities 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 Securities 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 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
Securities 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 the Securities, 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
the 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
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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. In addition, the DOL
Regulations provide that the term "equity interest" means any interest in an
entity other than an instrument which is treated as indebtedness under
applicable local law and which has no "substantial equity features". Under the
DOL Regulations, Plan Assets will be deemed to include an interest in the
instrument evidencing the equity interest of a Plan (such as a Certificate or a
Note with "substantial equity features"), and, because of the factual nature of
certain of the rules set forth in the DOL Regulations, Plan Assets may be deemed
to include an interest in the underlying assets of the entity in which a Plan
acquires an interest (such as the Trust Fund). Without regard to whether the
Notes are characterized as equity interests, the purchase, sale and holding of
Notes by or on behalf of a Plan could be considered to give rise to a prohibited
transaction if the Issuer, the Trustee or any of their respective affiliates is
or becomes a Party in Interest with respect to such Plan. Neither Plans nor
persons investing Plan Assets should acquire or hold Securities 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 the 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 Securities 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.
The DOL issued an individual exemption, Prohibited Transaction Exemption
91-23 (56 Fed. Reg. 15936, April 18, 1991) (the "Exemption"), to Salomon Smith
Barney Inc. (formerly known as Smith Barney 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
Smith Barney Inc., (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with Salomon
Smith Barney 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 Rating Group, Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc.
(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
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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 the 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 the Certificates by or on
behalf of a Plan or with Plan Assets.
Any transferee of the Certificates will be deemed to have represented that
either (a) such transferee is not a Plan and is not purchasing such Certificates
by or 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
Master Servicer, the Depositor or the Trustee to any obligation in addition to
those undertaken in the related Agreement. 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
disposition in the secondary market of Certificates by a Plan or with Plan
Assets or the continued holding of a Certificate 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
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(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;
(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:
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(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 Account falls below the minimum level specified in the
Agreement or an event of default occurs;
(7) amounts transferred to any Pre-Funding Account and/or capitalized
interest account used in connection with the pre-funding may be invested
only in 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 Plan 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
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 Securities 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)
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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
Securities 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 Securities after the date which is 18 months
after the date the 401(c) Regulations become final.
REPRESENTATION FROM PLANS INVESTING IN NOTES WITH "SUBSTANTIAL EQUITY FEATURES"
OR CERTAIN SECURITIES
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 Securities, such as Notes with "substantial equity features,"
Subordinate Securities, REMIC Residual Certificates, any Securities which are
not rated in one of the three highest generic rating categories by the Exemption
Rating Agencies, transfers of any such Securities 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 Securities 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 Securities 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 Agreement and
the following statements are correct: (i) the transferee is an insurance
company; (ii) the source of funds used to purchase such Securities is an
"insurance company general account" (as such term is defined in PTCE 95-60);
(iii) the conditions set forth in PTCE 95-60 have been satisfied; and (iv) 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 Securities.
An opinion of counsel or certification will not be required with respect to
the purchase of DTC registered Securities. Any purchaser of a DTC registered
Security will be deemed to have represented by such purchase that either (a)
such purchaser is not a Plan and is not purchasing such Securities on behalf of,
or with Plan Assets of, any Plan or (b) the purchase of any such Security 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.
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TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax-Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusion" of a REMIC allocated to a REMIC Residual Certificate and held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to federal
income tax. See "Federal Income Tax Consequences--REMICs--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions" above.
CONSULTATION WITH COUNSEL
There can be no assurance that any DOL exemption will apply with respect to
any particular Plan that acquires the Securities or, even if all the conditions
specified therein were satisfied, that any such exemption would apply to
transactions involving the 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 Securities. Neither the Depositor, the Trustee, the Master
Servicer nor any of their respective affiliates will make any representation to
the effect that the Securities satisfy all legal requirements with respect to
the investment therein by Plans generally or any particular Plan or to the
effect that the Securities are an appropriate investment for Plans generally or
any particular Plan.
BEFORE PURCHASING THE SECURITIES, 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 WOULD BE SATISFIED AND (B) IN THE CASE OF A SECURITY PURCHASED UNDER THE
EXEMPTION, THE SECURITY 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 401(C) OF ERISA, THE PLAN FIDUCIARY SHOULD CONSIDER ITS GENERAL
FIDUCIARY OBLIGATIONS UNDER ERISA IN DETERMINING WHETHER TO PURCHASE THE
SECURITIES ON BEHALF OF A PLAN.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Securities will specify which
classes of Securities 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 Securities that is not rated in one of the two
highest rating categories by one or more nationally recognized statistical
rating agencies or that represents an interest in a Trust Fund that includes
junior Mortgage Loans will not constitute "mortgage related securities" for
purposes of SMMEA "Mortgage related securities" are legal investments to the
same extent that, under applicable law, obligations issued by or guaranteed as
to principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, insurance companies and pension funds created pursuant
to or existing under the laws of the United States or of any state, the
authorized investments of which are subject to state regulation). Under SMMEA,
if a state enacted legislation prior to October 3, 1991 specifically limiting
the legal investment authority of any such entities with respect to "mortgage
related securities", the Securities 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
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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.
On April 23, 1998, the Federal Financial Institutions Examination Council
issued a revised supervisory policy statement (the "1998 Policy Statement")
applicable to all depository institutions, setting forth guidelines for
investments in "high-risk mortgage securities". The 1998 Policy Statement has
been adopted by the Federal Reserve Board, the Office of the Comptroller of the
Currency, the FDIC, the National Credit Union Administration (the "NCUA") and
the Office of Thrift Supervision (the "OTS") with an effective date of May 26,
1998. The 1998 Policy Statement rescinds a 1992 policy statement that had
required, prior to purchase, a depository institution 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. The 1998 Policy Statement eliminates former constraints on
investing in certain "high-risk" mortgage derivative products and substitutes
broader guidelines for evaluating and monitoring investment risk.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps," which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Securities. The OTS is, however, proposing to adopt revised requirements based
on the 1998 Policy Statement. In addition, the NCUA has issued regulations
governing federal credit union investments which prohibit investment in certain
specified types of securities, which may include certain classes of Securities.
Similar policy statements have been issued by regulators having jurisdiction
over other types of depository institutions.
Prospective investors in the Securities, including in particular the
classes of Securities that do not constitute "mortgage related securities" for
purposes of SMMEA should consider the matters discussed in the following
paragraph.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS IN DETERMINING WHETHER
AND TO WHAT EXTENT THE SECURITIES CONSTITUTE LEGAL INVESTMENTS FOR 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 Securities offered hereby and by the Supplements to this Prospectus
will be offered in series. The distribution of the Securities 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 Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Salomon Smith
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Barney Inc. ("Salomon Smith Barney") 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
Securities agreed to be purchased by purchasers pursuant to purchase agreements
acceptable to the Depositor. In connection with the sale of the Securities,
underwriters may receive compensation from the Depositor or from purchasers of
the Securities 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 Securities
will be distributed by Salomon Smith Barney acting as agent or in some cases as
principal with respect to Securities which it has previously purchased or agreed
to purchase. If Salomon Smith Barney acts as agent in the sale of Securities,
Salomon Smith Barney will receive a selling commission with respect to each
series of Securities, 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 Securities will be
disclosed in the related Prospectus Supplement. To the extent that Salomon Smith
Barney elects to purchase Securities as principal, Salomon Smith Barney 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 Securities of such series.
The Depositor will indemnify Salomon Smith Barney and any underwriters
against certain civil liabilities, including liabilities under the Securities
Act of 1933, or will contribute to payments Salomon Smith Barney and any
underwriters may be required to make in respect thereof.
In the ordinary course of business, Salomon Smith Barney 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 Securities.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, 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 Securities. Securityholders should consult
with their legal advisors in this regard prior to any such reoffer or sale.
As to each series of Securities, 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 Securities 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.
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INDEX OF PRINCIPAL DEFINITIONS
Page(s) on Which
Term is Defined
in the
Term Prospectus
- ---- ----------------
1998 Policy Statement ...................................................141
401(c) Regulations ......................................................138
Accrual Securities ........................................................7
Accrued Certificate Interest .............................................55
Accrued Note Interest ....................................................55
Accrued Security Interest ................................................55
Agency Securities .........................................................1
Agreement ................................................................46
ARM Loans .............................................................8, 25
Available Distribution Amount ............................................54
Average Interest Rate ...................................................137
Bankruptcy Amount ........................................................70
BIF ......................................................................43
Buydown Account ......................................................17, 53
Buydown Funds ........................................................17, 28
Buydown Mortgage Loans ...............................................17, 28
Buydown Period .......................................................17, 28
Call Class .................................................. 12, 24, 39, 69
Call Price ...................................................... 13, 24, 69
Cash Flow Agreement ...............................................1, 11, 77
Certificate ..............................................................46
Certificate Account ..................................................10, 51
Certificate Principal Balance ............................................55
Certificate Register .....................................................54
Certificateholders ....................................................4, 59
Certificates ..............................................................5
Charter Act ..............................................................34
Class Exemptions ........................................................138
Clean-up Call.................................................... 12, 24, 69
Closing Date ............................................................101
Code ..............................................................7, 47, 99
Commission ................................................................4
Committee Report ........................................................101
Contingent Payment Regulations ..........................................125
Contracts ................................................................25
Contributions Tax .......................................................113
Cooperative ...........................................................8, 25
Cooperative Loans .....................................................8, 25
Cooperative Notes ........................................................30
Cooperative Unit .........................................................25
Credit Support .......................................................11, 47
Cut-off Date .............................................................11
Defaulted Mortgage Amount ................................................70
Deficient Valuation ......................................................56
Deleted Mortgage Loan ....................................................49
Depositor ................................................................25
Determination Date .......................................................54
Distribution Date ........................................................11
DOL .....................................................................134
DOL Regulations .........................................................134
DTC ......................................................................46
DTC Registered Securities ................................................46
Due Period ...............................................................54
Equity Certificates .......................................................5
ERISA ...............................................................15, 134
ERISA Permitted Investments .............................................138
ERISA Plans .............................................................134
143
<PAGE>
Page(s) on Which
Term is Defined
in the
Term Prospectus
- ---- ----------------
Event of Default .........................................................66
Excluded Plan ...........................................................136
Exemption ...........................................................15, 135
Exemption Rating Agencies ...............................................135
FDIC .....................................................................43
FHA .......................................................................9
FHA Loans ................................................................30
FHLMC .....................................................................1
FHLMC Act ................................................................32
FHLMC Certificates ........................................................9
Finance Company ..........................................................37
Financial Guarantee Insurance ............................................77
FNMA ......................................................................1
FNMA Certificates .........................................................9
FTC Rule .................................................................92
Funding Agreement .....................................................1, 37
Garn-St Germain Act ......................................................93
GNMA ......................................................................1
GNMA Certificates .........................................................9
GNMA Issuer ..............................................................31
Grantor Trust Certificates ...........................................13, 99
Grantor Trust Fractional Interest Certificate ...........................117
Grantor Trust Fractional Interest Certificates ...........................14
Grantor Trust Fund .......................................................99
Grantor Trust Strip Certificate .........................................118
Grantor Trust Strip Certificates .........................................14
Guaranty Agreement .......................................................31
High LTV Loans ...........................................................27
Holder-in-Due-Course .....................................................92
Housing Act ..............................................................30
HUD ......................................................................79
Indenture .................................................................5
Insurance Instruments ....................................................59
Insurance Proceeds .......................................................52
Interest Rate .........................................................8, 25
IRS .....................................................................102
Issue Premium ...........................................................108
Issuer ....................................................................5
Letter of Credit Bank ....................................................72
Liquidated Loan ..........................................................56
Liquidation Proceeds .....................................................52
Loan-to-Value Ratio ......................................................26
Lockout Period ...........................................................40
Manufacturer's Invoice Price .............................................27
Mark-to-Market Regulations ..............................................111
Master Servicer ...........................................................5
Mortgage Loan Seller .....................................................25
Mortgage Loans .........................................................1, 7
Mortgage Notes ...........................................................29
Mortgage Pool .............................................................7
Mortgaged Properties ..................................................8, 25
Mortgages ................................................................29
Multifamily Loans ........................................................25
Multifamily Properties ...................................................25
NCUA ....................................................................141
Net Interest Rate ........................................................48
New Withholding Regulations .............................................116
Nonrecoverable Advance ...................................................57
144
<PAGE>
Page(s) on Which
Term is Defined
in the
Term Prospectus
- ---- ----------------
Note Interest Rate ........................................................6
Note Principal Balance ...................................................55
Note Register ............................................................54
Noteholders ...........................................................4, 59
Notes .....................................................................5
OID Regulations ..........................................................99
Originator ...............................................................25
OTS .....................................................................141
Owner Trust Agreement .....................................................5
Owner Trustee .............................................................5
Parties in Interest .....................................................134
Pass-Through Rate .........................................................6
Permitted Investments ....................................................51
Plan .....................................................................15
Plan Assets .............................................................134
Plans ...................................................................134
PMBS Agreement ...........................................................36
PMBS Issuer ..............................................................36
PMBS Servicer ............................................................36
PMBS Trustee .............................................................36
Pre-Funding Account ......................................................56
Pre-Funding Limit .......................................................137
Pre-Funding Period ......................................................137
Prepayment Assumption ..............................................101, 121
Prepayment Period ........................................................39
Principal Balance .....................................................6, 55
Private Mortgage-Backed Securities ........................................1
Prohibited Transactions Tax .............................................113
PTCE ....................................................................138
PTCE 83-1 ...............................................................138
Purchase Price ...........................................................45
Rating Agency ............................................................47
Record Date ..............................................................54
Related Proceeds .........................................................57
Relief Act ...............................................................96
REMIC ....................................................................99
REMIC Certificates .......................................................99
REMIC Provisions .........................................................99
REMIC Regular Certificates ...........................................13, 99
REMIC Regulations ........................................................99
REMIC Residual Certificates ..........................................13, 99
Reserve Fund .............................................................77
Reserve Funds ............................................................71
Retained Interest ........................................................46
SAIF .....................................................................43
Sales of Grantor Trust Certificates .....................................120
Salomon Smith Barney ................................................15, 142
Scheduled Principal Balance ..............................................71
Securities .............................................................1, 5
Security Interest Rate ....................................................6
Security Register ........................................................54
Securityholders .......................................................4, 58
Senior Liens .............................................................26
Senior Percentage ........................................................56
Senior Securities .....................................................6, 47
Senior/Subordinate Series ................................................47
Servicing Default ........................................................66
Single Family Loans ......................................................25
145
<PAGE>
Page(s) on Which
Term is Defined
in the
Term Prospectus
- ---- ----------------
Single Family Properties .................................................25
SMMEA ...............................................................15, 140
Special Hazard Amount ....................................................70
Special Hazard Realized Losses ...........................................71
Special Hazard Subordination Amount ......................................71
Stated Principal Balance .................................................45
Strip Securities ......................................................6, 47
Stripped Interest ........................................................39
Sub-Servicer .............................................................60
Sub-Servicing Account ....................................................51
Sub-Servicing Agreement ..................................................61
Subordinate Securities ................................................6, 47
Subsequent Mortgage Loans ...............................................137
Substitute Mortgage Loan .................................................49
Tax Favored Plans .......................................................134
Tax-Exempt Investor .....................................................140
Tiered REMICs ...........................................................100
Title V ..................................................................95
Title VIII ...............................................................95
Trust Fund .............................................................1, 6
Trust Fund Asset ..........................................................6
Trust Fund Assets .........................................................1
Trustee ...................................................................5
UBTI ....................................................................140
Underwriter .............................................................135
VA Loans .................................................................30
Window Period Loans ......................................................93
146
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
Subject to Completion, Dated November 10, 1998
[VERSION 2]
MORTGAGE PASS-THROUGH CERTIFICATES (ISSUABLE IN SERIES)
Principal and interest with respect to Certificates will be distributable
monthly, quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the
Certificates of any series will be made only from the assets of the related
Trust Fund (as defined herein).
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
The Certificates offered hereby and by Supplements to this Prospectus (the
"Offered Certificates") 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 trust fund (with respect to any series, the "Trust Fund")
consisting of a segregated pool of one or more of various types of multifamily
or commercial mortgage loans (the "Mortgage Loans"), mortgage-backed securities
("MBS") evidencing interests in, or secured by pledges of, one or more of
various types of multifamily or commercial mortgage loans, securities evidencing
interests in, or secured by pledges of, MBS (the "Tiered MBS") or a combination
of Mortgage Loans, MBS and Tiered MBS (with respect to any series, collectively,
"Mortgage Assets").
Each series of Certificates will consist of one or more classes of Certificates
that may (i) provide for the accrual of interest thereon based on fixed,
variable or adjustable rates; (ii) be senior or subordinate to one or more other
classes of Certificates in respect of certain distributions on the Certificates;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions; (iv) be entitled to interest
distributions, with disproportionately low, nominal or no principal
distributions; (v) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events, such as the
retirement of one or more other classes of Certificates of such series; (vi)
provide for distributions of principal sequentially, or based on specified
payment schedules or other methodologies, to the extent of available funds;
and/or (vii) provide for cash distributions based on available funds, in each
case as described in the related Prospectus Supplement. Any such classes may
include classes of Offered Certificates. If so specified in the related
Prospectus Supplement, the Trust Fund for a series of Certificates may include
letters of credit, insurance policies, guarantees, reserve funds or other types
of credit support, or any combination thereof (with respect to any series,
collectively, "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"). See "Description of the
Trust Funds", "Description of the Certificates" and "Description of Credit
Support".
The Certificates of each series will not represent an obligation of or interest
in the Depositor, any Master Servicer, any Special Servicer or any of their
respective affiliates, except to the limited extent described herein and in the
related Prospectus Supplement. Neither the Certificates nor any assets in the
related Trust Fund will be guaranteed or insured by any governmental agency or
instrumentality or by any other person, unless otherwise provided in the related
Prospectus Supplement. The assets in 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 also "Federal Income Tax Consequences" herein.
The yield on each class of Certificates of a series will be affected by, among
other things, the rate of payment of principal (including prepayments) on the
Mortgage Assets in the related Trust Fund and the timing of receipt of such
payments as described under the caption "Yield Considerations" herein and in the
related Prospectus Supplement. A Trust Fund may be subject to early termination
under the circumstances described herein and in the related Prospectus
Supplement.
-----------------------------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE 14 OF THIS PROSPECTUS AND SUCH INFORMATION AS MAY BE SET FORTH
UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS SUPPLEMENT BEFORE
PURCHASING ANY OFFERED
CERTIFICATE.
-----------------------------
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 ratings 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 SMITH BARNEY
- --------------------------------------
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS MAY NOT BE USED TO
CONSUMMATE SALES OF A SERIES OF OFFERED CERTIFICATES UNLESS ACCOMPANIED BY A
PROSPECTUS SUPPLEMENT.
The date of this Prospectus is
<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 OFFERED
CERTIFICATES OR AN OFFER OF THE OFFERED 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>
PROSPECTUS SUPPLEMENT.............................................................................................5
AVAILABLE INFORMATION.............................................................................................5
REPORTS TO CERTIFICATEHOLDERS.....................................................................................5
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.................................................................5
SUMMARY OF PROSPECTUS.............................................................................................7
RISK FACTORS.....................................................................................................14
Limited Liquidity.......................................................................................14
Limited Assets..........................................................................................14
Average Life of Certificates; Prepayments; Yields.......................................................14
Limited Nature of Ratings...............................................................................15
Risks Associated with Certain Mortgage Loans and Mortgaged Properties...................................15
Delinquent and Non-Performing Mortgage Loans............................................................16
Junior Mortgage Loans...................................................................................17
Balloon Payments........................................................................................17
Obligor Default.........................................................................................17
Mortgagor Type..........................................................................................17
Credit Support Limitations..............................................................................17
Due-on-Sale Clauses and Assignments of Leases and Rents.................................................18
Environmental Risks.....................................................................................18
ERISA Considerations....................................................................................18
Federal Tax Considerations Regarding REMIC Residual Certificates........................................19
Control.................................................................................................19
Book-Entry Registration.................................................................................19
DESCRIPTION OF THE TRUST FUNDS...................................................................................20
Mortgage Assets.........................................................................................20
Mortgage Loans..........................................................................................20
MBS and Tiered MBS......................................................................................23
Certificate Accounts....................................................................................24
Credit Support..........................................................................................24
Cash Flow Agreements....................................................................................24
USE OF PROCEEDS..................................................................................................24
YIELD CONSIDERATIONS.............................................................................................24
General.................................................................................................24
Pass-Through Rate.......................................................................................25
Timing of Payment of Interest and Principal.............................................................25
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Principal Prepayments...................................................................................25
Prepayments--Maturity and Weighted Average Life.........................................................26
Other Factors Affecting Weighted Average Life...........................................................27
Negative Amortization...................................................................................28
THE DEPOSITOR....................................................................................................28
DESCRIPTION OF THE CERTIFICATES..................................................................................28
General.................................................................................................28
Distributions...........................................................................................28
Available Distribution Amount...........................................................................29
Distributions of Interest on the Certificates...........................................................30
Distributions of Principal of the Certificates..........................................................30
Distributions on the Certificates of Prepayment Premiums or in Respect of Equity Participations
...............................................................................................31
Distributions in Respect of Spread Certificates.........................................................31
Allocation of Losses and Shortfalls.....................................................................31
Advances in Respect of Delinquencies....................................................................31
Reports to Certificateholders...........................................................................32
Termination.............................................................................................33
Book-Entry Registration and Definitive Certificates.....................................................34
DESCRIPTION OF THE AGREEMENTS....................................................................................35
Assignment of Mortgage Assets; Repurchases..............................................................35
Representations and Warranties; Repurchases.............................................................36
Certificate Account.....................................................................................37
Collection and Other Servicing Procedures...............................................................40
Sub-Servicers...........................................................................................41
Special Servicers.......................................................................................41
Realization Upon Defaulted Whole Loans..................................................................42
Hazard Insurance Policies...............................................................................44
Due-on-Sale and Due-on-Encumbrance Provisions...........................................................45
Retained Interest; Servicing Compensation and Payment of Expenses.......................................45
Evidence as to Compliance...............................................................................46
Certain Matters Regarding a Master Servicer and the Depositor...........................................46
Events of Default.......................................................................................47
Rights Upon Event of Default............................................................................48
Amendment...............................................................................................48
List of Certificateholders..............................................................................49
The Trustee.............................................................................................49
Duties of the Trustee...................................................................................49
Certain Matters Regarding the Trustee...................................................................49
Resignation and Removal of the Trustee..................................................................49
DESCRIPTION OF CREDIT SUPPORT....................................................................................50
General.................................................................................................50
Subordinate Certificates................................................................................50
Cross-Support Provisions................................................................................50
Insurance or Guarantees with Respect to Mortgage Loans..................................................51
Letter of Credit........................................................................................51
Insurance Policies and Surety Bonds.....................................................................51
Reserve Funds...........................................................................................51
Credit Support with respect to MBS and Tiered MBS.......................................................52
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS..........................................................................52
General.................................................................................................52
Types of Mortgage Instruments...........................................................................52
Leases and Rents........................................................................................53
Personalty..............................................................................................53
Foreclosure.............................................................................................53
Bankruptcy Laws.........................................................................................56
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Environmental Considerations............................................................................57
Due-on-Sale and Due-on-Encumbrance......................................................................59
Subordinate Financing...................................................................................59
Default Interest and Limitations on Prepayments.........................................................59
Applicability of Usury Laws.............................................................................60
Soldiers' and Sailors' Civil Relief Act of 1940.........................................................60
Forfeitures in Drug and RICO Proceedings................................................................60
FEDERAL INCOME TAX CONSEQUENCES..................................................................................60
General.................................................................................................60
REMICS..................................................................................................61
Grantor Trust Funds.....................................................................................75
STATE AND OTHER TAX CONSIDERATIONS...............................................................................84
ERISA CONSIDERATIONS.............................................................................................84
LEGAL INVESTMENT.................................................................................................88
METHOD OF DISTRIBUTION...........................................................................................89
LEGAL MATTERS....................................................................................................90
FINANCIAL INFORMATION............................................................................................90
RATING...........................................................................................................90
INDEX OF PRINCIPAL DEFINITIONS...................................................................................91
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES COVERED BY SUCH PROSPECTUS
SUPPLEMENT, WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE
REQUIRED TO DELIVER SUCH PROSPECTUS SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS AND PROSPECTUS
SUPPLEMENT WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
4
<PAGE>
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement
relating to the Offered Certificates of each series will, among other things,
set forth with respect to such Certificates, as appropriate: (i) a description
of the class or classes of Certificates, the payment provisions with respect to
each such class and the Pass-Through Rate or method of determining the
Pass-Through Rate with respect to each such class; (ii) the aggregate principal
amount and distribution dates relating to such series and, if applicable, the
initial and final scheduled distribution dates for each class; (iii) information
as to the assets comprising the Trust Fund, including the general
characteristics of the assets included therein, including the Mortgage Assets
and any Credit Support and Cash Flow Agreements (with respect to the
Certificates of any series, the "Trust Assets"); (iv) the circumstances, if any,
under which the Trust Fund may be subject to early termination; (v) additional
information with respect to the method of distribution of the Offered
Certificates; (vi) whether one or more REMIC elections will be made and
designation of the regular interests and residual interests; (vii) the aggregate
original percentage ownership interest in the Trust Fund to be evidenced by each
class of Certificates; (viii) information as to any Master Servicer, any Special
Servicer (or provision for the appointment thereof) and the Trustee, as
applicable; (ix) information as to the nature and extent of subordination with
respect to any class of Certificates that is subordinate in right of payment to
any other class; and (x) whether such Certificates will be initially issued in
definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") 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. 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.
REPORTS TO CERTIFICATEHOLDERS
The Master Servicer or the Trustee will be required to mail to holders
of Offered Certificates of each series periodic unaudited reports concerning the
related Trust Fund. Unless and until definitive Certificates are issued, or
unless otherwise provided in the related Prospectus Supplement, such reports
will be sent on behalf of the related Trust Fund to a nominee of The Depository
Trust Company ("DTC") and registered holder of the Offered Certificates,
pursuant to the applicable Agreement. Such reports may be available to holders
of interests in the Certificates (the "Certificateholders") upon request to
their respective DTC participants. See "Description of the Certificates--Reports
to Certificateholders" and "Description of the Agreements--Evidence as to
Compliance". The Depositor will file or cause to be filed with the Commission
such periodic reports with respect to each Trust Fund as are required under the
Exchange Act, and the rules and regulations of the Commission thereunder.
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 interests
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
5
<PAGE>
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.
6
<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 Smith Barney Holdings Inc. and
an affiliate of Salomon Smith Barney Inc.
See "The Depositor".
Master Servicer.......................The master servicer (the "Master
Servicer"), if any, for each series of
Certificates, which may be an affiliate of
the Depositor, will be named in the
related Prospectus Supplement. See
"Description of the Agreements--Collection
and Other Servicing Procedures".
Special Servicer......................The special servicer (the "Special
Servicer"), if any, for each series of
Certificates, which may be an affiliate of
the Depositor, will be named, or the
circumstances in accordance with which a
Special Servicer will be appointed will be
described, in the related Prospectus
Supplement. See "Description of the
Agreements--Special Servicers".
Trustee...............................The trustee (the "Trustee") for each
series of Certificates will be named in
the related Prospectus Supplement. See
"Description of the Agreements--The
Trustee".
The Trust Fund........................Each series of Certificates will represent
in the aggregate the entire beneficial
ownership interest in a Trust Fund
consisting primarily of:
A. Mortgage Assets..............The Mortgage Assets with respect to each
series of Certificates will consist of a
pool of multifamily and/or commercial
mortgage loans (collectively, the
"Mortgage Loans"), mortgage participation
certificates, mortgage pass-through
certificates or other mortgage-backed
securities ("MBS") evidencing interests in
or secured by pledges of multifamily
and/or commercial mortgage loans,
participation certificates, pass-through
certificates or other securities
evidencing an interest in, or secured by
MBS (collectively, the "Tiered MBS") or a
combination of Mortgage Loans, MBS and
Tiered MBS. The Mortgage Loans will not be
guaranteed or insured by the Depositor or
any of its affiliates or, unless otherwise
provided in the Prospectus Supplement, by
any governmental agency or instrumentality
or other person. The Mortgage Loans will
have the additional characteristics
described under "Description of the Trust
Funds--Mortgage Loans" and in the related
Prospectus Supplement. All Mortgage Loans
will have been originated by persons other
than the Depositor, including affiliates
of the Depositor, and all Mortgage Assets
will have been purchased, either directly
7
<PAGE>
or indirectly, by the Depositor on or
before the date of initial issuance of the
related series of Certificates.
Each Mortgage Loan may provide for no
accrual of interest or for accrual of
interest thereon at an interest rate (a
"Mortgage Rate") that is fixed over its
term or that adjusts from time to time, or
that may be converted from an adjustable
to a fixed Mortgage Rate, or from a fixed
to an adjustable Mortgage Rate, from time
to time at the mortgagor's election, in
each case as described in the related
Prospectus Supplement. Each Mortgage Loan
may provide for scheduled payments to
maturity, payments that adjust from time
to time to accommodate changes in the
Mortgage Rate or to reflect the occurrence
of certain events, and may provide for
negative amortization or accelerated
amortization, in each case as described in
the related Prospectus Supplement. Each
Mortgage Loan may be fully amortizing or
require a balloon payment due on its
stated maturity date, in each case as
described in the related Prospectus
Supplement. Each Mortgage Loan may contain
prohibitions on prepayment or require
payment of a premium or a yield
maintenance penalty in connection with a
prepayment, in each case as described in
the related Prospectus Supplement. The
Mortgage Loans may provide for payments of
principal, interest or both, on due dates
that occur monthly, quarterly,
semi-annually or at such other interval as
is specified in the related Prospectus
Supplement. See "Description of the Trust
Funds--Mortgage Loans".
B. 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 person or persons designated in
the related Prospectus Supplement will, to
the extent described herein and in such
Prospectus Supplement, deposit all
payments and collections received or
advanced with respect to the Mortgage
Assets and other assets in the Trust Fund.
A Certificate Account may be maintained as
an interest bearing or a non-interest
bearing account, and funds held therein
may be held as cash or invested in certain
short-term, investment grade obligations,
in each case as described in the related
Prospectus Supplement. See "Description of
the Agreements--Payments on Mortgage
Assets; Deposits to Certificate Account".
C. Credit Support...............If so provided in the related Prospectus
Supplement, partial or full protection
against certain defaults and losses on the
Mortgage Assets in the related Trust Fund
may be provided to one or more classes of
Certificates of the related series in the
form of subordination of one or more other
classes of Certificates of such series,
which other classes may include one or
more classes of Offered Certificates, or
by one or more other types of credit
support, such as a letter of credit,
insurance policy, guarantee, reserve fund
or another type of credit support, or a
combination thereof (any such coverage
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with respect to the Certificates of any
series, "Credit Support"). The amount and
types of coverage, the identification of
the entity providing the coverage (if
applicable) and related information with
respect to each type of Credit Support, if
any, will be described in the Prospectus
Supplement for a series of Certificates.
The Prospectus Supplement for any series
of Certificates evidencing an interest in
a Trust Fund that includes MBS or Tiered
MBS will describe any similar forms of
credit support that are provided by or
with respect to, or are included as part
of the trust fund evidenced by or
providing security for, such MBS or Tiered
MBS. See "RISK FACTORS--Credit Support
Limitations" and "Description of Credit
Support".
D. 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 provided
to reduce the effects of interest rate or
currency exchange rate fluctuations on the
Mortgage 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"), including, without
limitation, provisions relating to the
timing, manner and amount of payments
thereunder and provisions relating to the
termination thereof, will be described in
the Prospectus Supplement for the related
series. In addition, the related
Prospectus Supplement will provide certain
information with respect to the obligor
under any such Cash Flow Agreement. The
Prospectus Supplement for any series of
Certificates evidencing an interest in a
Trust Fund that includes MBS or Tiered MBS
will describe any cash flow agreements
that are included as part of the trust
fund evidenced by or providing security
for such MBS or Tiered MBS. See
"Description of the Trust Funds--Cash Flow
Agreements".
Description of Certificates...........Each series of Certificates evidencing an
interest in a Trust Fund that includes
Mortgage Loans as part of its assets will
be issued pursuant to a Pooling and
Servicing Agreement, and each series of
Certificates evidencing an interest in a
Trust Fund consisting exclusively of MBS
or Tiered MBS will be issued pursuant to a
Trust Agreement. Pooling and Servicing
Agreements and Trust Agreements are
sometimes referred to herein as
Agreements. 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 the Trust Fund. Each
class of Certificates (other than certain
Stripped Interest Certificates
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<PAGE>
and Spread Certificates, each as defined
below) will have a stated principal amount
(a "Certificate Balance") and (other than
certain Stripped Principal Certificates,
as defined below, and certain Spread
Certificates), will accrue interest
thereon based on a fixed, variable or
adjustable interest rate (a "Pass-Through
Rate"). The related Prospectus Supplement
will specify the Certificate Balance and
the Pass-Through Rate for each class of
Certificates, as applicable, or, in the
case of a variable or adjustable
Pass-Through Rate, the method for
determining the Pass-Through Rate.
Each series of Certificates will consist
of one or more classes of Certificates
that may (i) be senior (collectively,
"Senior Certificates") or subordinate
(collectively, "Subordinate Certificates")
to one or more other classes of
Certificates in respect of certain
distributions on the Certificates; (ii) be
entitled to principal distributions, with
disproportionately low, nominal or no
interest distributions (collectively,
"Stripped Principal Certificates"); (iii)
be entitled to interest distributions,
with disproportionately low, nominal or no
principal distributions (collectively,
"Stripped Interest Certificates"); (iv)
provide for distributions of accrued
interest thereon commencing only following
the occurrence of certain events, such as
the retirement of one or more other
classes of Certificates of such series
(collectively, "Accrual Certificates");
(v) provide for distributions of principal
sequentially, based on specified payment
schedules or other methodologies, to the
extent of available funds; and/or (vi)
provide for cash distributions based on
available funds (collectively, "Spread
Certificates"), in each case as described
in the related Prospectus Supplement. Any
such classes may include classes of
Offered Certificates.
The Certificates will not be guaranteed or
insured by the Depositor or any of its
affiliates, by any governmental agency or
instrumentality or by any other person,
unless otherwise provided in the related
Prospectus Supplement. See "RISK
FACTORS--Limited Assets" and "Description
of the Certificates".
Distributions of Interest on
Certificates....................Interest on each class of Offered
Certificates (other than Stripped
Principal Certificates and certain classes
of Stripped Interest Certificates and
Spread Certificates) of each series will
accrue at the applicable Pass-Through Rate
on the outstanding Certificate 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
Stripped Interest Certificates may be made
on each Distribution Date on the basis of
a notional amount as described in the
related Prospectus Supplement.
Distributions of interest with respect to
one or more classes of Certificates may be
reduced to the
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<PAGE>
extent of certain delinquencies, losses
and other contingencies described herein
and in the related Prospectus Supplement.
See "RISK FACTORS--Average Life of
Certificates; Prepayments; Yields", "Yield
Considerations", and "Description of the
Certificates--Distributions of Interest on
the Certificates".
Distributions of Principal of
Certificates....................The Certificates of each series (other
than certain classes of Stripped Interest
Certificates and Spread Certificates)
initially will have an aggregate
Certificate Balance no greater than the
outstanding principal balance of the
Mortgage 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 Balance of a
Certificate outstanding from time to time
represents the maximum amount that the
holder thereof is then entitled to receive
in respect of principal from future cash
flow on the assets in the related Trust
Fund. 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 Balances of such
Certificates have 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. See "Description of the
Certificates--Distributions of Principal
of the Certificates".
Advances..............................In connection with a series of
Certificates evidencing an interest in a
Trust Fund consisting of Mortgage Assets
other than MBS or Tiered MBS, unless
otherwise provided in the related
Prospectus Supplement, the Master Servicer
will be obligated as part of its servicing
responsibilities to make certain advances
with respect to delinquent scheduled
payments on the Mortgage Loans in such
Trust Fund. Advances made by a Master
Servicer are reimbursable generally from
subsequent recoveries in respect of such
Mortgage Loans and otherwise to the extent
described herein and in the related
Prospectus Supplement. If and to the
extent provided in the Prospectus
Supplement for any series, the Master
Servicer will be entitled to receive
interest on its outstanding advances,
payable from amounts in the related Trust
Fund. The Prospectus Supplement for any
series of Certificates evidencing an
interest in a Trust Fund that includes MBS
or Tiered MBS will describe any
corresponding advancing obligation of any
person in connection with such MBS or
Tiered MBS. See "Description of the
Certificates--Advances in Respect of
Delinquencies".
Termination...........................If so specified in the related Prospectus
Supplement, a series of Certificates may
be subject to optional early termination
through the repurchase of the Mortgage
Assets in the related
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<PAGE>
Trust Fund by the party specified therein,
under the circumstances and in the manner
set forth therein. If so provided in the
related Prospectus Supplement, upon the
reduction of the Certificate Balance of a
specified class or classes of Certificates
by a specified percentage or amount, the
party specified therein will solicit bids
for the purchase of all of the Mortgage
Assets in the Trust Fund, or of a
sufficient portion of such Mortgage Assets
to retire such class or classes, under the
circumstances and in the manner set forth
therein. See "Description of the
Certificates--Termination".
Registration of Certificates..........If so provided in the related Prospectus
Supplement, one or more classes of the
Offered Certificates will initially be
represented by one or more Certificates
registered in the name of the nominee of
DTC. No person acquiring an interest in
Offered Certificates so registered will be
entitled to receive a definitive
certificate representing such person's
interest except in the event that
definitive certificates are issued under
the limited circumstances described
herein. See "RISK FACTORS--Book-Entry
Registration" and "Description of the
Certificates--Book-Entry Registration and
Definitive Certificates".
Tax Status of the Certificates........The Certificates of each series 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 Internal Revenue Code of 1986 (the
"Code"), or (ii) interests ("Grantor Trust
Certificates") in a Trust Fund treated as
a grantor trust under applicable
provisions of the Code. For the treatment
of REMIC Regular Certificates, REMIC
Residual Certificates and Grantor Trust
Certificates under the Code, see "Federal
Income Tax Consequences" herein and in the
related Prospectus Supplement.
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 91-23 (the
"Exemption"), to Salomon Smith Barney Inc.
("Salomon Smith Barney") 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,
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<PAGE>
sale and holding of pass-through
certificates underwritten by Salomon Smith
Barney 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, 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 Trustee or the
Master Servicer to any obligation in
addition to those undertaken in the
related Agreement. See "ERISA
Considerations" herein.
Legal Investment......................Unless otherwise provided in the related
Prospectus Supplement, the Offered
Certificates will not constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act
of 1984. Accordingly, investors whose
investment authority is subject to legal
restrictions should consult their own
legal advisors to determine whether and to
what extent the Offered Certificates
constitute legal investments for them. See
"Legal Investment" herein and in the
related Prospectus Supplement.
Rating................................At the date of issuance, as to each
series, each class of Offered Certificates
will be rated not lower than investment
grade by one or more nationally recognized
statistical rating agencies (each, a
"Rating Agency"). See "Rating" herein and
in the related Prospectus Supplement.
13
<PAGE>
RISK FACTORS
Investors should consider, in connection with the purchase of Offered
Certificates, among other things, the following factors and certain other
factors as may be set forth in "Risk Factors" in the related Prospectus
Supplement. In general, to the extent that the factors discussed below pertain
to or are influenced by the characteristics or behavior of Mortgage Loans
included in a particular Trust Fund, they would be similarly influenced by the
characteristics or behavior of the mortgage loans underlying any MBS or Tiered
MBS included in such Trust Fund.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates
of any series will develop or, if it does develop, that it will provide holders
with liquidity of investment or will continue while Certificates of such series
remain outstanding. Any such secondary market may provide less liquidity to
investors than any comparable market for securities evidencing interests in
single-family mortgage loans. The market value of Certificates will fluctuate
with changes in prevailing rates of interest. Consequently, sale of Certificates
by a holder in any secondary market that may develop may be at a discount from
100% of their original principal balance or from their purchase price.
Furthermore, secondary market purchasers may look only hereto, to the related
Prospectus Supplement and to the reports to Certificateholders delivered
pursuant to the Agreement as described herein under the heading "Description of
the Certificates--Reports to Certificateholders", "--Book-Entry Registration and
Definitive Certificates" and "Description of the Agreements--Evidence as to
Compliance" for information concerning the Certificates. Except to the extent
described herein and in the related Prospectus Supplement, Certificateholders
will have no redemption rights and the Certificates are subject to early
retirement only under certain specified circumstances described herein and in
the related Prospectus Supplement. See "Description of the
Certificates--Termination". Salomon Smith Barney Inc., through one or more of
its affiliates, currently expects to make a secondary market in the Offered
Certificates, but has no obligation to do so.
LIMITED ASSETS
Unless otherwise specified in the related Prospectus Supplement, a
series of Certificates will not have any claim against or security interest in
the Trust Funds for any other series. If the related Trust Fund is insufficient
to make payments on such Certificates, no other assets will be available for
payment of the deficiency. Additionally, certain amounts remaining in certain
funds or accounts, including the Certificate Account and any accounts maintained
as Credit Support, may be withdrawn under certain conditions, as described in
the related Prospectus Supplement. In the event of such withdrawal, such amounts
will not be available for future payment of principal of or interest on the
Certificates. If so provided in the Prospectus Supplement for a series of
Certificates consisting of one or more classes of Subordinate Certificates, on
any Distribution Date in respect of which losses or shortfalls in collections on
the Mortgage Assets have been incurred, the amount of such losses or shortfalls
will be borne first by one or more classes of the Subordinate Certificates, and,
thereafter, by the remaining classes of Certificates in the priority and manner
and subject to the limitations specified in such Prospectus Supplement.
AVERAGE LIFE OF CERTIFICATES; PREPAYMENTS; YIELDS
Prepayments on the Mortgage Loans in any Trust Fund generally will
result in a faster rate of principal payments on one or more classes of the
related Certificates than if payments on such Mortgage Loans were made as
scheduled. Thus, the prepayment experience on the Mortgage Loans may affect the
average life of each class of related Certificates. The rate of principal
payments on pools of mortgage loans varies between pools and from time to time
is influenced by a variety of economic, demographic, geographic, social, tax,
legal and other factors. There can be no assurance as to the rate of prepayment
on the Mortgage Loans in any Trust Fund or that the rate of payments will
conform to any model described herein or in any Prospectus Supplement. If
prevailing interest rates fall significantly below the applicable rates borne by
the Mortgage Loans included in a Trust Fund, principal prepayments are likely to
be higher than if prevailing rates remain at or above the rates borne by those
Mortgage Loans. As a result, the actual maturity of any class of Certificates
could occur significantly earlier than expected. A series of Certificates may
include one or more classes of Certificates with priorities of payment and, as a
result, yields on other classes of Certificates, including classes of Offered
Certificates, of such series may be more sensitive to prepayments on Mortgage
Loans. A series of Certificates may include one or more classes offered at a
significant premium or discount. Yields on such classes of Certificates will be
sensitive, and in some cases extremely
14
<PAGE>
sensitive, to prepayments on Mortgage Loans and, where the amount of interest
payable with respect to a class is disproportionately high, as compared to the
amount of principal, as with certain classes of Stripped Interest Certificates,
a holder might, in some prepayment scenarios, fail to recoup its original
investment. A series of Certificates may include one or more classes of
Certificates, including classes of Offered Certificates, that provide for
distribution of principal thereof from amounts attributable to interest accrued
but not currently distributable on one or more classes of Accrual Certificates
and, as a result, yields on such Certificates will be sensitive to (a) the
provisions of such Accrual Certificates relating to the timing of distributions
of interest thereon and (b) if such Accrual Certificates accrue interest at a
variable or adjustable Pass-Through Rate, changes in such rate. See "Yield
Considerations" herein and, if applicable, in the related Prospectus Supplement.
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Certificates will
reflect such Rating Agency's assessment solely of the likelihood that holders of
Certificates of such class will receive payments to which such
Certificateholders are entitled under the related Agreement. Such rating will
not constitute an assessment of the likelihood that principal prepayments on the
related Mortgage Loans will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated or the likelihood of
early optional termination of the series of Certificates. Such rating will not
address the possibility that prepayment at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that an investor purchasing a Certificate at a significant
premium or a Stripped Interest Certificate might fail to recoup its initial
investment under certain prepayment scenarios. Each Prospectus Supplement will
identify any payment to which holders of Offered Certificates of the related
series are entitled that is not covered by the applicable rating.
The amount, type and nature of credit support, if any, established with
respect to a series of Certificates will be determined on the basis of criteria
established by each Rating Agency rating classes of the Certificates of such
series. Such criteria are sometimes based upon an actuarial analysis of the
behavior of mortgage loans in a larger group. Such analysis is often the basis
upon which each Rating Agency determines the amount of credit support required
with respect to each such class. There can be no assurance that the historical
data supporting any such actuarial analysis will accurately reflect future
experience nor any assurance that the data derived from a large pool of mortgage
loans accurately predicts the delinquency, foreclosure or loss experience of any
particular pool of Mortgage Loans. No assurance can be given that values of any
Mortgaged Properties have remained or will remain at their levels on the
respective dates of origination of the related Mortgage Loans. Moreover, there
is no assurance that appreciation of real estate values generally will limit
loss experiences on Commercial Properties or Multifamily Properties. If the
commercial or multifamily residential real estate markets should experience an
overall decline in property values such that the outstanding principal balances
of the Mortgage Loans in a particular Trust Fund and any secondary financing on
the related Mortgaged Properties become equal to or greater than the value of
the Mortgaged Properties, the rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced by institutional lenders.
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
rates of delinquencies, foreclosures and losses with respect to any Trust Fund.
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. See "Description of Credit Support" and
"Rating".
RISKS ASSOCIATED WITH CERTAIN MORTGAGE LOANS AND MORTGAGED PROPERTIES
Mortgage loans made with respect to multifamily or commercial property
may entail risks of delinquency and foreclosure, and risks of loss in the event
thereof, that are greater than similar risks associated with single-family
property. See "Description of the Trust Funds--Mortgage Loans". The ability of a
mortgagor to repay a loan secured by an income-producing property typically is
dependent primarily upon the successful operation of such property rather than
any independent income or assets of the mortgagor; thus, the value of an
income-producing property is directly related to the net operating income
derived from such property. In contrast, the ability of a mortgagor to repay a
single-family loan typically is dependent primarily upon the mortgagor's
household income, rather than the capacity of the property to produce income;
thus, other than in geographical areas where employment is dependent upon a
particular
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<PAGE>
employer or an industry, the mortgagor's income tends not to reflect directly
the value of such property. A decline in the net operating income of an
income-producing property will likely affect both the performance of the related
loan as well as the liquidation value of such property, whereas a decline in the
income of a mortgagor on a single-family property will likely affect the
performance of the related loan but may not affect the liquidation value of such
property.
The performance of a mortgage loan secured by an income-producing
property leased by the mortgagor to tenants as well as the liquidation value of
such property may be dependent upon the business operated by such tenants in
connection with such property, the creditworthiness of such tenants or both; the
risks associated with such loans may be offset by the number of tenants or, if
applicable, a diversity of types of business operated by such tenants. A number
of the Mortgage Loans may be secured by liens on owner-occupied Mortgaged
Properties or on Mortgaged Properties leased to a single tenant. Accordingly, a
decline in the financial condition of the borrower or single tenant, as
applicable, may have a disproportionately greater effect on the net operating
income from such Mortgaged Properties than would be the case with respect to
Mortgaged Properties with multiple tenants. Furthermore, the value of any
Mortgaged Property may be adversely affected by risks generally incident to
interests in real property, including changes in general or local economic
conditions and/or specific industry segments; declines in real estate values;
declines in rental or occupancy rates; increases in interest rates, real estate
tax rates and other operating expenses; changes in governmental rules,
regulations and fiscal policies, including environmental legislation; acts of
God; and other factors beyond the control of the Master Servicer.
In addition, additional risk may be presented by the type and use of a
particular Mortgaged Property. For instance, Mortgaged Properties that operate
as hospitals and nursing homes may present special risks to lenders due to the
significant governmental regulation of the ownership, operation, maintenance and
financing of health care institutions. Hotel and motel properties are often
operated pursuant to franchise, management or operating agreements which may be
terminable by the franchisor or operator. Moreover, the transferability of a
hotel's operating, liquor and other licenses upon a transfer of the hotel,
whether through purchase or foreclosure, is subject to local law requirements.
It is anticipated that a substantial portion of the Mortgage Loans
included in any Trust Fund will be nonrecourse loans or loans for which recourse
may be restricted or unenforceable, as to which, in the event of mortgagor
default, recourse may be had only against the specific multifamily or commercial
property and such other assets, if any, as have been pledged to secure the
Mortgage Loan. With respect to those Mortgage Loans that provide for recourse
against the mortgagor and its assets generally, there can be no assurance that
such recourse will ensure a recovery in respect of a defaulted Mortgage Loan
greater than the liquidation value of the related Mortgaged Property.
Further, the concentration of default, foreclosure and loss risks in
individual mortgagors or Mortgage Loans in a particular Trust Fund or the
related Mortgaged Properties will generally be greater than for pools of
single-family loans both because the Mortgage Loans in a Trust Fund will
generally consist of a smaller number of loans than would a single-family pool
of comparable aggregate unpaid principal balance and because of the higher
principal balance of individual Mortgage Loans. The Trust Fund may consist of a
single Mortgage Loan.
If applicable, certain legal aspects of the Mortgage Loans for a series
of Certificates may be described in the related Prospectus Supplement. See also
"Certain Legal Aspects of Mortgage Loans" herein.
DELINQUENT AND NON-PERFORMING MORTGAGE LOANS
If so provided in the related Prospectus Supplement, the Trust Fund for
a particular series of Certificates may include Mortgage Loans that are past due
or are non-performing. If so specified in the related Prospectus Supplement, the
servicing of such Mortgage Loans will be performed by a Special Servicer. Credit
Support provided with respect to a particular series of Certificates may not
cover all losses related to such delinquent or non-performing Mortgage Loans,
and investors should consider the risk that the inclusion of such Mortgage Loans
in the Trust Fund may adversely affect the rate of defaults and prepayments on
Mortgage Assets and the yield on the Certificates of such series. See
"Description of the Trust Funds--Mortgage Loans--General".
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<PAGE>
JUNIOR MORTGAGE LOANS
Certain of the Mortgage Loans may be junior mortgage loans. 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 a
related senior lien to satisfy the junior Mortgage Loan after satisfaction of
all related senior liens. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure".
BALLOON PAYMENTS
Certain of the Mortgage Loans as of the Cut-off Date may not be fully
amortizing over their terms to maturity and, thus, will require substantial
principal payments (i.e., balloon payments) at their stated maturity. Mortgage
Loans with balloon payments involve a greater degree of risk because the ability
of a mortgagor to make a balloon payment typically will depend upon its ability
either to timely refinance the loan or to timely sell the related Mortgaged
Property. The ability of a mortgagor to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage rates
at the time of sale or refinancing, the mortgagor's equity in the related
Mortgaged Property, the financial condition and operating history of the
mortgagor and the related Mortgaged Property, tax laws, rent control laws (with
respect to certain Multifamily Properties and mobile home parks), reimbursement
rates (with respect to certain hospitals, nursing homes and convalescent homes),
renewability of operating licenses, prevailing general economic conditions and
the availability of credit for commercial or multifamily, as the case may be,
real properties generally.
OBLIGOR DEFAULT
If so specified in the related Prospectus Supplement, in order to
maximize recoveries on defaulted Mortgage Loans, a Master Servicer will be
permitted (within prescribed parameters) to extend and modify Mortgage Loans
that are in default or as to which a payment default is imminent, including in
particular with respect to balloon payments. In addition, a Master Servicer or a
Special Servicer may receive workout fees, management fees, liquidation fees or
other similar fees based on receipts from or proceeds of such Mortgage Loans.
While a Master Servicer generally will be required to determine that any such
extension or modification is reasonably likely to produce a greater recovery on
a present value basis than liquidation, there can be no assurance that such
flexibility with respect to extensions or modifications or payment of a workout
fee will increase the present value of receipts from or proceeds of Mortgage
Loans that are in default or as to which a payment default is imminent. The
recent foreclosure and delinquency experience with respect to loans serviced by
a Master Servicer or, if applicable, any Special Servicer or significant
Sub-Servicer will be provided in the related Prospectus Supplement.
MORTGAGOR TYPE
Mortgage Loans made to partnerships, corporations or other entities may
entail risks of loss from delinquency and foreclosure that are greater than
those of Mortgage Loans made to individuals. The Mortgagor's sophistication and
form of organization may increase the likelihood of protracted litigation or
bankruptcy in default situations.
CREDIT SUPPORT LIMITATIONS
The Prospectus Supplement for a series of Certificates will describe
any Credit Support in the related Trust Fund, which may include letters of
credit, insurance policies, surety bonds, guarantees, reserve funds or other
types of credit support, or combinations thereof. Use of Credit Support will be
subject to the conditions and limitations described herein and in the related
Prospectus Supplement. Moreover, such Credit Support may not cover all potential
losses or risks; for example, Credit Support may or may not cover fraud or
negligence by a mortgage loan originator or other parties.
A series of Certificates may include one or more classes of Subordinate
Certificates (which may include Offered Certificates), if so provided in the
related Prospectus Supplement. Although subordination is intended to reduce the
risk to holders of Senior Certificates of delinquent distributions or ultimate
losses, the amount of subordination will be limited and may decline under
certain circumstances. In addition, if principal payments on one or more classes
of Certificates of a series are made in a specified order of priority, any
limits with respect to the aggregate amount of claims under any related Credit
Support may be exhausted before the principal of the lower priority classes of
Certificates of such series has been repaid. As a result, the impact of
significant losses and shortfalls on the Mortgage Assets may fall primarily upon
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those classes of Certificates having a lower priority of payment. Moreover, if a
form of Credit Support covers more than one series of Certificates, holders of
Certificates of one series will be subject to the risk that such Credit Support
will be exhausted by the claims of the holders of Certificates of one or more
other series.
The amount of any applicable Credit Support supporting one or more
classes of Offered Certificates, including the subordination of one or more
classes of Certificates, will be determined on the basis of criteria established
by each Rating Agency rating such classes of Certificates based on an assumed
level of defaults, delinquencies, other losses or other factors. There can,
however, be no assurance that the loss experience on the related Mortgage Assets
will not exceed such assumed levels. See "--Limited Nature of Ratings",
"Description of the Certificates" and "Description of Credit Support".
DUE-ON-SALE CLAUSES AND ASSIGNMENTS OF LEASES AND RENTS
Mortgages may contain a due-on-sale clause, which permits the lender to
accelerate the maturity of the Mortgage Loan if the mortgagor sells, transfers
or conveys the related Mortgaged Property or its interest in the Mortgaged
Property. Mortgages may also include a debt-acceleration clause, which permits
the lender to accelerate the debt upon a monetary or non-monetary default of the
mortgagor. Such clauses are generally enforceable subject to certain exceptions.
The courts of all states will enforce clauses providing for acceleration in the
event of a material payment default. The equity courts of any state, however,
may refuse the foreclosure of a mortgage or deed of trust when an acceleration
of the indebtedness would be inequitable or unjust or the circumstances would
render the acceleration unconscionable.
If so specified in the related Prospectus Supplement, the Mortgage
Loans will be secured by an assignment of leases and rents pursuant to which the
mortgagor typically assigns its right, title and interest as landlord under the
leases on the related Mortgaged Property and the income derived therefrom to the
lender as further security for the related Mortgage Loan, while retaining a
license to collect rents for so long as there is no default. In the event the
mortgagor defaults, the license terminates and the lender is entitled to collect
rents. Such assignments are typically not perfected as security interests prior
to actual possession of the cash flows. Some state laws may require that the
lender take possession of the Mortgaged Property and obtain a judicial
appointment of a receiver before becoming entitled to collect the rents. In
addition, if bankruptcy or similar proceedings are commenced by or in respect of
the mortgagor, the lender's ability to collect the rents may be adversely
affected. See "Certain Legal Aspects of Mortgage Loans--Leases and Rents".
ENVIRONMENTAL RISKS
Real property pledged as security for a mortgage loan may be subject to
certain environmental risks. Under the laws of certain states, contamination of
a property may give rise to a lien on the property to assure the costs of
cleanup. In several states, such a lien has priority over the lien of an
existing mortgage against such property. In addition, under the laws of some
states and under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA"), a lender may be liable, as an "owner" or
"operator", for costs of addressing releases or threatened releases of hazardous
substances that require remedy at a property, if agents or employees of the
lender have become sufficiently involved in the operations of the mortgagor,
regardless of whether or not the environmental damage or threat was caused by a
prior owner. A lender also risks such liability on foreclosure of the mortgage.
Unless otherwise specified in the related Prospectus Supplement, each Agreement
will provide that the Master Servicer, acting on behalf of the Trust Fund, may
not acquire title to a Mortgaged Property securing a Mortgage Loan or take over
its operation unless the Master Servicer has previously determined, based upon a
report prepared by a person who regularly conducts environmental audits, that:
(i) the Mortgaged Property is in compliance with applicable environmental laws,
and there are no circumstances present at the Mortgaged Property relating to the
use, management or disposal of any hazardous substances, hazardous materials,
wastes, or petroleum based materials for which investigation, testing,
monitoring, containment, clean-up or remediation could be required under any
federal, state or local law or regulation; or (ii) if the Mortgaged Property is
not so in compliance or such circumstances are so present, then it would be in
the best economic interest of the Trust Fund to acquire title to the Mortgaged
Property and further to take such actions as would be necessary and appropriate
to effect such compliance and/or respond to such circumstances. See "Certain
Legal Aspects of Mortgage Loans--Environmental Legislation".
ERISA CONSIDERATIONS
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Generally, ERISA applies to investments made by employee benefit plans
and transactions involving the assets of such plans. Due to the complexity of
regulations which govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of the Offered Certificates of any
series. See "ERISA Considerations".
FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates will be required to report on
their federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their receipt
of cash payments, as described in "Federal Income Tax Consequences--REMICs".
Accordingly, under certain circumstances, holders of Offered Certificates that
constitute REMIC Residual Certificates may have taxable income and tax
liabilities arising from such investment during a taxable year in excess of the
cash received during such period. The requirement that holders of REMIC Residual
Certificates report their pro rata share of the taxable income and net loss of
the REMIC will continue until the Certificate Balances of all classes of
Certificates of the related series have been reduced to zero, even though
holders of REMIC Residual Certificates have received full payment of their
stated interest and principal. A portion (or, in certain circumstances, all) of
such Certificateholder's share of the REMIC taxable income may be treated as
"excess inclusion" income to such holder which (i) generally, will not be
subject to offset by losses from other activities, (ii) for a tax-exempt holder,
will be treated as unrelated business taxable income and (iii) for a foreign
holder, will not qualify for exemption from withholding tax. Individual holders
of REMIC Residual Certificates may be limited in their ability to deduct
servicing fees and other expenses of the REMIC. In addition, REMIC Residual
Certificates are subject to certain restrictions on transfer. Because of the
special tax treatment of REMIC Residual Certificates, the taxable income arising
in a given year on a REMIC Residual Certificate will not be equal to the taxable
income associated with investment in a corporate bond or stripped instrument
having similar cash flow characteristics and pre-tax yield. Therefore, the
after-tax yield on the REMIC Residual Certificate may be significantly less than
that of a corporate bond or stripped instrument having similar cash flow
characteristics.
CONTROL
Under certain circumstances, the consent or approval of the holders of
a specified percentage of the aggregate Certificate Balance of all outstanding
Certificates of a series or a similar means of allocating decision-making under
the related Agreement ("Voting Rights") will be required to direct, and will be
sufficient to bind all Certificateholders of such series to, certain actions,
including amending the related Agreement in certain circumstances. See
"Description of the Agreements--Events of Default", "--Rights Upon Event of
Default", "--Amendment" and "--List of Certificateholders".
BOOK-ENTRY REGISTRATION
If so provided in the Prospectus Supplement, one or more classes of the
Certificates will be initially represented by one or more certificates
registered in the name of the nominee for DTC, and will not be registered in the
names of the Certificateholders or their nominees. Because of this, unless and
until Definitive Certificates are issued, beneficial owners of the Certificates
of such class or classes will not be recognized by the Trustee as
"Certificateholders" (as that term is to be used in the related Agreement).
Hence, until such time, the beneficial owners will be able to exercise the
rights of Certificateholders only indirectly through DTC and its participating
organizations. See "Description of the Certificates--Book-Entry Registration and
Definitive Certificates".
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DESCRIPTION OF THE TRUST FUNDS
MORTGAGE ASSETS
The primary assets of each Trust Fund (the "Mortgage Assets") will
include (i) one or more various types of multifamily and/or commercial mortgage
loans (the "Mortgage Loans"), (ii) mortgage participation certificates,
pass-through certificates or other mortgage-backed securities ("MBS") evidencing
interests in, or secured by pledges of one or more of various types of
multifamily and/or commercial mortgage loans, (iii) participation certificates,
pass-through certificates or other securities evidencing interests in, or
secured by pledges of one or more MBS ("Tiered MBS") or (iv) a combination of
Mortgage Loans, MBS or Tiered MBS. As used herein, "Mortgage Loans" refers to
both whole Mortgage Loans and Mortgage Loans underlying MBS or Tiered MBS.
Mortgage Loans that secure, or interests in which are evidenced by, MBS are
herein sometimes referred to as Underlying Mortgage Loans. Mortgage Loans that
are not Underlying Mortgage Loans are sometimes referred to as Whole Loans. The
Mortgage Assets will not be guaranteed or insured by Salomon Brothers Mortgage
Securities VII, Inc (the "Depositor") or any of its affiliates or, unless
otherwise provided in the Prospectus Supplement, by any governmental agency or
instrumentality or by any other person. Each Mortgage Asset will be selected by
the Depositor for inclusion in a Trust Fund from among those (i) originated by
the Depositor or (ii) purchased, either directly or indirectly, from a prior
holder thereof (a "Mortgage Asset Seller"), which prior holder may or may not be
the originator of such Mortgage Loan or the issuer of such MBS or Tiered MBS and
may be an affiliate of the Depositor.
MORTGAGE LOANS
GENERAL
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by mortgages, deeds of trust or similar security instruments
(the "Mortgages") creating a lien on the properties (the "Mortgaged Properties")
consisting of (i) residential properties consisting of three or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden apartment
buildings or other residential structures ("Multifamily Properties" and the
related loans, "Multifamily Loans") or (ii) office buildings, retail stores,
hotels or motels, nursing homes, hospitals or other health care-related
facilities, mobile home parks, warehouse facilities, mini-warehouse facilities
or self-storage facilities, industrial plants, mixed use or other types of
commercial properties or unimproved land ("Commercial Properties" and the
related loans, "Commercial Loans") located, unless otherwise specified in the
related Prospectus Supplement, in any one of the fifty states or the District of
Columbia. Unless otherwise specified in the related Prospectus Supplement, each
of the Mortgage Loans will be secured by a first mortgage or deed of trust or
other similar security instrument creating a first lien on a Mortgaged Property.
Multifamily Property may include mixed commercial and residential structures and
may include apartment buildings owned by private cooperative housing
corporations ("Cooperatives"). The Mortgaged Properties may include leasehold
interests in properties, the title to which is held by third party lessors;
however, unless otherwise specified in the related Prospectus Supplement, the
term of any such leasehold will exceed the term of the mortgage note by at least
two years. Each Mortgage Loan will have been originated by a person (the
"Originator") other than the Depositor. Mortgage Loans will generally also be
secured by an assignment of leases and rents and/or operating or other cash flow
guarantees relating to the Mortgage Loan.
If so specified in the related Prospectus Supplement, Mortgage Assets
for a series of Certificates may include Mortgage Loans made on the security of
real estate projects under construction. In that case, the related Prospectus
Supplement will describe the procedures and timing for making disbursements from
construction reserve funds as portions of the related real estate project are
completed. In addition, the Mortgage Assets for a particular series of
Certificates may include Mortgage Loans that are delinquent or non-performing as
of the date such Certificates are issued. In that case, the related Prospectus
Supplement will set forth, as to each such Mortgage Loan, available information
as to the period of such delinquency or non-performance, any forbearance
arrangement then in effect, the condition of the related Mortgaged Property and
the ability of the Mortgaged Property to generate income to service the mortgage
debt.
DEFAULT AND LOSS CONSIDERATIONS WITH RESPECT TO THE MORTGAGE LOANS
Mortgage loans secured by commercial and multifamily properties are
markedly different from owner-occupied single-family home mortgage loans. The
repayment of loans secured by commercial or multifamily properties is typically
dependent upon the successful operation of such property rather than upon
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the liquidation value of the real estate. Unless otherwise specified in the
Prospectus Supplement, the Mortgage Loans will be non-recourse loans, which
means that, absent special facts, the mortgagee may look only to the Net
Operating Income from the property for repayment of the mortgage debt, and not
to any other of the mortgagor's assets, in the event of the mortgagor's default.
Lenders typically look to the Debt Service Coverage Ratio of a loan secured by
income-producing property as an important measure of the risk of default on such
a loan. The "Debt Service Coverage Ratio" of a Mortgage Loan at any given time
is the ratio of the Net Operating Income for a twelve-month period to the
annualized scheduled payments on the Mortgage Loan. "Net Operating Income"
means, for any given period, unless otherwise specified in the related
Prospectus Supplement, the total operating revenues derived from a Mortgaged
Property during such period, minus the total operating expenses incurred in
respect of such Mortgaged Property during such period other than (i) non-cash
items such as depreciation and amortization, (ii) capital expenditures and (iii)
debt service on loans secured by the Mortgaged Property. The Net Operating
Income of a Mortgaged Property will fluctuate over time and may be sufficient or
insufficient to cover debt service on the related Mortgage Loan at any given
time.
As the primary component of Net Operating Income, rental income (and
maintenance payments from tenant-stockholders of a Cooperative) is subject to
the vagaries of the applicable real estate market and/or business climate.
Properties typically leased, occupied or used on a short-term basis, such as
health care-related facilities, hotels and motels, and mini-warehouse and
self-storage facilities, tend to be affected more rapidly by changes in market
or business conditions than do properties leased, occupied or used for longer
periods, such as (typically) warehouses, retail stores, office buildings and
industrial plants. Commercial Loans may be secured by owner-occupied Mortgaged
Properties or Mortgaged Properties leased to a single tenant. Accordingly, a
decline in the financial condition of the mortgagor or single tenant, as
applicable, may have a disproportionately greater effect on the Net Operating
Income from such Mortgaged Properties than would be the case with respect to
Mortgaged Properties with multiple tenants.
Changes in the expense components of Net Operating Income due to the
general economic climate or economic conditions in a locality or industry
segment, such as increases in interest rates, real estate and personal property
tax rates and other operating expenses including energy costs; changes in
governmental rules, regulations and fiscal policies, including environmental
legislation; and acts of God may also affect the risk of default on the related
Mortgage Loan. As may be further described in the related Prospectus Supplement,
in some cases leases of Mortgaged Properties may provide that the lessee, rather
than the mortgagor, is responsible for payment of certain of these expenses
("Net Leases"); however, because leases are subject to default risks as well
when a tenant's income is insufficient to cover its rent and operating expenses,
the existence of such "net of expense" provisions will only temper, not
eliminate, the impact of expense increases on the performance of the related
Mortgage Loan.
While the duration of leases and the existence of any "net of expense"
provisions are often viewed as the primary considerations in evaluating the
credit risk of mortgage loans secured by certain income-producing properties,
such risk may be affected equally or to a greater extent by changes in
government regulation of the operator of the property. Examples of the latter
include mortgage loans secured by health care-related facilities and hospitals,
the income from which and the operating expenses of which are subject to state
and/or federal regulations, such as Medicare and Medicaid, and multifamily
properties and mobile home parks, which may be subject to state or local rent
control regulation and, in certain cases, restrictions on changes in use of the
property. Low- and moderate-income housing may be particularly subject to legal
limitations and regulations but, because of such regulations, may also be less
sensitive to fluctuations in market rents generally.
The liquidation value of any Mortgaged Property may be adversely
affected by risks generally incident to interests in real property, including
declines in rental or occupancy rates. Lenders generally use the Loan-to-Value
Ratio of a mortgage loan as a measure of risk of loss if a property must be
liquidated upon a default by the mortgagor. 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 to the Value of the
related Mortgaged Property. The "Value" of a Mortgaged Property, other than with
respect to Refinance Loans, is generally 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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The Value of a Mortgaged Property as of the date of initial issuance of the
related series of Certificates may be less than the value at origination and
will fluctuate from time to time based upon changes in economic conditions and
the real estate market.
Appraised values of income-producing properties may be based on the
market comparison method (recent resale value of comparable properties at the
date of the appraisal), the cost replacement method (the cost of replacing the
property at such date), the income capitalization method (a projection of value
based upon the property's projected net cash flow), or upon a selection from or
interpolation of the values derived from such methods. Each of these appraisal
methods presents analytical challenges. It is often difficult to find truly
comparable properties that have recently been sold; the replacement cost of a
property may have little to do with its current market value; and income
capitalization is inherently based on inexact projections of income and expense
and the selection of an appropriate capitalization rate. Where more than one of
these appraisal methods are used and create significantly different results, or
where a high Loan-to-Value Ratio accompanies a high Debt Service Coverage Ratio
(or vice versa), the analysis of default and loss risks is even more difficult.
While the Depositor believes that the foregoing considerations are
important factors that generally distinguish the Mortgage Loans from
single-family mortgage loans and provide insight to the risks associated with
income-producing real estate, there is no assurance that such factors will in
fact have been considered by the Originators of the Mortgage Loans, or that, for
a particular Mortgage Loan, they are complete or relevant. See "Risk
Factors--Risks Associated with Certain Mortgage Loans and Mortgaged Properties",
"--Balloon Payments", "--Mortgagor Default" and "--Mortgagor Type".
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS
Each Prospectus Supplement will contain information, as of the date of
such Prospectus Supplement and to the extent then applicable and specifically
known to the Depositor, with respect to the Mortgage Loans constituting related
Trust Assets, including (i) the aggregate outstanding principal balance and the
largest, smallest and average outstanding principal balance of the Mortgage
Loans as of the applicable Cut-off Date, (ii) the type of property securing the
Mortgage Loans (e.g., Multifamily Property or Commercial Property and the type
of property in each such category), (iii) the original and remaining terms to
maturity of the Mortgage Loans, and the seasoning of the Mortgage Loans, (iv)
the earliest and latest origination date and maturity date and weighted average
original and remaining terms to maturity of the Mortgage Loans, (v) the
Loan-to-Value Ratios at origination of the Mortgage Loans, (vi) the Mortgage
Rates or range of Mortgage Rates and the weighted average Mortgage Rate borne by
the Mortgage Loans, (vii) the geographical distribution of the Mortgaged
Properties on a state-by-state basis, (viii) information with respect to the
prepayment provisions, if any, of the Mortgage Loans, (ix) the weighted average
Retained Interest, if any, (x) with respect to Mortgage Loans with adjustable
Mortgage Rates ("ARM Loans"), the adjustment dates, the highest, lowest and
weighted average margin, and the maximum Mortgage Rate variation at the time of
any adjustment and over the life of the ARM Loan, (xi) the Debt Service Coverage
Ratio either at origination or as of a more recent date (or both) and (xii)
information regarding the payment characteristics of the Mortgage Loans,
including without limitation balloon payment and other amortization provisions.
The related Prospectus Supplement will also contain certain information
available to the Depositor with respect to the provisions of leases and the
nature of tenants of the Mortgaged Properties and other information referred to
in a general manner under "Description of the Trust Funds--Mortgage
Loans--Default and Loss Considerations with Respect to the Mortgage Loans"
above. If specific information respecting the Mortgage Loans 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 that will be
available to purchasers of the related Certificates at or before the initial
issuance thereof and will be filed as part of a Current Report on Form 8-K with
the Securities and Exchange Commission within fifteen days after such initial
issuance.
PAYMENT PROVISIONS OF THE MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans will (i) have individual principal balances at origination of
not less than $25,000, (ii) have original terms to maturity of not more than 40
years and (iii) provide for payments of principal, interest or both, on due
dates that occur monthly, quarterly or semi-annually. Each Mortgage Loan may
provide for no accrual of interest or for accrual of interest thereon at an
interest rate (a "Mortgage Rate") that is fixed over its term or that adjusts
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from time to time, or that may be converted from an adjustable to a fixed
Mortgage Rate, or from a fixed to an adjustable Mortgage Rate, from time to time
at the mortgagor's election, in each case as described in the related Prospectus
Supplement. Each Mortgage Loan may provide for scheduled payments to maturity or
payments that adjust from time to time to accommodate changes in the Mortgage
Rate or to reflect the occurrence of certain events, and may provide for
negative amortization or accelerated amortization, in each case as described in
the related Prospectus Supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each case as
described in the related Prospectus Supplement. Each Mortgage Loan may contain
prohibitions on prepayment (a "Lock-out Period" and the date of expiration
thereof, a "Lock-out Date") or require payment of a premium or a yield
maintenance penalty (a "Prepayment Premium") in connection with a prepayment, in
each case as described in the related Prospectus Supplement. In the event that
holders of any class or classes of Offered Certificates will be entitled to all
or a portion of any Prepayment Premiums collected in respect of Mortgage Loans,
the related Prospectus Supplement will specify the method or methods by which
any such amounts will be allocated. A Mortgage Loan may also contain provisions
entitling the mortgagee to a share of profits realized from the operation or
disposition of the Mortgaged Property ("Equity Participation"), as described in
the related Prospectus Supplement. In the event that holders of any class or
classes of Offered Certificates will be entitled to all or a portion of an
Equity Participation, the related Prospectus Supplement will specify the terms
and provisions of the Equity Participation and the method or methods by which
distributions in respect thereof will be allocated among such Certificates.
MBS AND TIERED MBS
MBS and Tiered MBS may include (i) private (that is, not guaranteed or
insured by the United States or any agency or instrumentality thereof)
participation certificates, pass-through certificates or other securities or
(ii) certificates insured or guaranteed by FHLMC, FNMA or GNMA, provided that
each MBS and Tiered MBS will evidence an interest directly or indirectly in, or
will be secured by a pledge of, mortgage loans that conform to the descriptions
of the Mortgage Loans contained herein.
Any MBS or Tiered MBS will have been issued pursuant to a participation
and servicing agreement, a pooling and servicing agreement, an indenture or
similar agreement (an "MBS Agreement"). A seller (the "MBS Issuer") and/or
servicer (the "MBS Servicer") of the underlying Mortgage Loans in the case of
MBS, or of the underlying MBS, in the case of Tiered MBS will have entered into
the MBS Agreement with a trustee or a custodian under the MBS Agreement (the
"MBS Trustee"), if any, or with the original purchaser of the interest in the
underlying Mortgage Loans evidenced by MBS in the case of MBS, or of the
interest in the underlying MBS evidenced by the Tiered MBS in the case of Tiered
MBS.
Distributions of principal and interest will be made on MBS and Tiered
MBS on the dates specified in the related Prospectus Supplement. MBS and Tiered
MBS may be issued in one or more classes with characteristics similar to the
classes of Certificates described in this Prospectus. Principal and interest
distributions will be made on MBS and Tiered MBS by the MBS Trustee or the MBS
Servicer. The MBS Issuer or the MBS Servicer or another person specified in the
related Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the MBS or Tiered MBS after a certain date or under
other circumstances specified in the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other credit
support similar to that described for the Certificates under "Description of
Credit Support" may be provided with respect to MBS and Tiered MBS. The type,
characteristics and amount of such credit support, if any, will be a function of
certain characteristics of the Mortgage Loans evidenced by or securing such MBS
in the case of MBS, and a function of such characteristics and the
characteristics of the related MBS evidenced by or securing such Tiered MBS, in
the case of Tiered MBS and other factors and generally will have been
established for MBS or Tiered MBS on the basis of requirements of either any
Rating Agency that may have assigned a rating to such MBS or Tiered MBS or the
initial purchasers of such MBS or Tiered MBS.
The Prospectus Supplement for a series of Certificates evidencing
interests in Mortgage Assets that include MBS or Tiered MBS will specify, to the
extent available, (i) the aggregate approximate initial and outstanding
principal amount and type of the MBS or Tiered MBS to be included in the Trust
Fund, (ii) the original and remaining term to stated maturity of the MBS or
Tiered MBS, if applicable, (iii) the pass-through or bond rate of the MBS or
Tiered MBS or formula for determining such rates, (iv) the applicable payment
provisions for the MBS or Tiered MBS, (v) the MBS Issuer, MBS Servicer and MBS
Trustee, as applicable,
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(vi) certain characteristics of the credit support, if any, such as
subordination, reserve funds, insurance policies, letters of credit or
guarantees relating to the related Underlying Mortgage Loans or directly to such
MBS or Tiered MBS, (vii) the terms on which the related Underlying Mortgage
Loans for such MBS, or the MBS or Tiered MBS may, or are required to, be
purchased prior to their maturity, (viii) the terms on which Mortgage Loans may
be substituted for those originally underlying the MBS or Tiered MBS, (ix) the
servicing fees payable under the MBS Agreement, (x) to the extent available to
the Depositor, the type of information in respect of the Underlying Mortgage
Loans described under "Description of the Trust Funds--Mortgage Loans--Mortgage
Loan Information in Prospectus Supplements" and (xi) the characteristics of any
cash flow agreements that are included as part of the trust fund evidenced or
secured by the MBS or Tiered MBS.
CERTIFICATE ACCOUNTS
Each Trust Fund will include one or more accounts (collectively, the
"Certificate Account") established and maintained on behalf of the
Certificateholders into which the person or persons designated in the related
Prospectus Supplement will, to the extent described herein and in such
Prospectus Supplement deposit all payments and collections received or advanced
with respect to the Mortgage Assets and other assets in the Trust Fund. A
Certificate Account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as described in
the related Prospectus Supplement.
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Mortgage Assets in the
related Trust Fund may be provided to one or more classes of Certificates in the
related 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, insurance policy, guarantee, reserve fund or another
type of credit support, or a combination thereof (any such coverage with respect
to the Certificates of any series, "Credit Support"). The amount and types of
coverage, the identification of the entity providing the coverage (if
applicable) and related information with respect to each type of Credit Support,
if any, will be described in the Prospectus Supplement for a series of
Certificates. See "Risk Factors--Credit Support Limitations" and "Description of
Credit Support".
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 provided to reduce the
effects of interest rate or currency exchange rate fluctuations on the Mortgage
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"), including, without limitation, provisions relating to the
timing, manner and amount of payments thereunder and provisions relating to the
termination thereof, will be described in the Prospectus Supplement for the
related series. In addition, the related Prospectus Supplement will provide
certain information with respect to the obligor under any such Cash Flow
Agreement.
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 Assets or will be used by
the Depositor for general corporate purposes. The Depositor expects to sell 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
Mortgage Assets acquired by the Depositor, prevailing interest rates,
availability of funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Certificate will depend on the price paid by
the Certificateholder, the Pass-Through Rate of the Certificate, the receipt and
timing of receipt of distributions on the Certificate and the weighted average
life of the Mortgage Assets in the related Trust Fund. See "Risk
Factors--Average Life of Certificates; Prepayments; Yields". The following
discussion contemplates a Trust Fund that consists
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solely of Mortgage Loans. While the characteristics and behavior of mortgage
loans underlying MBS and Tiered MBS can generally be expected to have the same
effect on the yield to maturity and/or weighted average life of a Class of
Certificates as will the characteristics and behavior of comparable Mortgage
Loans, the effect may differ due to the payment characteristics of the MBS and
Tiered MBS. If a Trust Fund includes MBS or Tiered MBS, the related Prospectus
Supplement will discuss the effect that the MBS or Tiered MBS payment
characteristics may have on the yield and weighted average lives of the
Certificates offered thereby.
PASS-THROUGH RATE
Certificates of any class within a series may have fixed, variable or
adjustable Pass-Through Rates, which may or may not be based upon the interest
rates borne by the Mortgage Loans in the related Trust Fund. The Prospectus
Supplement with respect to any series of Certificates will specify the
Pass-Through Rate for each class of such Certificates or, in the case of a
variable or adjustable Pass-Through Rate, the method of determining the
Pass-Through Rate; the effect, if any, of the prepayment of any Mortgage Loans
on the Pass-Through Rate of one or more classes of Certificates; and whether the
distributions of interest on the Certificates of any class will be dependent, in
whole or in part, on the performance of any obligor under a Cash Flow Agreement.
TIMING OF PAYMENT OF INTEREST AND PRINCIPAL
Each payment of interest on the Certificates (or addition to the
Certificate Balance of a class of Accrual Certificates) on a Distribution Date
will include interest accrued during the Interest Accrual Period for such
Distribution Date. If the Interest Accrual Period ends on a date other than a
Distribution Date for the related series, the yield realized by the holders of
such Certificates may be lower than the yield that would result if the Interest
Accrual Period ended on such Distribution Date. In addition, if so specified in
the related Prospectus Supplement, interest accrued for an Interest Accrual
Period for one or more classes of Certificates may be calculated on the
assumption that distributions of principal (and additions to the Certificate
Balance of Accrual Certificates) and allocations of losses on the Mortgage
Assets may be made on the first day of the Interest Accrual Period for a
Distribution Date and not on such Distribution Date. Such method would produce a
lower effective yield than if interest were calculated on the basis of the
actual principal amount outstanding during an Interest Accrual Period. The
Interest Accrual Period for any class of Offered Certificates will be described
in the related Prospectus Supplement.
PRINCIPAL PREPAYMENTS
The yield to maturity on the Certificates will be affected by the rate
of principal payments on the Mortgage Loans (including principal prepayments on
Mortgage Loans resulting from both voluntary prepayments by the mortgagors and
involuntary liquidations). The rate at which principal prepayments occur on the
Mortgage Loans will be affected by a variety of factors, including, without
limitation, the terms of the Mortgage Loans, the level of prevailing interest
rates, the availability of mortgage credit and economic, demographic,
geographic, tax, legal and other factors. In general, however, if prevailing
interest rates fall significantly below the Mortgage Rates on the Mortgage Loans
in a particular Trust Fund, such Mortgage Loans are likely to be the subject of
higher principal prepayments than if prevailing rates remain at or above the
rates borne by such Mortgage Loans. In this regard, it should be noted that
certain Mortgage Assets may consist of Mortgage Loans with different Mortgage
Rates and the stated pass-through or pay-through interest rate of certain MBS or
Tiered MBS may be a number of percentage points higher or lower than certain of
the Underlying Mortgage Loans or underlying MBS in the case of Tiered MBS. The
rate of principal payments on some or all of the classes of Certificates of a
series will correspond to the rate of principal payments on the Mortgage Loans
in the related Trust Fund and is likely to be affected by the existence of
Lock-out Periods and Prepayment Premium provisions of the Mortgage Loans, and by
the extent to which the servicer of any such Mortgage Loan is able to enforce
such provisions. Mortgage Loans with a Lock-out Period or a Prepayment Premium
provision, to the extent enforceable, generally would be expected to experience
a lower rate of principal prepayments than otherwise identical Mortgage Loans
without such provisions, with shorter Lock-out Periods or with lower Prepayment
Premiums.
If the purchaser of a Certificate offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Mortgage Loans,
the actual yield to maturity will be lower than that so calculated. Conversely,
if the purchaser of a Certificate offered at a premium calculates its
anticipated yield to maturity based on an assumed rate of
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distributions of principal that is slower than that actually experienced on the
Mortgage Assets, the actual yield to maturity will be lower than that so
calculated. In either case, if so provided in the Prospectus Supplement for a
series of Certificates, the effect on yield on one or more classes of the
Certificates of such series of prepayments of the Mortgage Loans in the related
Trust Fund may be mitigated or exacerbated by any provisions for sequential or
selective distribution of principal to such classes.
The timing of changes in the rate of principal payments on the Mortgage
Loans may significantly affect an investor's actual yield to maturity, even if
the average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Mortgage Loans and distributed on a Certificate, the greater the effect on such
investor's yield to maturity. The effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by the
investor during a given period may not be offset by a subsequent like decrease
(or increase) in the rate of principal payments.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Mortgage
Loans and the rate at which payments are made from any Credit Support or Cash
Flow Agreement for the related series of Certificates may affect the ultimate
maturity and the weighted average life of each class of such series. Prepayments
on the Mortgage Loans comprising or underlying the Mortgage Assets in a
particular Trust Fund will generally accelerate the rate at which principal is
paid on some or all of the classes of the Certificates of the related series.
If so provided in the Prospectus Supplement for a series of
Certificates, one or more classes of Certificates may have a final scheduled
Distribution Date, which is the date on or prior to which the Certificate
Balance thereof is scheduled to be reduced to zero, calculated on the basis of
the assumptions applicable to such series set forth therein.
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of a
class of Certificates of a series will be influenced by the rate at which
principal on the Mortgage Loans is paid to such class, which may be in the form
of scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes prepayments, in whole or in part, and liquidations due to
default). Prepayments on loans are also commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment model,
each as described below. CPR represents a constant assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of loans
for the life of such loans. SPA represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of loans, including the
Mortgage Loans underlying or comprising the Mortgage Assets. Moreover, CPR and
SPA were developed based upon historical prepayment experience for single-family
loans. Thus, it is likely that prepayment of any Mortgage Loans comprising or
underlying the Mortgage Assets for any series will not conform to any particular
level of CPR or SPA.
The Depositor is not aware of any meaningful publicly available
prepayment statistics for multifamily or commercial mortgage loans.
The Prospectus Supplement with respect to each series of Certificates
will contain tables, if applicable, setting forth the projected weighted average
life of each class of Offered Certificates of such series and the percentage of
the initial Certificate Balance of each such class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Mortgage Assets are made at rates
corresponding to various percentages of CPR, SPA or at such other rates
specified in
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such Prospectus Supplement. Such tables and assumptions are intended to
illustrate the sensitivity of weighted average life of the Certificates to
various prepayment rates and will not be intended to predict or to provide
information that will enable investors to predict the actual weighted average
life of the Certificates. It is unlikely that prepayment of any Mortgage Loans
comprising or underlying the Mortgage Assets for any series will conform to any
particular level of CPR, SPA or any other rate specified in the related
Prospectus Supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF MORTGAGE LOAN
Certain Mortgage Loans may have balloon payments due at maturity, and
because the ability of a mortgagor to make a balloon payment typically will
depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property, there is a risk that a Mortgage Loan having a balloon
payment provision may default at maturity, or that the servicer may extend the
maturity of such a Mortgage Loan in connection with a workout. In the case of
defaults, recovery of proceeds may be delayed by, among other things, bankruptcy
of the mortgagor or adverse conditions in the market where the property is
located. In order to minimize losses on defaulted Mortgage Loans, the servicer
may, to the extent and under the circumstances set forth in the related
Prospectus Supplement, be permitted to modify Mortgage Loans that are in default
or as to which a payment default is imminent. Any defaulted balloon payment or
modification that extends the maturity of a Mortgage Loan will tend to extend
the weighted average life of the Certificates, thereby lengthening the period of
time elapsed from the date of issuance of a Certificate until it is retired.
FORECLOSURES AND PAYMENT PLANS
The number of foreclosures and the principal amount of the Mortgage
Loans that are foreclosed in relation to the number and principal amount of
Mortgage Loans that are repaid in accordance with their terms will affect the
weighted average life of those Mortgage Loans and that of the related series of
Certificates. Servicing decisions made with respect to the Mortgage Loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of Mortgage Loans in bankruptcy proceedings, may also have an
effect upon the payment patterns of particular Mortgage Loans and thus the
weighted average life of the Certificates.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE CLAUSES
Acceleration of mortgage payments as a result of certain transfers of
or the creation of encumbrances upon underlying Mortgaged Property is another
factor affecting prepayment rates that may not be reflected in the prepayment
standards or models used in the relevant Prospectus Supplement. A number of the
Mortgage Loans may include "due-on-sale" clauses or "due-on-encumbrance" clauses
that allow the holder of the Mortgage Loans to demand payment in full of the
remaining principal balance of the Mortgage Loans upon sale or certain other
transfers of or the creation of encumbrances upon the related Mortgaged
Property. With respect to any Whole Loans, unless otherwise provided in the
related Prospectus Supplement, the Master Servicer, on behalf of the Trust Fund,
will be required to exercise (or waive its right to exercise) any such right
that the Trustee may have as mortgagee to accelerate payment of the Whole Loan
in a manner consistent with the servicing standard specified in the related
Prospectus Supplement or, if no such standard is specified, consistent with the
Master Servicer's normal servicing practices. See "Certain Legal Aspects of
Mortgage Loans--Due-on-Sale and Due-on-Encumbrance" and "Description of the
Agreements--Due-on-Sale and Due-on-Encumbrance Provisions".
SINGLE MORTGAGE LOAN OR SINGLE MORTGAGOR
The Mortgage Assets in a particular Trust Fund may consist of a single
Mortgage Loan or obligations of a single mortgagor or related mortgagors as
specified in the related Prospectus Supplement. Assumptions used with respect to
the prepayment standards or models based upon analysis of the behavior of
mortgage loans in a larger group will not necessarily be relevant in determining
prepayment experience on a single Mortgage Loan or with respect to a single
mortgagor.
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NEGATIVE AMORTIZATION
The weighted average life of a class of Certificates can be affected by
Mortgage Loans that permit negative amortization to occur. To the extent that
deferred interest is added to the principal balance of any of such Mortgage
Loans, future interest accruals are computed on that higher principal balance
and less of the scheduled payment is available to amortize the unpaid principal
over the remaining amortization term of the Mortgage Loan. Accordingly, the
weighted average lives of such Mortgage Loans (and that of the classes of
Certificates to which any such negative amortization is allocated) will
increase. During a period of declining interest rates, the portion of each
scheduled payment in excess of the scheduled interest and principal due will be
applied to reduce the outstanding principal balance of the related Mortgage
Loan, thereby resulting in accelerated amortization of such Mortgage Loan. Any
such acceleration in amortization of its principal balance will shorten the
weighted average life of such Mortgage Loan and, correspondingly, the weighted
average lives of Certificates entitled to principal payments.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on January 27,
1987 as an indirect wholly-owned subsidiary of Salomon Smith Barney Holdings
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) 783-5635.
The Depositor does not have, nor is it expected in the future to have,
any significant assets.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates of each series (including any class of Certificates
not offered hereby) will represent the entire beneficial ownership interest in
the Trust Fund created pursuant to the related Agreement. Each series of
Certificates will consist of one or more classes of Certificates that may (i)
provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior (collectively, "Senior Certificates") or
subordinate (collectively, "Subordinate Certificates") to one or more other
classes of Certificates in respect of certain distributions on the Certificates;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions (collectively, "Stripped Principal
Certificates"); (iv) be entitled to interest distributions, with
disproportionately low, nominal or no principal distributions (collectively,
"Stripped Interest Certificates"); (v) provide for distributions of accrued
interest thereon commencing only following the occurrence of certain events,
such as the retirement of one or more other classes of Certificates of such
series (collectively, "Accrual Certificates"); (vi) provide for distributions of
principal sequentially, or based on specified payment schedules or other
methodologies, to the extent of available funds; and/or (vii) provide for cash
distributions based on available funds (collectively, "Spread Certificates"), in
each case as described in the related Prospectus Supplement. Any such classes
may include classes of Offered Certificates.
Unless otherwise provided in the related Prospectus Supplement, each
class of Offered Certificates of a series will be issued in minimum
denominations corresponding to the Certificate Balances or, in case of Stripped
Interest Certificates, notional amounts specified in such Prospectus Supplement.
The transfer of any Offered Certificates may be registered and such Certificates
may be exchanged without the payment of any service charge payable in connection
with such registration of transfer or exchange, 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. One or more classes of Certificates of a series may
be issued in definitive form ("Definitive Certificates") or in book-entry form
("Book-Entry Certificates"), as provided in the related Prospectus Supplement.
See "Risk Factors--Book-Entry Registration" and "Description of the
Certificates--Book-Entry Registration and Definitive Certificates". Definitive
Certificates will be exchangeable for other Certificates of the same class and
series of a like aggregate Certificate Balance or notional amount but of
different authorized denominations. See "Risk Factors--Limited Liquidity" and
"--Limited Assets".
DISTRIBUTIONS
Distributions on the Certificates of each series will be made by or on
behalf of the Trustee or the Master Servicer on each Distribution Date as
specified in the related Prospectus Supplement from the Available Distribution
Amount for such series and such Distribution Date, except as otherwise provided
in
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the related Prospectus Supplement. Except as otherwise specified in the related
Prospectus Supplement, distributions (other than the final distribution) 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 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
Trustee or other person required to make such payments 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 or
denomination 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 any class of Certificates (whether
Definitive Certificates or Book-Entry Certificates) will be made only upon
presentation and surrender of the Certificates at the location specified in the
notice to Certificateholders of such final distribution.
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 will equal the sum of
the following amounts:
(i) the total amount of all cash on deposit in the related Certificate
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected but
due on a date subsequent to the related Due Period (unless the related
Prospectus Supplement provides otherwise, a "Due Period" with respect
to any Distribution Date will commence on the second day of the month
in which the immediately preceding Distribution Date occurs, or the day
after the Cut-off Date in the case of the first Due Period, and will
end on the first day of the month of the related Distribution Date),
(b) all prepayments, together with related payments of the
interest thereon and related Prepayment Premiums, Liquidation Proceeds,
Insurance Proceeds and other unscheduled recoveries received subsequent
to the related Prepayment Period, as defined in the related Prospectus
Supplement, and
(c) all amounts in the Certificate Account that are due or
reimbursable to the Depositor, the Trustee, a Mortgage Asset 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,
including any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Master Servicer with respect to such
Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Master Servicer 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 to the holders of 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.
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DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each class of Certificates (other than certain classes of Stripped
Principal Certificates and Spread Certificates that have no Pass-Through Rate)
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.
Distributions of interest in respect of the Certificates of any class
will be made on each Distribution Date (other than any class of Accrual
Certificates, which will be entitled to distributions of accrued interest
commencing only on the Distribution Date, or under the circumstances, specified
in the related Prospectus Supplement, and any class of Stripped Principal
Certificates and Spread Certificates that are not entitled to any distributions
of interest) based on the Accrued Certificate Interest for such class and such
Distribution Date, subject to the sufficiency of the portion of the Available
Distribution Amount allocable to such class on such Distribution Date. Prior to
the time interest is distributable on any class of Accrual Certificates, the
amount of Accrued Certificate Interest otherwise distributable on such class
will be added to the Certificate Balance thereof on each Distribution Date. With
respect to each class of Certificates and each Distribution Date (other than
certain classes of Stripped Interest Certificates and Spread Certificates),
"Accrued Certificate Interest" will be equal to interest accrued for a specified
period on the outstanding Certificate Balance thereof immediately prior to the
Distribution Date, at the applicable Pass-Through Rate, reduced as described
below. Unless otherwise provided in the Prospectus Supplement, Accrued
Certificate Interest on Stripped Interest Certificates will be equal to interest
accrued for a specified period on the outstanding notional amount thereof
immediately prior to each Distribution Date, at the applicable Pass-Through
Rate, reduced as described below. The method of determining the notional amount
for any class of Stripped Interest Certificates will be described in the related
Prospectus Supplement. Reference to the notional amount is solely for
convenience in making certain calculations and does not represent the right to
receive any distributions of principal. Unless otherwise provided in the related
Prospectus Supplement, the Accrued Certificate Interest on a series of
Certificates will be reduced in the event of prepayment interest shortfalls,
which are shortfalls in collections of interest for a full accrual period
resulting from prepayments prior to the due date in such accrual period on the
Mortgage Loans comprising or underlying the Mortgage Assets in the Trust Fund
for such series. The particular manner in which such shortfalls are to be
allocated among some or all of the classes of Certificates of that series will
be specified in the related Prospectus Supplement. The related Prospectus
Supplement will also describe the extent to which the amount of Accrued
Certificate Interest that is otherwise distributable on (or, in the case of
Accrual Certificates, that may otherwise be added to the Certificate Balance of)
a class of Offered Certificates may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on or in
respect of the Mortgage Assets in the related Trust Fund. Unless otherwise
provided in the related Prospectus Supplement, any reduction in the amount of
Accrued Certificate Interest otherwise distributable on a class of Certificates
by reason of the allocation to such class of a portion of any deferred interest
on or in respect of the Mortgage Assets in the related Trust Fund will result in
a corresponding increase in the Certificate Balance of such class. See "Risk
Factors--Average Life of Certificates; Prepayments; Yields" and "Yield
Considerations".
DISTRIBUTIONS OF PRINCIPAL OF THE CERTIFICATES
The Certificates of each series, other than certain classes of Stripped
Interest Certificates and Spread Certificates, will have a "Certificate Balance"
which, at any time, will equal the then maximum amount that the holder will be
entitled to receive in respect of principal out of the future cash flow on the
Mortgage Assets and other assets included in the related Trust Fund. The
outstanding Certificate Balance of a Certificate will be reduced to the extent
of distributions of principal thereon from time to time and, if and to the
extent so provided in the related Prospectus Supplement, by the amount of losses
incurred in respect of the related Mortgage Assets, may be increased in respect
of deferred interest on the related Mortgage Loans to the extent provided in the
related Prospectus Supplement and, in the case of Accrual Certificates prior to
the Distribution Date on which distributions of interest are required to
commence, will be increased by the amount of any Accrued Certificate Interest
accrued thereon. The initial aggregate Certificate Balance of all classes of
Certificates of a series will not be greater than the outstanding aggregate
principal balance
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of the related Mortgage Assets as of the applicable Cut-off Date. The initial
aggregate Certificate 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 in
accordance with the provisions described in such Prospectus Supplement until the
Certificate Balance of such class has been reduced to zero.
DISTRIBUTIONS ON THE CERTIFICATES OF PREPAYMENT PREMIUMS OR IN RESPECT OF EQUITY
PARTICIPATIONS
If so provided in the related Prospectus Supplement, Prepayment
Premiums or payments in respect of Equity Participations that are collected on
the Mortgage Assets in the related Trust Fund will be distributed on each
Distribution Date to the class or classes of Certificates entitled thereto in
accordance with the provisions described in such Prospectus Supplement.
DISTRIBUTIONS IN RESPECT OF SPREAD CERTIFICATES
If so provided in the related Prospectus Supplement, a portion of the
Available Distribution Amount for the applicable series of Certificates may be
distributed on such date to one or more classes of Spread Certificates of such
series, in accordance with the provisions described in such Prospectus
Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of
Certificates consisting of one or more classes of Subordinate Certificates, the
amount of any losses or shortfalls in collections on the Mortgage Assets will be
borne first by a class of Subordinate Certificates in the priority and manner,
and subject to the limitations, specified in such Prospectus Supplement. See
"Description of Credit Support" for a description of the types of protection
that may be included in a Trust Fund against losses and shortfalls on Mortgage
Assets comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Certificates evidencing an interest in a
Trust Fund consisting of Mortgage Assets other than MBS or Tiered MBS, unless
otherwise provided in the related Prospectus Supplement, the Master Servicer
will be required as part of its servicing responsibilities to advance, on or
before each Distribution Date, from its own funds and/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 (other than any balloon payments) and interest (net of related
servicing fees and Retained Interest) that were due on the Whole Loans in such
Trust Fund 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). In the case of a series of Certificates that includes one or more
classes of Subordinate Certificates and if so provided in the related Prospectus
Supplement, the Master Servicer's advance obligation may be limited only to the
portion of such delinquencies necessary to make the required distributions on
one or more classes of Senior Certificates and/or may be subject to the Master
Servicer's good faith determination that such advances will be reimbursable not
only from Related Proceeds but also from collections on other Mortgage Assets
otherwise distributable on one or more classes of such Subordinate Certificates.
See "Description of Credit Support".
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses. Unless
otherwise provided in the related Prospectus Supplement, advances of the Master
Servicer's funds will be reimbursable only out of related recoveries on the
Mortgage Loans (including amounts received under any form of Credit Support)
respecting which such advances were made (as to any Mortgage Loan, "Related
Proceeds") and, if so provided in the Prospectus Supplement, out of any amounts
otherwise distributable on one or more classes of Subordinate Certificates of
such series; provided, however, that any such advance will be reimbursable from
any amounts in the Certificate Account prior to any distributions being made on
the Certificates to the extent that the Master Servicer shall determine in good
faith that such advance (a "Nonrecoverable Advance") will not ultimately be
recoverable from Related Proceeds or, if applicable, from collections on other
Mortgage Assets otherwise distributable on such Subordinate Certificates. If
advances have been made by the Master Servicer from excess funds in the
Certificate Account, the Master Servicer will be required to 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. If so specified
in the related Prospectus
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Supplement, the obligation 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.
If and to the extent so provided in the related Prospectus Supplement,
the Master Servicer will be entitled to receive interest at the rate specified
therein on its outstanding advances and will be entitled to pay itself such
interest periodically from general collections on the Mortgage Loans prior to
any payment to Certificateholders or as otherwise provided in the related
Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes MBS or Tiered MBS will describe any
corresponding advancing obligation of any person in connection with such MBS.
REPORTS TO CERTIFICATEHOLDERS
With each distribution to holders of any class of Certificates of a
series, a Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, 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 that, unless otherwise specified in the related
Prospectus Supplement, will set forth, in each case to the extent applicable and
available:
(i) the amount of such distribution to holders of Certificates of such
class applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of Certificates of such
class allocable to Accrued Certificate Interest;
(iii) the amount, if any, of such distribution allocable to (a)
Prepayment Premiums and (b) payments on account of Equity Participations;
(iv) the amount of related servicing compensation received by a Master
Servicer (and, if payable directly out of the related Trust Fund, by any
Special Servicer and any Sub-Servicer) and such other customary information
as any such Master Servicer or the Trustee deems necessary or desirable, or
that a Certificateholder reasonably requests, to enable Certificateholders
to prepare their tax returns;
(v) 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;
(vi) the aggregate principal balance of the Mortgage Assets at the
close of business on such Distribution Date;
(vii) the number and aggregate principal balance of Mortgage Loans in
respect of which (a) one scheduled payment is delinquent, (b) two scheduled
payments are delinquent, (c) three or more scheduled payments are
delinquent and (d) foreclosure proceedings have been commenced;
(viii) with respect to each Mortgage Loan that is delinquent two or
more months, (a) the loan number thereof, (b) the unpaid balance thereof,
(c) whether the delinquency is in respect of any balloon payment, (d) the
aggregate amount of unreimbursed servicing expenses and unreimbursed
advances in respect thereof, (e) if applicable, the aggregate amount of any
interest accrued and payable on related servicing expenses and related
advances, (f) whether a notice of acceleration has been sent to the
mortgagor and, if so, the date of such notice, (g) whether foreclosure
proceedings have been commenced and, if so, the date so commenced and (h)
if such Mortgage Loan is more than three months delinquent and foreclosure
has not been commenced, the reason therefor;
(ix) with respect to any Mortgage Loan liquidated during the related
Due Period or Prepayment Period, as applicable (other than by payment in
full), (a) the loan number thereof, (b) the manner in which it was
liquidated, (c) the aggregate amount of Liquidation Proceeds received, (d)
the portion of such Liquidation Proceeds payable or reimbursable to the
Master Servicer in respect of such Mortgage Loan and (e) the amount of any
loss to Certificateholders;
(x) with respect to each REO Property included in the Trust Fund as of
the end of the related Due Period or Prepayment Period, as applicable, (a)
the loan number of the related Mortgage Loan, (b) the date of acquisition,
(c) the book value, (d) the principal balance of the related Mortgage Loan
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immediately following such Distribution Date (calculated as if such
Mortgage Loan were still outstanding taking into account certain limited
modifications to the terms thereof specified in the Agreement), (e) the
aggregate amount of unreimbursed servicing expenses and unreimbursed
advances in respect thereof and (f) if applicable, the aggregate amount of
interest accrued and payable on related servicing expenses and related
advances;
(xi) with respect to any such REO Property sold during the related Due
Period or Prepayment Period, as applicable, (a) the loan number of the
related Mortgage Loan, (b) the aggregate amount of sale proceeds, (c) the
portion of such sales proceeds payable or reimbursable to the Master
Servicer or a Special Servicer in respect of such REO Property or the
related Mortgage Loan and (d) the amount of any loss to Certificateholders
in respect of the related Mortgage Loan;
(xii) the aggregate Certificate Balance or notional amount, as the case
may be, 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 Balance due to the
allocation of any loss and increase in the Certificate Balance of a class
of Accrual Certificates in the event that Accrued Certificate Interest has
been added to such balance;
(xiii) the aggregate amount of principal prepayments made during the
related Prepayment Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of the close
of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Certificate Interest, if any, on
each class of Certificates at the close of business on such Distribution
Date;
(xvii) 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;
(xviii) 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;
(xix) 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; and
(xx) the aggregate amount of payments by the mortgagors of (a) default
interest, (b) late charges and (c) assumption and modification fees
collected during the related Due Period or Prepayment Period, as
applicable.
In the case of information furnished pursuant to subclauses (i)-(iv)
above, the amounts shall be expressed as a dollar amount per minimum
denomination of Certificates or for such other specified portion thereof. The
Prospectus Supplement for each series of Offered Certificates will describe any
additional information to be included in reports to the holders of such
Certificates.
Within a reasonable period of time after the end of each calendar year,
the Master Servicer, if any, 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)-(iv) 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. See "Description
of the Certificates--Book-Entry Registration and Definitive Certificates".
If the Trust Fund for a series of Certificates includes MBS or Tiered
MBS, the related Prospectus Supplement will describe the contents of the
statements that will be forwarded to Certificateholders of that series in
connection with distributions made to them.
TERMINATION
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The obligations created by the Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Certificate Account or by the Master Servicer,
if any, or the Trustee 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 Mortgage Asset subject thereto or the disposition of all property
acquired upon foreclosure of any Mortgage Loan subject thereto 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 such Agreement. Written
notice of termination of the Agreement will be given to each Certificateholder,
and the final distribution will be made only upon presentation and surrender of
the Certificates at the location to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Certificate Balance of
a specified class or classes of Certificates by a specified percentage or
amount, the party specified therein will solicit bids for the purchase of all
assets of the Trust Fund, or of a sufficient portion of such assets to retire
such class or classes under the circumstances and in the manner set forth
therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
If so provided in the related Prospectus Supplement, one or more
classes of the Offered Certificates of any series will be issued as Book-Entry
Certificates, and each such class will be represented by one or more single
Certificates registered in the name of the depository, The Depository Trust
Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations ("Participants") and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants include
Salomon Smith Barney Inc., securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other organizations.
Indirect access to the DTC system also is available to 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").
Unless otherwise provided in the related Prospectus Supplement,
investors that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or other interests in,
Book-Entry Certificates may do so only through Participants and Indirect
Participants. In addition, such investors ("Certificate Owners") will receive
all distributions on the Book-Entry Certificates through DTC and its
Participants. Under a book-entry format, Certificate Owners will receive
payments after the related Distribution Date because, while payments are
required to be forwarded to DTC's nominee, on each such date, DTC will forward
such payments to its Participants which thereafter will be required to forward
them to Indirect Participants or Certificate Owners. Unless otherwise provided
in the related Prospectus Supplement, the only "Certificateholder"(as such term
is used in the Agreement) will be the nominee of DTC, and the Certificate Owners
will not be recognized by the Trustee as Certificateholders under the Agreement.
Certificate Owners will be permitted to exercise the rights of
Certificateholders under the related Agreement only indirectly through the
Participants who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Book-Entry Certificates
and is required 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.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Certificate
Owner to pledge its interest in the Book-Entry Certificates to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of its
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interest in the Book-Entry Certificates, may be limited due to the lack of a
physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to
be taken by a Certificateholder under an Agreement only at the direction of one
or more Participants to whose account with DTC interests in the Book-Entry
Certificates are credited.
Unless otherwise specified in the related Prospectus Supplement,
Certificates initially issued in book-entry form will be issued as Definitive
Certificates 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 properly discharge its responsibilities as depository
with respect to the Certificates and the Depositor is unable to locate a
qualified successor or (ii) the Depositor, at its option, elects to terminate
the book-entry system through DTC.
Upon the occurrence of either of the events described in the
immediately preceding paragraph, DTC is required to notify all Participants of
the availability through DTC of Definitive Certificates for the Certificate
Owners. Upon surrender by DTC of the certificate or certificates representing
the Book-Entry Certificates, together with instructions for re-registration, the
Trustee will issue (or cause to be issued) to the Certificate Owners identified
in such instructions the Definitive Certificates to which they are entitled, and
thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
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, a Master Servicer, any Special Servicer appointed
as of the date of the Pooling and Servicing Agreement and the Trustee. The
Certificates of each series evidencing interests in a Trust Fund consisting
exclusively of MBS and/or Tiered MBS will be issued pursuant to a Trust
Agreement between the Depositor and a Trustee. Any Master Servicer, any such
Special Servicer and the Trustee with respect to any series of Certificates will
be named in the related Prospectus Supplement. 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. A form of a Pooling and Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The following summaries describe certain provisions
that 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 description of such provisions in the
related Prospectus Supplement. 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. The Depositor will provide a copy of the Agreement (without
exhibits) relating to any series of Certificates without charge upon written
request of a holder of a Certificate of such series addressed to Salomon
Brothers Mortgage Securities VII, Inc., Seven World Trade Center, New York, New
York 10048. Attention: Secretary.
ASSIGNMENT OF MORTGAGE ASSETS; REPURCHASES
At the time of issuance of any series of Certificates, the Depositor
will assign (or cause to be assigned) to the designated Trustee the Mortgage
Assets to be included in the related Trust Fund, together with all principal and
interest to be received on or with respect to such Mortgage Assets after the
Cut-off Date, other than principal and interest due on or before the Cut-off
Date and other than any Retained Interest. The Trustee will, concurrently with
such assignment, deliver the Certificates to the Depositor in exchange for the
Mortgage Assets and the other assets comprising the Trust Fund for such series.
Each Mortgage Asset will be identified in a schedule appearing as an exhibit to
the related Agreement. Unless otherwise provided in the related Prospectus
Supplement, such schedule will include detailed information (i) in respect of
each Mortgage Loan included in the related Trust Fund, including without
limitation, the address of the related Mortgaged Property and type of such
property, the Mortgage Rate and, if applicable, the applicable index, margin,
adjustment date and any rate cap information, the original and remaining term to
maturity, the original and outstanding principal balance and balloon payment, if
any, the Value, Loan-to-Value Ratio and Debt Service Coverage Ratio as of the
date indicated and payment and prepayment provisions, if applicable, and (ii) in
respect of each MBS and Tiered MBS included in the related
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Trust Fund, including without limitation, the MBS Issuer, MBS Servicer and MBS
Trustee, the pass-through or bond rate or formula for determining such rate, the
issue date and original and remaining term to maturity, if applicable, the
original and outstanding principal amount and payment provisions, if applicable.
With respect to each Whole Loan, the Depositor will deliver or cause to
be delivered to the Trustee (or to the custodian hereinafter referred to)
certain loan documents, which unless otherwise specified in the related
Prospectus Supplement will include the original Mortgage Note endorsed, without
recourse, to the order of the Trustee, the original Mortgage (or a certified
copy thereof) with evidence of recording indicated thereon and an assignment of
the Mortgage to the Trustee in recordable form. Unless otherwise provided in the
related Prospectus Supplement, the related Agreement will require that the
Depositor or other party thereto promptly cause each such assignment of Mortgage
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 related Whole Loan against the claim of any subsequent
transferee or any successor to or creditor of the Depositor, the Master
Servicer, the relevant Mortgage Asset Seller or any other prior holder of the
Whole Loan.
The Trustee (or the custodian) will review such Whole Loan documents
within a specified period of days after receipt thereof, and the Trustee (or the
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 Asset Seller. If the Mortgage Asset Seller cannot
cure the omission or defect within a specified number of days after receipt of
such notice, then unless otherwise specified in the related Prospectus
Supplement, the Mortgage Asset Seller will be obligated, within a specified
number of days of receipt of such notice, to repurchase the related Whole Loan
from the Trustee at the Purchase Price or substitute for such Mortgage Loan.
There can be no assurance that a Mortgage Asset Seller will fulfill this
repurchase or substitution obligation, and neither the Master Servicer nor the
Depositor will be obligated to repurchase or substitute for such Mortgage Loan
if the Mortgage Asset 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.
With respect to each MBS and Tiered MBS, the Depositor will deliver or
cause to be delivered to the Trustee (or the custodian) the original certificate
or other definitive evidence of the MBS or Tiered MBS, together with bond power
or other instruments, certifications or documents required to transfer fully the
MBS or Tiered MBS to the Trustee for the benefit of the Certificateholders in
accordance with the related MBS Agreement. Unless otherwise provided in the
related Prospectus Supplement, the related Agreement will require that either
the Depositor or the Trustee promptly cause the MBS or Tiered MBS to be
re-registered, with the applicable persons, in the name of the Trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the related Prospectus Supplement the
Depositor will, with respect to each Whole Loan constituting a Mortgage Asset in
the related Trust Fund, make or assign certain representations and warranties,
as of a specified date (the person making such representations and warranties,
the "Warranting Party") covering, by way of example, the following types of
matters: (i) the accuracy of the information set forth for such Whole Loan on
the schedule of Mortgage Assets appearing as an exhibit to the related
Agreement; (ii) the existence of title insurance insuring the lien priority of
the Whole Loan; (iii) the authority of the Warranting Party to sell the Whole
Loan; (iv) the payment status of the Whole Loan and the status of payments of
taxes, assessments and other charges affecting the related Mortgaged Property;
(v) the existence of customary provisions in the related Mortgage Note and
Mortgage to permit realization against the Mortgaged Property of the benefit of
the security of the Mortgage; and (vi) the existence of hazard and extended
perils insurance coverage on the Mortgaged Property.
Any Warranting Party, if other than the Depositor, shall be a Mortgage
Asset Seller or an affiliate thereof or such other person acceptable to the
Depositor and shall be identified in the related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan may have
been made as of a date prior to the applicable Cut-off Date. A substantial
period of time may have elapsed between such date and
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the date of initial issuance of the related series of Certificates evidencing an
interest in such Whole Loan. Unless otherwise specified in the related
Prospectus Supplement, in the event of a breach of any such representation or
warranty, the Warranting Party will be obligated to cure such breach or
repurchase or replace the affected Whole Loan as described below. Since the
representations and warranties may not address events that may occur following
the date as of which they were made, the Warranting Party 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 such date. Such party would have no such obligations if the
relevant event that causes such breach occurs after such date. However, the
Depositor will not include any Whole 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
Whole Loan will not be accurate and complete in all material respects as of the
date of initial issuance of the related series of Certificates.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Trustee will be required
to notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of a Whole Loan that materially
and adversely affects the value of such Mortgage Loan or the interests therein
of the Certificateholders. If such Warranting Party cannot cure such breach
within a specified period following the date on which such party was notified of
such breach, then such Warranting Party will be obligated to repurchase such
Mortgage Loan from the Trustee within a specified period from the date on which
the Warranting Party was notified of such breach, at the Purchase Price
therefor. As to any Whole Loan, unless otherwise specified in the related
Prospectus Supplement, the "Purchase Price" is equal to the sum of the unpaid
principal balance thereof, plus unpaid accrued interest thereon at the Mortgage
Rate from the date as to which interest was last paid to the due date in the
Prepayment Period in which the relevant purchase is to occur, plus certain
servicing expenses that are reimbursable to the Master Servicer. If so provided
in the Prospectus Supplement for a series, a Warranting Party, 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 such series of
Certificates, to cause the removal of such Mortgage Loan from the Trust Fund and
substitute in its place one or more other Whole Loans, in accordance with the
standards described in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, 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 Warranting Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute for a
Whole Loan if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that Warranting Parties will carry out such obligations
with respect to Whole Loans.
With respect to a Trust Fund that includes MBS or Tiered MBS, the
related Prospectus Supplement will describe any representations or warranties
made or assigned by the Depositor with respect to such MBS or Tiered MBS, the
person making them and the remedies for breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. Unless otherwise provided in the
related Prospectus Supplement, a breach of any such representation of the Master
Servicer which materially and adversely affects the interests of the
Certificateholders and which continues unremedied for thirty days after the
giving of written notice of such breach 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, will
constitute an Event of Default. See "--Events of Default" and "--Rights Upon
Event of Default".
CERTIFICATE ACCOUNT
GENERAL
The Master Servicer, if any, 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 Mortgage
Assets (collectively, the "Certificate Account"), which must be either (i) an
account or accounts the deposits in which are insured by the Bank Insurance Fund
or the Savings Association Insurance Fund of the Federal Deposit Insurance
Corporation ("FDIC") (to the limits established by the
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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 or (ii) otherwise 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. The collateral eligible to secure amounts in the
Certificate Account is limited to United States government securities and other
investment grade obligations specified in the Agreement ("Permitted
Investments"). A Certificate Account may be maintained as an interest bearing or
a non-interest bearing account and the funds held therein may be invested
pending each succeeding Distribution Date in certain short-term 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 a Master Servicer or its designee as additional servicing compensation. The
Certificate Account may be maintained with an institution that is an affiliate
of the Master Servicer, if applicable, provided that such institution meets the
standards imposed by the Rating Agency or Agencies. 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
mortgage pass-through certificates and may contain other funds respecting
payments on mortgage loans belonging to the Master Servicer or serviced or
master serviced by it on behalf of others.
DEPOSITS
A Master Servicer or the Trustee will deposit or cause to be deposited
in the Certificate Account for each Trust Fund on a daily basis, unless
otherwise provided in the related Agreement and described in the related
Prospectus Supplement, the following payments and collections received, or
advances made, by the Master Servicer or the Trustee 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 Assets;
(ii) all payments on account of interest on the Mortgage
Assets, including any default interest collected, in each case net of
any portion thereof retained by a Master Servicer or a Sub-Servicer as
its servicing compensation and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies to be
maintained in respect of each Mortgaged Property securing a Mortgage
Loan in the Trust Fund (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 a Master Servicer or
the related Sub-Servicer, subject to the terms and conditions of the
related Mortgage and Mortgage Note) (collectively, "Insurance
Proceeds") and all other amounts received and retained in connection
with the liquidation of defaulted Mortgage Loans in the Trust Fund, 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 paid under any instrument or drawn from any
fund that constitutes Credit Support for the related series of
Certificates as described under "Description of Credit Support";
(v) any advances made as described under "Description of the
Certificates--Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as
described under "Description of the Trust Funds--Cash Flow Agreements";
(vii) all proceeds of any Mortgage Loan or property acquired
in respect thereof purchased by the Depositor, any Mortgage Asset
Seller or any other specified person as described under "--Assignment
of Mortgage Assets; Repurchases" and "--Representations and Warranties;
Repurchases", all proceeds of any defaulted Mortgage Loan purchased as
described under "--Realization Upon Defaulted Whole Loans", and all
proceeds of any Mortgage Asset purchased as described under
"Description of the Certificates--Termination" (also, "Liquidation
Proceeds");
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(viii) any amounts paid by a Master Servicer to cover certain
interest shortfalls arising out of the prepayment of Mortgage Loans in
the Trust Fund as described under "Description of the
Agreements--Retained Interest; Servicing Compensation and Payment of
Expenses";
(ix) to the extent that any such item does not constitute
additional servicing compensation to a Master Servicer, any payments on
account of modification or assumption fees, late payment charges,
Prepayment Premiums or Equity Participations on the Mortgage Assets;
(x) all payments required to be deposited in the Certificate
Account with respect to any deductible clause in any blanket insurance
policy described under "--Hazard Insurance Policies";
(xi) any amount required to be deposited by a Master Servicer
or the Trustee in connection with losses realized on investments for
the benefit of the Master Servicer or the Trustee, as the case may be,
of funds held in the Certificate Account; and
(xii) any other amounts required to be deposited in the
Certificate Account as provided in the related Agreement and described
in the related Prospectus Supplement.
WITHDRAWALS
A Master Servicer or the Trustee may, from time to time, unless
otherwise provided in the related Agreement and described in the related
Prospectus Supplement, make withdrawals from the Certificate Account for each
Trust Fund for any of the following purposes:
(i) to make distributions to the Certificateholders on each
Distribution Date;
(ii) to reimburse a Master Servicer for unreimbursed amounts
advanced as described under "Description of the Certificates--Advances
in Respect of Delinquencies", such reimbursement to be made out of
amounts received which were identified and applied by the Master
Servicer as late collections of interest (net of related servicing fees
and Retained Interest) on and principal of the particular Mortgage
Loans with respect to which the advances were made or out of amounts
drawn under any form of Credit Support with respect to such Mortgage
Loans;
(iii) to reimburse a Master Servicer for unpaid servicing fees
earned and certain unreimbursed servicing expenses incurred with
respect to Mortgage Loans in the Trust Fund and properties acquired in
respect thereof, such reimbursement to be made out of amounts that
represent Liquidation Proceeds and Insurance Proceeds collected on the
particular Mortgage Loans and properties, and net income collected on
the particular properties, with respect to which such fees were earned
or such expenses were incurred or out of amounts drawn under any form
of Credit Support with respect to such Mortgage Loans and properties;
(iv) to reimburse a Master Servicer for any advances described
in clause (ii) above and any servicing expenses described in clause
(iii) above which, in the Master Servicer's good faith judgment, will
not be recoverable from the amounts described in clauses (ii) and
(iii), respectively, such reimbursement to be made from amounts
collected on other Mortgage Assets or, if and to the extent so provided
by the related Agreement and described in the related Prospectus
Supplement, just from that portion of amounts collected on other
Mortgage Assets that is otherwise distributable on one or more classes
of Subordinate Certificates of the related series;
(v) if and to the extent described in the related Prospectus
Supplement, to pay a Master Servicer interest accrued on the advances
described in clause (ii) above and the servicing expenses described in
clause (iii) above while such remain outstanding and unreimbursed;
(vi) to pay for costs and expenses incurred by the Trust Fund
for environmental site assessments with respect to, and for
containment, clean-up or remediation of hazardous wastes and materials
on, Mortgaged Properties securing defaulted Mortgage Loans in the Trust
Fund as described under "--Realization Upon Defaulted Whole Loans";
(vii) to reimburse a Master Servicer, the Depositor, or any of
their respective directors, officers, employees and agents, as the case
may be, for certain expenses, costs and liabilities incurred thereby,
as and to the extent described under "--Certain Matters Regarding a
Master Servicer and the Depositor";
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(viii) if and to the extent described in the related
Prospectus Supplement, to pay (or to transfer to a separate account for
purposes of escrowing for the payment of) the Trustee's fees;
(ix) to reimburse the Trustee or any of its directors,
officers, employees and agents, as the case may be, for certain
expenses, costs and liabilities incurred thereby, as and to the extent
described under "--Certain Matters Regarding the Trustee";
(x) to pay a Master Servicer, as additional servicing
compensation, interest and investment income earned in respect of
amounts held in the Certificate Account;
(xi) to pay the person entitled thereto any amounts deposited
in the Certificate Account that were identified and applied by the
Master Servicer as recoveries of Retained Interest;
(xii) to pay for costs reasonably incurred in connection with
the proper operation, management and maintenance of any Mortgaged
Property acquired for the benefit of Certificateholders by foreclosure
or by deed in lieu of foreclosure or otherwise, such payments to be
made out of income received on such property;
(xiii) if one or more elections have been made to treat the
Trust Fund or designated portions thereof as a REMIC, to pay any
federal, state or local taxes imposed on the Trust Fund or its assets
or transactions, as and to the extent described under "Federal Income
Tax Consequences--REMICS--Prohibited Transactions Tax and Other
Taxes";
(xiv) to pay for the cost of an independent appraiser or other
expert in real estate matters retained to determine a fair sale price
for a defaulted Mortgage Loan in the Trust Fund or a property acquired
in respect thereof in connection with the liquidation of such Mortgage
Loan or property;
(xv) to pay for the cost of various opinions of counsel
obtained pursuant to the related Agreement for the benefit of
Certificateholders;
(xvi) to pay for the costs of recording the related Agreement
if such recordation materially and beneficially affects the interests
of Certificateholders;
(xvii) to pay the person entitled thereto any amounts
deposited in the Certificate Account in error, including amounts
received on any Mortgage Asset after its removal from the Trust Fund
whether by reason of purchase or substitution as contemplated by
"--Assignment of Mortgage Assets; Repurchase" and "--Representations
and Warranties; Repurchases" or otherwise;
(xviii) to make any other withdrawals permitted by the related
Agreement and described in the related Prospectus Supplement; and
(xix) to clear and terminate the Certificate Account at the
termination of the Trust Fund.
COLLECTION AND OTHER SERVICING PROCEDURES
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer, directly or through Sub-Servicers, is required to make
reasonable efforts to collect all scheduled payments under the Whole 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 Whole Loans and
held for its own account, provided such procedures are consistent with (i) the
terms of the related Agreement and any related hazard insurance policy or
instrument of Credit Support included in the related Trust Fund described herein
or under "Description of Credit Support", (ii) applicable law and (iii) the
general servicing standard specified in the related Prospectus Supplement or, if
no such standard is so specified, its normal servicing practices (in either
case, the "Servicing Standard"). In connection therewith, the Master Servicer
will be permitted in its discretion to waive any late payment charge or penalty
interest in respect of a late Whole Loan payment.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus Supplement,
and filing and settling claims thereunder; maintaining escrow or impoundment
accounts of mortgagors for payment of taxes, insurance and other items required
to be paid by any mortgagor pursuant to the Whole Loan; processing assumptions
or substitutions in those cases where the Master Servicer has determined not to
enforce any applicable due-on-sale clause; attempting to cure delinquencies;
supervising foreclosures; inspecting and managing Mortgaged Properties acquired
on behalf of the Trust Fund through foreclosure, deed-in-lieu of foreclosure or
otherwise (each, an "REO Property");
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and maintaining accounting records relating to the Whole Loans. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer will be
responsible for filing and settling claims in respect of particular Whole Loans
under any applicable instrument of Credit Support. See "Description of Credit
Support".
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer may agree to modify, waive or amend any term of any Whole Loan
in a manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (i) affect the amount or timing of any scheduled
payments of principal or interest on the Whole Loan or (ii) in its judgment,
materially impair the security for the Whole Loan or reduce the likelihood of
timely payment of amounts due thereon. The Master Servicer also may agree to any
modification, waiver or amendment that would so affect or impair the payments
on, or the security for, a Whole Loan if, unless otherwise provided in the
related Prospectus Supplement, (i) in its judgment, a material default on the
Whole Loan has occurred or a payment default is imminent and (ii) in its
judgment, such modification, waiver or amendment is reasonably likely to produce
a greater recovery with respect to the Whole Loan on a present value basis than
would liquidation. The Master Servicer is required to notify the Trustee in the
event of any modification, waiver or amendment of any Whole Loan.
SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in respect of
the Whole Loans to third-party servicers (each, a "Sub-Servicer"), but such
Master Servicer will remain obligated under the related Agreement. Each
sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") must be consistent with the terms of the related
Agreement and must provide that, if for any reason the Master Servicer for the
related series of Certificates is no longer acting in such capacity, the Trustee
or any successor Master Servicer may assume the Master Servicer's rights and
obligations under such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, 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 Whole 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 an Agreement. See "--Retained Interest, Servicing Compensation
and Payment of Expenses".
SPECIAL SERVICERS
To the extent so specified in the related Prospectus Supplement, one or
more Special Servicers may be a party to the related Agreement or may be
appointed by the Master Servicer or another specified party. A Special Servicer
for any series of Certificates may be an affiliate of the Depositor or the
Master Servicer and may hold, or be affiliated with the holder of, Subordinate
Certificates of such series. A Special Servicer may be entitled to any of the
rights, and subject to any of the obligations, described herein in respect of a
Master Servicer. In general, a Special Servicer's duties will relate to
defaulted Mortgage Loans, including instituting foreclosures and negotiating
work-outs. The related Prospectus Supplement will describe the rights,
obligations and compensation of any Special Servicer for a particular series of
Certificates. The Master Servicer will be liable for the performance of a
Special Servicer only if, and to the extent, set forth in the related Prospectus
Supplement. In certain cases the Master Servicer may be appointed the Special
Servicer.
In general, the Special Servicer will be obligated to operate and
manage any Mortgaged Property acquired as REO Property in a manner that would,
to the extent commercially feasible, maximize the Trust Fund's net after-tax
proceeds from such property. After the Special Servicer reviews the operation of
such property and consults with the Trustee to determine the Trustee's federal
income tax reporting position with respect to the income it is anticipated that
the Trust Fund would derive from such property, the Special Servicer could
determine (particularly in the case of REO Properties that are hotels) that it
would not be commercially feasible to manage and operate such property in a
manner that would avoid the imposition of a tax on "net income from foreclosure
property" within the meaning of Section 857(b)(4)(B) of the Code or a tax on
"prohibited transactions" under Section 860F of the Code (either such tax
referred to herein as an "REO Tax"). To the extent that income the Trust Fund
receives from an REO Property is subject to a tax on (i) "net income from
foreclosure property", such income would be subject to federal tax at the
highest
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marginal corporate tax rate (currently 35%) or (ii) "prohibited transactions",
such income would be subject to federal tax at a 100% rate. The determination as
to whether income from an REO Property would be subject to an REO Tax will
depend on the specific facts and circumstances relating to the management and
operation of each REO Property. Generally, income from an REO Property that is
directly operated by the Special Servicer would be apportioned and classified as
"service" or "non-service" income. The "service" portion of such income could be
subject to federal tax either at the highest marginal corporate tax rate or at
the 100% rate on "prohibited transactions", and the "non-service" portion of
such income could be subject to federal tax at the highest marginal corporate
tax rate or, although it appears unlikely, at the 100% rate applicable to
"prohibited transactions". Any REO Tax imposed on the Trust Fund's income from
an REO Property would reduce the amount available for distribution to
Certificateholders. Certificateholders are advised to consult their tax advisors
regarding the possible imposition of REO Taxes in connection with the operation
of commercial REO Properties by REMICs. See "Federal Income Tax Consequences"
herein.
REALIZATION UPON DEFAULTED WHOLE LOANS
A 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 Mortgage 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. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer is required to monitor any Whole 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 are consistent with the Servicing Standard. 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.
The time within which the Master Servicer makes the initial
determination of appropriate action, evaluates the success of corrective action,
develops additional initiatives, institutes foreclosure proceedings and actually
forecloses (or takes a deed to a Mortgaged Property in lieu of foreclosure) on
behalf of the Certificateholders, may vary considerably depending on the
particular Whole Loan, the Mortgaged Property, the mortgagor, the presence of an
acceptable party to assume the Mortgage Loan and the laws of the jurisdiction in
which the Mortgaged Property is located. Under federal bankruptcy law, the
Master Servicer in certain cases may not be permitted to accelerate a Whole Loan
or to foreclose on a Mortgaged Property for a considerable period of time. See
"Certain Legal Aspects of Mortgage Loans".
Any Agreement relating to a Trust Fund that includes Whole Loans may
grant to the Master Servicer and/or the holder or holders of certain classes of
Certificates a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Whole Loan as to which a specified number
of scheduled payments thereunder are delinquent. Any such right granted to the
holder of an Offered Certificate will be described in the related Prospectus
Supplement. The related Prospectus Supplement will also describe any such right
granted to any person if the predetermined purchase price is less than the
Purchase Price described under "--Representations and Warranties; Repurchases".
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer may offer to sell any defaulted Whole Loan described in the
preceding paragraph and not otherwise purchased by any person having a right of
first refusal with respect thereto, if and when the Master Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a greater
recovery on a present value basis than would liquidation through foreclosure or
similar proceeding. The related Agreement will provide that any such offering be
made in a commercially reasonable manner for a specified period and that the
Master Servicer accept the highest cash bid received from any person (including
itself, an affiliate of the Master Servicer or any Certificateholder) that
constitutes a fair price for such defaulted Whole Loan. In the absence of any
bid determined in accordance with the related Agreement to be fair, the Master
Servicer shall proceed with respect to such defaulted Mortgage Loan as described
below. Any bid in an amount at least equal to the Purchase Price described under
"--Representations and Warranties; Repurchases" will in all cases be deemed
fair.
The Master Servicer, on behalf of the Trustee, may at any time
institute foreclosure proceedings, exercise any power of sale contained in any
mortgage, obtain a deed in lieu of foreclosure, or otherwise
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acquire title to a Mortgaged Property securing a Whole Loan by operation of law
or otherwise, if such action is consistent with the Servicing Standard and a
default on the related Mortgage Loan has occurred or, in the Master Servicer's
judgment, is imminent. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer may not, however, acquire title to any Mortgaged
Property or take any other action that would cause the Trustee, for the benefit
of Certificateholders, or any other specified person to be considered to hold
title to, to be a "mortgagee-in-possession" of, or to be an "owner" or an
"operator" of such Mortgaged Property within the meaning of certain federal
environmental laws, unless the Master Servicer has previously determined, based
on a report prepared by a person who regularly conducts environmental audits
(which report will be an expense of the Trust Fund), that either:
(i) the Mortgaged Property is in compliance with applicable
environmental laws, and there are no circumstances present at the
Mortgaged Property relating to the use, management or disposal of any
hazardous substances, hazardous materials, wastes, or petroleum-based
materials for which investigation, testing, monitoring, containment,
clean-up or remediation could be required under any federal, state or
local law or regulation; or
(ii) if the Mortgaged Property is not so in compliance or such
circumstances are so present, then it would be in the best economic
interest of the Trust Fund to acquire title to the Mortgaged Property
and further to take such actions as would be necessary and appropriate
to effect such compliance and/or respond to such circumstances (the
cost of which actions will be an expense of the Trust Fund).
Unless otherwise provided in the related Prospectus Supplement, if
title to any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Master Servicer, on behalf of the Trust Fund, will
be required to sell the Mortgaged Property within two years of acquisition,
unless (i) the Internal Revenue Service grants an extension of time to sell such
property or (ii) the Trustee receives an opinion of independent counsel to the
effect that the holding of the property by the Trust Fund subsequent to two
years after its acquisition will not result in the imposition of a tax on the
Trust Fund or cause the Trust Fund to fail to qualify as a REMIC under the Code
at any time that any Certificate is outstanding. Subject to the foregoing, the
Master Servicer will be required to (i) solicit bids for any Mortgaged Property
so acquired in such a manner as will be reasonably likely to realize a fair
price for such property and (ii) accept the first (and, if multiple bids are
contemporaneously received, the highest) cash bid received from any person that
constitutes a fair price.
If the Trust Fund acquires title to any Mortgaged Property, the Master
Servicer, on behalf of the Trust Fund, may retain an independent contractor to
manage and operate such property. The retention of an independent contractor,
however, will not relieve the Master Servicer of any of its obligations with
respect to the management and operation of such Mortgaged Property. Unless
otherwise specified in the related Prospectus Supplement, any such property
acquired by the Trust Fund will be managed in a manner consistent with the
management and operation of similar property by a prudent lending institution.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made with respect to the
related Trust Fund) on the operations and ownership of any Mortgaged Property
acquired on behalf of the Trust Fund may result in the recovery of an amount
less than the amount that would otherwise be recovered. See "Certain Legal
Aspects of Mortgage Loans--Foreclosure".
If recovery on a defaulted Whole Loan under any related instrument of
Credit Support is not available, 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 Whole Loan. If
the proceeds of any liquidation of the property securing the defaulted Whole
Loan are less than the outstanding principal balance of the defaulted Whole Loan
plus interest accrued thereon at the Mortgage 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 Whole Loan, prior to the
distribution of such Liquidation Proceeds to Certificateholders, amounts
representing its normal servicing compensation on the Whole Loan, unreimbursed
servicing expenses incurred with respect to the Whole Loan and any unreimbursed
advances of delinquent payments made with respect to the Whole Loan.
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Unless otherwise provided in the related Agreement and described in the
related Prospectus Supplement, if any property securing a defaulted Whole Loan
is damaged and proceeds, if any, from the related hazard insurance policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under the related instrument of Credit Support, 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 Whole 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.
As servicer of the Whole Loans, a Master Servicer, on behalf of itself,
the Trustee and the Certificateholders, will present claims to the obligor under
each instrument of Credit Support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Whole Loans.
If a Master Servicer or its designee recovers payments under any
instrument of Credit Support with respect to any defaulted Whole 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 Whole Loan, unreimbursed servicing expenses incurred with respect to the
Whole Loan and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan. See "--Hazard Insurance Policies" and "Description of
Credit Support".
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for a Trust Fund that includes Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage or, if any Mortgage permits the holder thereof to dictate to the
mortgagor the insurance coverage to be maintained on the related Mortgaged
Property, then such coverage as is consistent with the Servicing Standard.
Unless otherwise specified in the related Agreement and described 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 Whole 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 hazard insurance policy
and under any other insurance policy referred to below, or upon the extent to
which information in this regard is furnished by mortgagors. 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 mortgagor 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 will
provide that the Master Servicer may satisfy its obligation to cause each
mortgagor to maintain such a hazard insurance policy by the Master Servicer's
maintaining a blanket policy or a master single interest policy insuring against
hazard losses on the Whole Loans. Unless otherwise provided in the related
Prospectus Supplement, if such policy contains a deductible clause, the Master
Servicer will be required to deposit in the Certificate Account all sums that
would have been deposited therein but for such clause. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer will also be
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, errors and omissions or negligence, 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 Whole Loans will be underwritten
by different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically
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do not cover any physical damage resulting from war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mudflows), wet or dry rot, vermin, domestic animals
and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties
securing the Whole Loans will 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.
Unless otherwise provided in the related Agreement and described in the
related Prospectus Supplement, a Trust Fund that includes Whole Loans will
require the Master Servicer to cause the mortgagor on each Whole Loan to
maintain all such other insurance coverage with respect to the related Mortgaged
Property as is consistent with the terms of the related Mortgage and the
Servicing Standard, which insurance may typically include flood insurance (if
the related Mortgaged Property was located at the time of origination in a
federally designated flood area) and business interruption or loss of rents
insurance.
Under the terms of the Whole Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related 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 securing the Whole Loans. 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 mortgagors.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Whole Loans may contain clauses requiring the consent of
the mortgagee to any sale or other transfer of the related Mortgaged Property,
or due-on-sale clauses entitling the mortgagee to accelerate payment of the
Whole Loan upon any sale or other transfer of the related Mortgaged Property.
Certain of the Whole Loans may contain clauses requiring the consent of the
mortgagee to the creation of any other lien or encumbrance on the Mortgaged
Property or due-on-encumbrance clauses entitling the mortgagee to accelerate
payment of the Whole Loan upon the creation of any other lien or encumbrance
upon the Mortgaged Property. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer, on behalf of the Trust Fund, will determine
whether to exercise any right the Trustee may have as mortgagee to accelerate
payment of any such Whole Loan or to withhold its consent to any transfer or
further encumbrance in a manner consistent with the Servicing Standard. Unless
otherwise specified in the related Prospectus Supplement, 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--Due-on-Sale and
Due-on-Encumbrance".
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a series of Certificates will specify
whether there will be any Retained Interest in the Mortgage 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 Mortgage Asset represents a specified portion of the
interest payable thereon. The Retained Interest will be deducted from mortgagor
payments as received and will not be part of the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, a
Master Servicer's primary servicing compensation with respect to a series of
Certificates will come from the periodic payment to it of a portion of the
interest payment on each Whole Loan. Since any Retained Interest and a Master
Servicer's primary compensation are percentages of the principal balance of each
Mortgage Asset, such amounts will decrease in accordance with the amortization
of the Mortgage Loans underlying or comprising such Mortgage Asset. The
Prospectus Supplement with respect to a series of Certificates evidencing
interests in a Trust Fund that includes Whole Loans may provide that, as
additional compensation, the Master Servicer or the Sub-Servicers may retain all
or a portion of assumption fees, modification fees, late payment
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charges or Prepayment Premiums collected from mortgagors and any interest or
other income which may be earned on funds held in the Certificate Account or any
Sub-Servicing Account. Any Sub-Servicer will receive a portion of the Master
Servicer's compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, a Master Servicer
may, to the extent provided in the related Prospectus Supplement, 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. Certain other expenses, including certain expenses
relating to defaults and liquidations on the Mortgage Loans and, to the extent
so provided in the related Prospectus Supplement, interest thereon at the rate
specified therein, and the fees of any Special Servicer, may be borne by the
Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period or Prepayment Period, as
applicable, to certain interest shortfalls resulting from the voluntary
prepayment of any Whole Loans in the related Trust Fund during such period prior
to their respective due dates therein.
EVIDENCE AS TO COMPLIANCE
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will provide that on or before a specified date in each year,
beginning on the first such date that is at least a specified number of months
after the Cut-off Date, there will be furnished to the related Trustee a report
of a firm of independent certified public accountants stating that (i) it has
obtained a letter of representation regarding certain matters from the
management of the Master Servicer which includes an assertion that the Master
Servicer has complied with certain minimum mortgage loan servicing standards (to
the extent applicable to commercial and multifamily mortgage loans), identified
in the Uniform Single Attestation Program for Mortgage Bankers established by
the Mortgage Bankers Association of America, with respect to the servicing of
commercial and multifamily mortgage loans by the Master Servicer during the most
recently completed fiscal year and (ii) on the basis of an examination conducted
by such firm in accordance with standards established by the American Institute
of Certified Public Accountants, such representation is fairly stated in all
material respects, subject to such exceptions and other qualifications as may be
appropriate. In rendering its report such firm may rely, as to matters relating
to the direct servicing of commercial and multifamily mortgage loans by
Sub-Servicers, upon comparable reports of firms of independent public
accountants rendered on the basis of examinations conducted in accordance the
same standards (rendered within one year of such report) with respect to those
Sub-Servicers. The Prospectus Supplement may provide that additional or
alternative reports of independent certified public accountants relating to the
servicing of mortgage loans may be required to be delivered to the Trustee.
Each such 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 calendar
year or other specified twelve month period.
Unless otherwise provided in the related Prospectus Supplement, copies
of the annual accountants' statement and the statement of officers of a Master
Servicer will be obtainable by Certificateholders without charge upon written
request to the Master Servicer at the address set forth in the related
Prospectus Supplement.
CERTAIN MATTERS REGARDING A MASTER SERVICER AND THE DEPOSITOR
The Master Servicer, if any, 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.
Unless otherwise specified in the related Prospectus Supplement, the
related Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Master
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Servicer so causing such a conflict being of a type and nature carried on by the
Master Servicer at the date of the Agreement. Unless applicable law requires the
Master Servicer's immediate resignation, 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.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the Depositor
nor any director, officer, employee, or agent of a 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; provided, however, that
neither a Master Servicer, the Depositor nor any such person will be protected
against any breach of a representation or warranty made in such Agreement, or
against any liability specifically imposed thereby, or against any liability
which would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of obligations or duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. Unless
otherwise specified in the related Prospectus Supplement, each Agreement will
further provide that any Master Servicer, the Depositor and any director,
officer, employee or agent of a Master Servicer or the Depositor will be
entitled to indemnification by the related Trust Fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the Agreement or the Certificates; provided, however, that
such indemnification will not extend to any loss, liability or expense (i)
specifically imposed by such Agreement or otherwise incidental to the
performance of obligations and duties thereunder, including, in the case of a
Master Servicer, the prosecution of an enforcement action in respect of any
specific Whole Loan or Whole Loans (except as any such loss, liability or
expense shall be otherwise reimbursable pursuant to such Agreement); (ii)
incurred in connection with any breach of a representation or warranty made in
such Agreement; (iii) incurred by reason of misfeasance, bad faith or gross
negligence in the performance of obligations or duties thereunder, or by reason
of reckless disregard of such obligations or duties; or (iv) incurred in
connection with any violation of any state or federal securities law. In
addition, each Agreement will provide that neither any 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. Any such 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.
Any person into which the Master Servicer or the Depositor may be
merged or consolidated, or any person resulting from any merger or consolidation
to which the Master Servicer or the Depositor is a party, or any person
succeeding to the business of the Master Servicer or the Depositor, will be the
successor of the Master Servicer or the Depositor, as the case may be, under the
related Agreement.
EVENTS OF DEFAULT
Unless otherwise provided in the related Prospectus Supplement for a
Trust Fund that includes Whole Loans, Events of Default under the related
Agreement will include (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 written notice of such failure has been given 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 after
written notice of such failure has been given 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; (iii) any breach of a representation or warranty made by the
Master Servicer under the Agreement which materially and adversely affects the
interests of Certificateholders and which continues unremedied for thirty days
after written notice of such breach has been given 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 (iv) certain events of insolvency,
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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. Material
variations to the foregoing Events of Default (other than to shorten cure
periods or eliminate notice requirements) will be specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the Trustee shall, not later than the later of 60 days after the
occurrence of any event which constitutes or, with notice or lapse of time or
both, would constitute an Event of Default and five days after certain officers
of the Trustee become aware of the occurrence of such an event, transmit by mail
to the Depositor and all Certificateholders of the applicable series notice of
such occurrence, unless such default shall have been cured or waived.
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 and in and to the Mortgage Loans (other than as a
Certificateholder or as the owner of any Retained Interest), whereupon the
Trustee will succeed to all of the responsibilities, duties and liabilities of
the Master Servicer under the Agreement (except that if the Trustee is
prohibited by law from obligating itself to make advances regarding delinquent
mortgage loans, or if the related Prospectus Supplement so specifies, then the
Trustee will not be obligated to make such advances) and will be entitled to
similar compensation arrangements. Unless otherwise specified in the related
Prospectus Supplement, 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 loan servicing
institution acceptable to the Rating Agency with a net worth at the time of such
appointment of at least $10,000,000 to act as successor to the Master Servicer
under the Agreement. Pending such appointment, the Trustee is obligated to act
in such capacity. The Trustee and any such successor may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the Master Servicer under the Agreement.
Unless otherwise described in the related Prospectus Supplement, the
holders of Certificates representing at least 66 2/3% of the Voting Rights
allocated to the respective classes of Certificates affected by any Event of
Default will be entitled to waive such Event of Default; provided, however, that
an Event of Default described in clause (i) under "--Events of Default" may be
waived only by all of the Certificateholders. Upon any such waiver of an Event
of Default, such Event of Default shall cease to exist and shall be deemed to
have been remedied for every purpose under the Agreement.
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 sixty days has neglected or refused to institute any such proceeding. 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.
AMENDMENT
Unless otherwise provided in the related Prospectus Supplement, such
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, (i) to cure any ambiguity, (ii) to correct, modify or supplement
any provision therein which may be inconsistent with any other provision
therein, (iii) to make any other provisions with respect to matters or questions
arising under the Agreement which are not inconsistent with the provisions
thereof, or (iv) to comply with any requirements imposed by the Code; provided
that such amendment (other than an amendment for the purpose specified in clause
(iv) above) will not (as evidenced by an opinion of counsel to such effect)
adversely affect in any material respect the interests of any holder of
Certificates covered by the Agreement. Unless otherwise specified in the related
Prospectus Supplement,
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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 51% of the Voting Rights, for any purpose; provided, however, that
unless otherwise specified in the related Prospectus Supplement, no such
amendment may (i) reduce in any manner the amount of or delay the timing of,
payments received or advanced on Mortgage Loans 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 all Certificates of such class or (iii)
modify the provisions of such Agreement described in this paragraph 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 result in the imposition of a tax on the
related Trust Fund or cause the related Trust Fund to fail to qualify as a REMIC
at any time that the related Certificates are outstanding.
LIST OF CERTIFICATEHOLDERS
Upon written request of any Certificateholder of record of a series of
Certificates, for purposes of communicating with other Certificateholders with
respect to their rights under the Agreement for such series, the Trustee will
afford such Certificateholder access during business hours to the most recent
list of Certificateholders of that series held by the Trustee.
THE TRUSTEE
The Trustee under each Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company serving as Trustee may have typical banking
relationships with the Depositor and its affiliates and with any Master Servicer
and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee will make 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
any Master Servicer of any funds paid to the Master Servicer or its designee or
any Special Servicer 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 or any Special Servicer. 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.
CERTAIN MATTERS REGARDING THE TRUSTEE
Unless otherwise specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Certificate Account for any loss,
liability or expense incurred in connection with the Trustee's acceptance or
administration of its trusts under the related Agreement; provided, however,
that such indemnification will not extend to any loss, liability or expense that
constitutes a specific liability of the Trustee pursuant to the related
Agreement, or to any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence on the part of the Trustee in the
performance of its obligations and duties thereunder, or by reason of its
reckless disregard of such obligations or duties, or as may arise from a breach
of any representation, warranty or covenant of the Trustee made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties
under an Agreement by giving written notice thereof to the Depositor and the
Master Servicer. Upon receiving such notice of resignation, the Depositor (or
such other person as may be named in the Prospectus Supplement) will be required
promptly to appoint a successor trustee. If no successor trustee shall have been
so appointed and have accepted appointment within 30 days after the giving of
such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor trustee.
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If at any time the Trustee shall cease to be eligible to continue as
such under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, then the Depositor
may remove the Trustee and appoint a successor trustee. Holders of the
Certificates of any series entitled to at least 51% of the Voting Rights for
such series may at any time remove the Trustee without cause and appoint a
successor trustee.
Any resignation or removal of the Trustee and appointment of a
successor trustee shall not become effective until acceptance of appointment by
the successor trustee.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Certificates, Credit Support may be provided with
respect to one or more classes thereof or the related Mortgage Assets. Credit
Support may be in the form of the subordination of one or more classes of
Certificates, letters of credit, insurance policies, surety bonds, guarantees,
the establishment of one or more reserve funds or another method of Credit
Support described in the related Prospectus Supplement, or any combination of
the foregoing. If so provided in the related Prospectus Supplement, any form of
Credit Support may be structured so as to be drawn upon by more than one series
to the extent described therein.
Unless otherwise provided in the related Prospectus Supplement for a
series of Certificates, the Credit Support will not provide protection against
all risks of loss and will not guarantee repayment of the entire Certificate
Balance of the Certificates and interest thereon. If losses or shortfalls occur
that exceed the amount covered by Credit Support or that are not covered by
Credit Support, Certificateholders will bear their allocable share of
deficiencies. Moreover, if a form of Credit Support covers more than one series
of Certificates, holders of Certificates of one series will be subject to the
risk that such Credit Support will be exhausted by the claims of the holders of
Certificates of one or more other series before the former receive their
intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or the related Mortgage Assets, the related Prospectus
Supplement will include a description of (a) the nature and amount of coverage
under such Credit Support, (b) any conditions to payment thereunder not
otherwise described herein, (c) the conditions (if any) under which the amount
of coverage under such Credit Support may be reduced and under which such Credit
Support may be terminated or replaced and (d) the material provisions relating
to such Credit Support. Additionally, the related Prospectus Supplement will set
forth certain information with respect to the obligor under any instrument of
Credit Support, including (i) a brief description of its principal business
activities, (ii) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business, (iii) if
applicable, the identity of regulatory agencies that exercise primary
jurisdiction over the conduct of its business and (iv) its total assets, and its
stockholders" equity or policyholders" surplus, if applicable, as of the date
specified in the Prospectus Supplement. See "Risk Factors--Credit Support
Limitations".
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more
classes of Certificates of a series may be Subordinate Certificates. To the
extent specified in the related Prospectus Supplement, the rights of the holders
of Subordinate Certificates to receive distributions of principal and interest
from the Certificate Account on any Distribution Date will be subordinated to
such rights of the holders of Senior Certificates. If so provided in the related
Prospectus Supplement, the subordination of a class may apply only in the event
of (or may be limited to) certain types of losses or shortfalls. The related
Prospectus Supplement will set forth information concerning the amount of
subordination provided by a class or classes of Subordinate Certificates in a
series, the circumstances under which such subordination will be available and
the manner in which the amount of subordination will be made available.
CROSS-SUPPORT PROVISIONS
If the Mortgage Assets for a series are divided into separate groups,
each supporting a separate class or classes of Certificates of a series, credit
support may be provided by cross-support provisions
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requiring that distributions be made on Senior Certificates evidencing interests
in one group of Mortgage Assets prior to distributions on Subordinate
Certificates evidencing interests in a different group of Mortgage Assets within
the Trust Fund. The Prospectus Supplement for a series that includes a
cross-support provision will describe the manner and conditions for applying
such provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO MORTGAGE LOANS
If so provided in the Prospectus Supplement for a series of
Certificates, Mortgage Loans included in the related Trust Fund will be covered
for various default risks by insurance policies or guarantees. A copy of any
such material instrument for a series will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed within 15 days of issuance
of the Certificates of the related series.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by one or more letters of credit, issued
by a bank or financial institution specified in such Prospectus Supplement (the
"L/C Bank"). Under a letter of credit, the L/C Bank will be obligated to honor
draws thereunder in an aggregate fixed dollar amount, net of unreimbursed
payments thereunder, generally equal to a percentage specified in the related
Prospectus Supplement of the aggregate principal balance of the Mortgage Assets
on the related Cut-off Date or of the initial aggregate Certificate Balance of
one or more classes of Certificates. If so specified in the related Prospectus
Supplement, the letter of credit may permit draws only in the event of certain
types of losses and shortfalls. The amount available under the letter of credit
will, in all cases, be reduced to the extent of the unreimbursed payments
thereunder and may otherwise be reduced as described in the related Prospectus
Supplement. The obligations of the L/C Bank under the letter of credit for each
series of Certificates will expire at the earlier of the date specified in the
related Prospectus Supplement or the termination of the Trust Fund. A copy of
any such letter of credit for a series will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed within 15 days of issuance
of the Certificates of the related series.
INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by insurance policies and/or surety
bonds provided by one or more insurance companies or sureties. Such instruments
may cover, with respect to one or more classes of Certificates of the related
series, timely distributions of interest and/or 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. A copy of any such
instrument for a series will be filed with the Commission as an exhibit to a
Current Report on Form 8-K to be filed with the Commission within 15 days of
issuance of the Certificates of the related series.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by one or more reserve funds in which
cash, a letter of credit, Permitted Investments, a demand note or a combination
thereof will be deposited, in the amounts so specified in such Prospectus
Supplement. The reserve funds for a series may also be funded over time by
depositing therein a specified amount of the distributions received on the
related Mortgage Assets as specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Certificates. If so specified in the related
Prospectus Supplement, reserve funds may be established to provide limited
protection against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required to
be maintained therein may be released from the reserve fund under the conditions
and to the extent specified in the related Prospectus Supplement and will not be
available for further application to the Certificates.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus Supplement.
Unless otherwise specified in the related
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Prospectus Supplement, any reinvestment income or other gain from such
investments will be credited to the related Reserve Fund for such series, and
any loss resulting from such investments will be charged to such Reserve Fund.
However, such income may be payable to any related Master Servicer or another
service provider as additional compensation. The Reserve Fund, if any, for a
series will not be a part of the Trust Fund unless otherwise specified in the
related Prospectus Supplement.
Additional information concerning any Reserve Fund will be set forth in
the related Prospectus Supplement, including the initial balance of such Reserve
Fund, the balance required to be maintained in the Reserve Fund, the manner in
which such required balance will decrease over time, the manner of funding such
Reserve Fund, the purposes for which funds in the Reserve Fund may be applied to
make distributions to Certificateholders and use of investment earnings from the
Reserve Fund, if any.
CREDIT SUPPORT WITH RESPECT TO MBS AND TIERED MBS
If so provided in the Prospectus Supplement for a series of
Certificates, the MBS and/or Tiered MBS included in the related Trust Fund
and/or the mortgage loans directly or indirectly underlying such MBS and/or
Tiered MBS may be covered by one or more of the types of Credit Support
described herein. The related Prospectus Supplement will specify as to each such
form of Credit Support the information indicated above with respect thereto, to
the extent such information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of loans secured by commercial and multifamily residential properties.
Because such legal aspects are governed by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete, to reflect
the laws of any particular state, or to encompass the laws of all states in
which the security for the Mortgage Loans (or mortgage loans underlying any MBS)
is situated. Accordingly, the summaries are qualified in their entirety by
reference to the applicable laws of those states. See "Description of the Trust
Funds--Mortgage Loans". For purposes of the following discussion, "Mortgage
Loan" includes a mortgage loan underlying an MBS.
GENERAL
Each Mortgage Loan will be evidenced by a note or bond and secured by
an instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the prevailing
practice and law in the state in which the related Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are herein
collectively referred to as "mortgages". A mortgage creates a lien upon, or
grants a title interest in, the real property covered thereby, and represents
the security for the repayment of the indebtedness customarily evidenced by a
promissory note. The priority of the lien created or interest granted will
depend on the terms of the mortgage and, in some cases, on the terms of separate
subordination agreements or intercreditor agreements with others that hold
interests in the real property, the knowledge of the parties to the mortgage
and, generally, the order of recordation of the mortgage in the appropriate
public recording office. However, the lien of a recorded mortgage will generally
be subordinate to later-arising liens for real estate taxes and assessments and
other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage: a mortgagor (the borrower and
usually the owner of the subject property) and a mortgagee (the lender). In
contrast, a deed of trust is a three-party instrument, among a trustor (the
equivalent of a borrower), a trustee to whom the real property is conveyed, and
a beneficiary (the lender) for whose benefit the conveyance is made. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust and generally with a power of sale, to the trustee to secure
repayment of the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties, pursuant to which the borrower, or grantor,
conveys title to the real property to the grantee, or lender, generally with a
power of sale, until such time as the debt is repaid. In a case where the
borrower is a land trust, there would be an additional party because legal title
to the property is held by a land trustee under a land trust agreement for the
benefit of the borrower. At origination of a mortgage loan involving a land
trust, the borrower may execute a separate undertaking to make payments on the
mortgage note. In no event is the land trustee personally liable for the
mortgage note obligation. The mortgagee's authority under a mortgage, the
trustee's authority under a deed of trust and the grantee's authority under a
deed to secure
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debt are governed by the express provisions of the related instrument, the law
of the state in which the real property is located, certain federal laws and, in
some deed of trust transactions, the directions of the beneficiary.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while (unless rents are to be paid directly to the
lender) retaining a revocable 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/or obtain a court-appointed receiver before
becoming entitled to collect the rents.
In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code ("UCC"); in cases where hotels or
motels constitute loan security, the rates are generally pledged by the borrower
as additional security for the loan. In general, the lender must file financing
statements in order to perfect its security interest in the room rates and must
file continuation statements, generally every five years, to maintain perfection
of such security interest. In certain cases, Mortgage Loans secured by hotels or
motels may be included in a Trust Fund even if the security interest in the room
rates was not perfected or the requisite UCC filings were allowed to lapse. Even
if the lender's security interest in room rates is perfected under applicable
non-bankruptcy law, it will generally be required to commence a foreclosure
action or otherwise take possession of the property in order to enforce its
rights to collect the room rates following a default. In the bankruptcy setting,
however, the lender will be stayed from enforcing its rights to collect room
rates, but those room rates (in light of certain revisions to the Bankruptcy
Code which are effective for all bankruptcy cases commenced on or after October
22, 1994) constitute "cash collateral" and therefore cannot be used by the
bankruptcy debtor without a hearing or lender's consent and unless the lender's
interest in the room rates is given adequate protection (e.g., cash payment for
otherwise encumbered funds or a replacement lien on unencumbered property, in
either case equal in value to the amount of room rates that the debtor proposes
to use, or other similar relief). See "--Bankruptcy Laws".
PERSONALTY
In the case of certain types of mortgaged properties, such as hotels,
motels and nursing homes, personal property (to the extent owned by the borrower
and not previously pledged) may constitute a significant portion of the
property's value as security. The creation and enforcement of liens on personal
property are governed by the UCC. Accordingly, if a borrower pledges personal
property as security for a mortgage loan, the lender generally must file UCC
financing statements in order to perfect its security interest therein, and must
file continuation statements, generally every five years, to maintain that
perfection. In certain cases, Mortgage Loans secured in part by personal
property may be included in a Trust Fund even if the security interest in such
personal property was not perfected or the requisite UCC filings were allowed to
lapse.
FORECLOSURE
GENERAL
Foreclosure is a legal procedure that allows the lender to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the borrower defaults in payment or performance of its obligations
under the note or mortgage, the lender has the right to institute foreclosure
proceedings to sell the real property at public auction to satisfy the
indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and non-judicial foreclosure pursuant to a power of sale granted in the mortgage
instrument. Other foreclosure procedures are available in some states, but they
are either infrequently used or available only in limited circumstances.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses are raised or counterclaims are interposed, and
sometimes requires several years to complete.
JUDICIAL FORECLOSURE
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A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having a subordinate interest of
record in the real property and all parties in possession of the property, under
leases or otherwise, whose interests are subordinate to the mortgage. Delays in
completion of the foreclosure may occasionally result from difficulties in
locating defendants. When the lender's right to foreclose is contested, the
legal proceedings can be time-consuming. Upon successful completion of a
judicial foreclosure proceeding, the court generally issues a judgment of
foreclosure and appoints a referee or other officer to conduct a public sale of
the mortgaged property, the proceeds of which are used to satisfy the judgment.
Such sales are made in accordance with procedures that vary from state to state.
EQUITABLE AND OTHER LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS
United States courts have traditionally imposed general equitable
principles to limit the remedies available to lenders in foreclosure actions.
These principles are generally designed to relieve borrowers from the effects of
mortgage defaults perceived as harsh or unfair. Relying on such principles, a
court may alter the specific terms of a loan to the extent it considers
necessary to prevent or remedy an injustice, undue oppression or overreaching,
or may require the lender to undertake affirmative actions to determine the
cause of 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 and have required that lenders reinstate loans or
recast payment schedules in order to accommodate borrowers who are suffering
from a temporary financial disability. In other cases, courts have limited the
right of the lender to foreclose in the case of a non-monetary default, such as
a failure to adequately maintain the mortgaged property or an impermissible
further encumbrance of the mortgaged property. Finally, some courts have
addressed the issue of whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that a borrower
receive notice in addition to statutorily-prescribed minimum notice. For the
most part, these cases have upheld the reasonableness of the notice provisions
or have found that a public sale under a mortgage providing for a power of sale
does not involve sufficient state action to trigger constitutional protections.
In addition, some states may provide statutory protections such as the
right of the borrower to cure outstanding defaults and reinstate a mortgage loan
after commencement of foreclosure proceedings but prior to a foreclosure sale.
NON-JUDICIAL FORECLOSURE/POWER OF SALE
In states permitting non-judicial foreclosure proceedings, foreclosure
of a deed of trust is generally accomplished by a non-judicial trustee's sale
pursuant to a power of sale typically granted in the deed of trust. A power of
sale may also be contained in any other type of mortgage instrument if
applicable law so permits. A power of sale under a deed of trust allows a
non-judicial public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon default by the
borrower and after notice of sale is given in accordance with the terms of the
mortgage and applicable state law. In some states, prior to such sale, the
trustee under the deed of trust must record a notice of default and notice of
sale and send a copy to the borrower and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The borrower or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears
(without regard to the acceleration of the indebtedness), plus the lender's
expenses incurred in enforcing the obligation. In other states, the borrower or
the junior lienholder is not provided a period to reinstate the loan, but has
only the right to pay off the entire debt to prevent the foreclosure sale.
Generally, state law governs the procedure for public sale, the parties entitled
to notice, the method of giving notice and the applicable time periods.
PUBLIC SALE
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the exact status of title
to the property (due to, among other things, redemption rights that may exist)
and because of the possibility that physical deterioration of the property may
have occurred during the foreclosure proceedings. Therefore, it is common for
the lender to purchase the mortgaged property for an amount equal to the secured
indebtedness and accrued and unpaid interest plus the expenses of foreclosure,
in which event the borrower's debt will be extinguished, or for a lesser amount
in
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order to preserve its right to seek a deficiency judgment if such is available
under state law and under the terms of the Mortgage Loan documents. (The
Mortgage Loans, however, are generally expected to be non-recourse. See "Risk
Factors--Investment in Commercial and Multifamily Mortgage Loans".) Thereafter,
subject to the borrower's right in some states to remain in possession during a
redemption period, the lender will become the owner of the property and have
both the benefits and burdens of ownership, including the obligation to pay debt
service on any senior mortgages, to pay taxes, to obtain casualty insurance and
to make such repairs as are necessary to render the property suitable for sale.
The costs of operating and maintaining a commercial or multifamily residential
property may be significant and may be greater than the income derived from that
property. The lender also will commonly obtain the services of a real estate
broker and pay the broker's commission in connection with the sale or lease of
the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Moreover, because of the expenses associated with acquiring, owning and selling
a mortgaged property, a lender could realize an overall loss on a mortgage loan
even if the mortgaged property is sold at foreclosure, or resold after it is
acquired through foreclosure, for an amount equal to the full outstanding
principal amount of the loan plus accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens, and may be
obliged to keep senior mortgage loans current in order to avoid foreclosure of
its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the lender to
realize upon its security and to bar the borrower, and all persons who have
interests in the property that are subordinate to that of the foreclosing
lender, from exercise of their "equity of redemption". The doctrine of equity of
redemption provides that, until the property encumbered by a mortgage has been
sold in accordance with a properly conducted foreclosure and foreclosure sale,
those having interests that are subordinate to that of the foreclosing lender
have an equity of redemption and may redeem the property by paying the entire
debt with interest. Those having an equity of redemption must generally be made
parties and joined in the foreclosure proceeding in order for their equity of
redemption to be terminated.
The equity of redemption is a common-law (non-statutory) right which
should be distinguished from post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the
borrower and foreclosed junior lienors are given a statutory period in which to
redeem the property. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
permitted 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 because the exercise of a right of redemption would
defeat the title of any purchaser through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
ANTI-DEFICIENCY LEGISLATION
Some or all of the Mortgage Loans may be nonrecourse loans, as to which
recourse in the case of default will be limited to the Mortgaged Property and
such other assets, if any, that were pledged to secure the Mortgage Loan.
However, even if a mortgage loan by its terms provides for recourse to the
borrower's other assets, a lender's ability to realize upon those assets may be
limited by state law. For example, in some states a lender cannot 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 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 may
require the lender to exhaust the security afforded under a mortgage before
bringing a personal action against the borrower. In certain other states, the
lender has the option of bringing a personal action against the borrower on the
debt without first exhausting such security; however, in some of those states,
the lender, following judgment on such personal action, may be deemed to have
elected a remedy and thus may be precluded from foreclosing upon the security.
Consequently, lenders in
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those states where such an election of remedy provision exists will usually
proceed first against the security. Finally, other statutory provisions,
designed to protect borrowers from exposure to large deficiency judgments that
might result from bidding at below-market values at the foreclosure sale, limit
any deficiency judgment to the excess of the outstanding debt over the fair
market value of the property at the time of the sale.
LEASEHOLD CONSIDERATIONS
Mortgage Loans may be secured by a mortgage on the borrower's leasehold
interest in a ground lease. Leasehold mortgage loans are subject to certain
risks not associated with mortgage loans secured by a lien on the fee estate of
the borrower. The most significant of these risks is that if the borrower's
leasehold were to be terminated upon a lease default, the leasehold mortgagee
would lose its security. This risk may be lessened if the ground lease requires
the lessor to give the leasehold mortgagee notices of lessee defaults and an
opportunity to cure them, permits the leasehold estate to be assigned to and by
the leasehold mortgagee or the purchaser at a foreclosure sale, and contains
certain other protective provisions typically included in a "mortgageable"
ground lease. Certain Mortgage Loans, however, may be secured by ground leases
which do not contain these provisions.
CROSS-COLLATERALIZATION
Certain of the Mortgage Loans may be secured by more than one mortgage
covering properties located in more than one state. Because of various state
laws governing foreclosure or the exercise of a power of sale and because, in
general, foreclosure actions are brought in state court and the courts of one
state cannot exercise jurisdiction over property in another state, it may be
necessary upon a default under a cross-collateralized Mortgage Loan to foreclose
on the related mortgages in a particular order rather than simultaneously and/or
utilize judicial foreclosure even in states that permit non-judicial
foreclosures in order to ensure that the lien of the mortgages is not impaired
or released. In addition, because of the various state laws governing the
ability to obtain a deficiency judgment, it may be necessary in certain states
to foreclose through an action in state court rather than by exercise of a power
of sale, possibly causing a delay in the ultimate recovery by the
Certificateholders and increasing the expense of foreclosing on the security.
Certain other state laws may limit the amount of the recovery on a particular
property located within that state which is being foreclosed after the
foreclosure of one or more properties to the difference between the amount of
the outstanding indebtedness and the value of the property or properties
previously foreclosed, as opposed to the actual amounts recovered in such
foreclosure or foreclosures. Furthermore, due to the effect of "oneaction" or
"security first" rules in some states, the remedies that a lender may exercise
upon an event of default as against a property or other collateral or against a
borrower may result in the impairment or loss of the lender's lien on other
properties located in that state or other states or lender's security interest
in other collateral.
BANKRUPTCY LAWS
Operation of the Bankruptcy Code and related state laws may interfere
with or affect the ability of a lender to realize upon collateral and/or to
enforce a deficiency judgment. For example, under the Bankruptcy Code, virtually
all actions (including foreclosure actions and deficiency judgment proceedings)
to collect a debt are automatically stayed upon the filing of the bankruptcy
petition and, often, no interest or principal payments are made during the
course of the bankruptcy case. The delay and the consequences thereof caused by
such automatic stay can be significant. Also, under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lienor may stay
the senior lender from taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a mortgage
loan secured by a lien on property of the debtor may be modified under certain
circumstances. For example, the outstanding amount of the loan may be reduced to
the then-current value of the property (with a corresponding partial reduction
of the amount of lender's security interest) pursuant to a confirmed plan or
lien avoidance proceeding, thus leaving the lender a general unsecured creditor
for the difference between such value and the outstanding balance of the loan.
Other modifications may include the reduction in the amount of each scheduled
payment, by means of a reduction in the rate of interest and/or an alteration of
the repayment schedule (with or without affecting the unpaid principal balance
of the loan), and/or by an extension (or shortening) of the term to maturity.
Some bankruptcy courts have approved plans, based on the particular facts of the
reorganization case, that
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effected the cure of a mortgage loan default by paying arrearages over a number
of years. Also, a bankruptcy court may permit a debtor, through its
rehabilitative plan, to reinstate a loan mortgage payment schedule even if the
lender has obtained a final judgment of foreclosure prior to the filing of the
debtor's petition.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of a secured lender to enforce the borrower's assignment
of rents and leases related to the mortgaged property. Under the Bankruptcy
Code, a lender may be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents. Recent amendments to the
Bankruptcy Code, however, may minimize the impairment of the lender's ability to
enforce the borrower's assignment of rents and leases. In addition to the
inclusion of hotel revenues within the definition of "cash collateral" as noted
previously in the section entitled "--Leases and Rents", the amendments provide
that, in general, a pre-petition security interest in rents or hotel revenues
extends to rents and hotel revenues received post-petition. The amendments are,
in part, a response to certain cases that held that a security interest in rents
is unperfected under the laws of certain states until the lender has taken some
further action, such as commencing foreclosure or obtaining a receiver prior to
activation of the assignment of rents.
If a borrower's ability to make payment on a mortgage loan is dependent
on its receipt of rent payments under a lease of the related property, that
ability may be impaired by the commencement of a bankruptcy case relating to a
lessee under such lease. Under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a lessee results in a stay in bankruptcy against
the commencement or continuation of any state court proceeding for past due
rent, for accelerated rent, for damages or for a summary eviction order with
respect to a default under the lease that occurred prior to the filing of the
lessee's petition. In addition, the Bankruptcy Code generally provides that a
trustee or debtor-in-possession may, subject to approval of the court, (i)
assume the lease and retain it or assign it to a third party or (ii) reject the
lease. If the lease is assumed, the trustee or debtor-in-possession (or
assignee, if applicable) must cure any defaults under the lease, compensate the
lessor for its losses and provide the lessor with "adequate assurance" of future
performance. Such remedies may be insufficient, and any assurances provided to
the lessor may, in fact, be inadequate. If the lease is rejected, the lessor
will be treated as an unsecured creditor with respect to its claim for damages
for termination of the lease. The Bankruptcy Code also limits a lessor's damages
for lease rejection to the rent reserved by the lease (without regard to
acceleration) for the greater of one year, or 15%, not to exceed three years, of
the remaining term of the lease.
ENVIRONMENTAL CONSIDERATIONS
GENERAL
A lender may be subject to environmental risks when taking a security
interest in real property. Of particular concern may be properties that are or
have been used for industrial, manufacturing, military or disposal activity.
Such environmental risks include the possible diminution of the value of a
contaminated property or, as discussed below, potential liability for clean-up
costs or other remedial actions that could exceed the value of the property or
the amount of the lender's loan. In certain circumstances, a lender may decide
to abandon a contaminated mortgaged property as collateral for its loan rather
than foreclose and risk liability for clean-up costs.
SUPERLIEN LAWS
Under the laws of many states, contamination on a property may give
rise to a lien on the property for clean-up costs. In several states, such a
lien has priority over all existing liens, including those of existing
mortgages. In these states, the lien of a mortgage may lose its priority to such
a "superlien".
CERCLA
The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of clean-up. A secured lender may be liable as an "owner" or "operator" of
a contaminated mortgaged property if agents or employees of the lender have
participated in the management of such mortgaged property or the operations of
the borrower. Such liability may exist even if the lender did not cause or
contribute to the contamination and regardless of whether the lender has
actually taken
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possession of a mortgaged property through foreclosure, deed in lieu of
foreclosure or otherwise. Moreover, such liability is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Excluded from CERCLA's definition of "owner" or
"operator", however, is a person "who without participating in the management of
the facility, holds indicia of ownership primarily to protect his security
interest".
In general, what constitutes participation in the management of a
mortgaged property or the business of a borrower to render the secured creditor
exemption unavailable to a lender is based upon judicial interpretation of the
statutory language, and court decisions have been inconsistent in this matter.
The Court of Appeals for the Eleventh Circuit has suggested that the mere
capacity of the lender to influence a borrower's disposal of hazardous
substances was sufficient participation in the management of the borrower's
business to deny the secured creditor exemption to the lender. However, the
Court of Appeals for the Ninth Circuit disagreed with the Eleventh Circuit and
held that there must be some degree of "actual management" of a facility on the
part of a lender in order to bar its reliance on the secured creditor exemption.
In addition, certain cases decided in the First Circuit and the Fourth Circuit
have held that lenders were entitled to the secured creditor exemption,
notwithstanding a lender's taking title to a mortgaged property through
foreclosure or deed in lieu of foreclosure.
CERCLA's "innocent landowner" defense may be available to a lender that
has taken title to a mortgaged property and has performed an appropriate
environmental site assessment that does not disclose existing contamination and
that meets other requirements of the defense. However, it is unclear whether the
environmental site assessment must be conducted upon loan origination, prior to
foreclosure, or both, and uncertainty exists as to what kind of environmental
site assessment must be performed in order to qualify for the defense.
CERTAIN OTHER FEDERAL AND STATE LAWS
Many states have statutes similar to CERCLA, and not all those statutes
provide for a secured creditor exemption. In addition, under federal law, there
is potential liability relating to hazardous wastes and underground storage
tanks under the federal Resource Conservation and Recovery Act.
In a few states, transfers of some types of properties are conditioned
upon cleanup of contamination prior to transfer. In these cases, a lender that
becomes the owner of a property through foreclosure, deed in lieu of foreclosure
or otherwise, may be required to clean up the contamination before selling or
otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law
causes of action (for example, actions based on nuisance or on toxic tort
resulting in death, personal injury or damage to property) related to hazardous
environmental conditions on a property. While it may be more difficult to hold a
lender liable in such cases, unanticipated or uninsured liabilities of the
borrower may jeopardize the borrower's ability to meet its loan obligations.
ADDITIONAL CONSIDERATIONS
The cost of remediating hazardous substance contamination at a property
can be substantial. If a lender becomes liable, it can, subject to any
limitations in the Mortgage Loan documents regarding deficiency judgments or
non-recourse, bring an action for contribution against the owner or operator who
created the environmental hazard, but that individual or entity may be without
substantial assets. Accordingly, it is possible that such costs could become a
liability of the Trust Fund and occasion a loss to the Certificateholders.
To reduce the likelihood of such a loss, unless otherwise specified in
the related Prospectus Supplement, the related Agreement will provide that the
Master Servicer, acting on behalf of the Trustee, may not acquire title to a
Mortgaged Property or take over its operation unless the Master Servicer, based
solely (as to environmental matters) on a report prepared by a person who
regularly conducts environmental audits, has made the determination that it is
appropriate to do so, as described under "The Pooling and Servicing
Agreements--Realization Upon Defaulted Mortgage Loans".
If a lender forecloses on a mortgage secured by a property, the
operations on which are subject to environmental laws and regulations, the
lender will be required to operate the property in accordance with
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those laws and regulations. Such compliance may entail substantial expense,
especially in the case of industrial or manufacturing properties.
In addition, a lender may be obligated to disclose environmental
conditions on a property to government entities and/or to prospective buyers
(including prospective buyers at a foreclosure sale or following foreclosure).
Such disclosure may decrease the amount that prospective buyers are willing to
pay for the affected property, sometimes substantially, and thereby decrease the
ability of the lender to recoup its investment in a loan upon foreclosure.
ENVIRONMENTAL SITE ASSESSMENTS
In most cases, an environmental site assessment of each Mortgaged
Property will have been performed in connection with the origination of the
related Mortgage Loan or at some time prior to the issuance of the related
Certificates. Environmental site assessments, however, vary considerably in
their content, quality and cost. Even when adhering to good professional
practices, environmental consultants will sometimes not detect significant
environmental problems because to do an exhaustive environmental assessment
would be far too costly and time-consuming to be practical.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE
Certain of the Mortgage Loans may contain "due-on-sale" and
"due-on-encumbrance" clauses that purport to permit the lender to accelerate the
maturity of the loan if the borrower transfers or encumbers the related
Mortgaged Property. In recent years, court decisions and legislative actions
placed substantial restrictions on the right of lenders to enforce such clauses
in many states. However, the Garn-St Germain Depository Institutions Act of 1982
(the "Garn Act") generally preempts state laws that prohibit the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limitations as set forth in the Garn Act
and the regulations promulgated thereunder. Accordingly, a Master Servicer may
nevertheless have the right to accelerate the maturity of a Mortgage Loan that
contains a "due-on-sale" provision upon transfer of an interest in the property,
without regard to the Master Servicer's ability to demonstrate that a sale
threatens its legitimate security interest.
SUBORDINATE FINANCING
The terms of certain of the Mortgage Loans may not restrict the ability
of the borrower to use the Mortgaged Property as security for one or more
additional loans, or such restrictions may be unenforceable. Where a borrower
encumbers a mortgaged property with one or more junior liens, the senior lender
is subjected to additional risk. First, the borrower may have difficulty
servicing and repaying multiple loans. Moreover, if the subordinate financing
permits recourse to the borrower (as is frequently the case) and the senior loan
does not, a borrower may have more incentive to repay sums due on the
subordinate 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 borrower 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 any
existing junior lender is harmed or the borrower is additionally burdened.
Third, if the borrower 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 proceedings by the
senior lender.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower
to pay a late charge or additional interest if payments are not timely made, and
in some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
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APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 ("Title V") provides that state usury limitations shall not
apply to certain types of residential (including multifamily) first mortgage
loans originated by certain lenders after March 31, 1980. Title V 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.
No Mortgage Loan originated in any state in which application of Title
V has been expressly rejected or a provision limiting discount points or other
charges has been adopted, will (if originated after that rejection or adoption)
be eligible for inclusion in a Trust Fund unless (i) such Mortgage Loan provides
for such interest rate, discount points and charges as are permitted in such
state or (ii) such Mortgage Loan provides that the terms thereof are to be
construed in accordance with the laws of another state under which such interest
rate, discount points and charges would not be usurious and the borrower's
counsel has rendered an opinion that such choice of law provision would be given
effect.
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
individuals 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
individuals 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 with individuals as borrowers 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 a Master Servicer or
Special 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 a
Master Servicer or Special Servicer to foreclose on an affected Mortgage Loan
during the borrower's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter.
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 purchased with the proceeds of, illegal drug or
RICO activities.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the material
federal income tax consequences of the purchase, ownership and disposition of
Offered Certificates and does not purport to discuss all federal
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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. In addition, the following
discussion represents an interpretation of the law at the time of this
Prospectus, and does not represent an opinion of Thacher Proffitt & Wood,
counsel to the Depositor, except with respect to the first paragraph under
"--REMICS--Classification of REMICS" and the first paragraph under "--REMICS--
Tiered REMIC Structures" herein.
Further, the authorities on which this discussion, and the opinions
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, it is recommended that taxpayers consult their 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 Offered Certificates. See "State and Other Tax
Consequences". It is recommended that Certificateholders consult their tax
advisors concerning the federal, state, local or other tax consequences to them
of the purchase, ownership and disposition of Offered Certificates.
The following discussion addresses securities of two general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, that the Master Servicer or 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 Internal Revenue Code of 1986
(the "Code"), and (ii) Grantor Trust Certificates representing interests in a
Trust Fund ("Grantor Trust Fund") as to which no such election will be made. The
Prospectus Supplement for each series of Certificates will indicate whether a
REMIC election (or elections) will be made for the related Trust Fund and, if
such an election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC. For purposes of this tax discussion,
references to a "Certificateholder" or a "holder" are to the beneficial owner of
a Certificate.
The following discussion is limited in applicability to Offered
Certificates. Moreover, this discussion applies only to the extent that Mortgage
Assets held by a Trust Fund consist solely of Mortgage Loans. To the extent that
other Mortgage Assets, including REMIC certificates and mortgage pass-through
certificates, are to be held by a Trust Fund, the tax consequences associated
with the inclusion of such assets will be disclosed in the related Prospectus
Supplement. In addition, if Cash Flow Agreements, other than guaranteed
investment contracts, are included in a Trust Fund, the tax consequences
associated with such Cash Flow Agreements also will be disclosed in the related
Prospectus Supplement. See "Description of the Trust Funds--Cash Flow
Agreements".
Furthermore, 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
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 REMIC Regular Certificates or REMIC
Residual Certificates in that REMIC within the meaning of the REMIC Provisions.
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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 related 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 inadvertently terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES
In general, unless otherwise provided in the related Prospectus
Supplement, the REMIC Certificates will be "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
underlying such Certificates would be so treated. However, to the extent that
the REMIC assets constitute mortgages on property not used for residential or
certain other prescribed purposes, the REMIC Certificates will not be treated as
assets qualifying under Section 7701(a)(19)(C). Moreover, if 95% or more of the
assets of the REMIC qualify for any of the foregoing treatments at all times
during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and income
allocated to the REMIC Residual Certificates will be interest described in
Section 856(c)(3)(B) of the Code to the extent that such Certificates are
treated as "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code. In addition, the REMIC Regular Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3) of the Code. The
determination as to the percentage of the REMIC's assets that constitute assets
described in the foregoing sections of the Code will be made with respect to
each calendar quarter based on the average adjusted basis of each category of
the assets held by the REMIC during such calendar quarter. The Master Servicer
or the Trustee 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)(5)(A) of the Code. Furthermore, foreclosure property will qualify as
"real estate assets" under Section 856(c)(5)(A) of the Code.
TIERED REMIC STRUCTURES
For certain series of REMIC Certificates, two or more separate
elections may be made to treat designated portions of the related Trust Fund as
REMICs ("Tiered REMICs") for federal income tax purposes. Upon the issuance of
any such series of REMIC Certificates, Thacher Proffitt & Wood, counsel to the
Depositor will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related Agreement, the Tiered REMICs will
each qualify as a REMIC and the REMIC Certificates issued by the Tiered REMICs,
will be considered to evidence ownership of REMIC Regular Certificates or REMIC
Residual Certificates in the related REMIC within the meaning of the REMIC
Provisions.
Solely for purposes of determining whether the REMIC Certificates will
be "real estate assets" within the meaning of Section 856(c)(5)(A) of the Code,
and "loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code, and whether the income on such Certificates is interest described
in Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
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GENERAL. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT. Certain REMIC Regular Certificates may be
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance with the method described below, in advance of the
receipt of the cash attributable to such income. In addition, Section 1272(a)(6)
of the Code provides special rules applicable to REMIC Regular Certificates and
certain other debt instruments issued with original issue discount. Regulations
have not been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986 (the
"Committee Report") indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Depositor nor any other person 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" is 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 a Distribution Date, in some cases, as a consequence of this "long
first accrual period", some or all interest payments may be required to be
included in the stated redemption price of the REMIC Regular Certificate and
accounted for as original issue discount. Because interest on REMIC Regular
Certificates must in any event be accounted for under an accrual method,
applying this analysis would result in only a slight difference in the timing of
the inclusion in income of the yield on the REMIC Regular Certificates.
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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 provided 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 a Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on the
Closing Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original issue
discount that accrues in any accrual period will equal the excess, if any, of
(i) the sum of (a) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the REMIC Regular Certificate,
if any, in future periods and (b) the distributions made on such REMIC Regular
Certificate during the accrual period of amounts included in the stated
redemption price, over (ii) the adjusted issue price of such REMIC Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
(i) assuming that distributions on the REMIC Regular Certificate will be
received in future periods based on the Mortgage Loans being prepaid at a rate
equal to the Prepayment Assumption, (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
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included in the stated redemption price. The original issue discount accruing
during any accrual period, computed as described above, will be allocated
ratably to each day during the accrual period to determine the daily portion of
original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases
such Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price", in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day.
MARKET DISCOUNT. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price will recognize gain upon receipt of each distribution
representing stated redemption price. In particular, under Section 1276 of the
Code such a Certificateholder generally will be required to allocate the portion
of each such distribution representing stated redemption price first to accrued
market discount not previously included in income, and to recognize ordinary
income to that extent. A Certificateholder may elect to include market discount
in income currently as it accrues rather than including it on a deferred basis
in accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the first
day of the first taxable year to which such election applies. In addition, the
OID Regulations permit a Certificateholder to elect to accrue all interest,
discount (including DE MINIMIS market or original issue discount) and premium in
income as interest, based on a constant yield method. If such an election were
made with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "--Taxation of Owners of REMIC
Regular Certificates--Premium" below. Each of these elections to accrue
interest, discount and premium with respect to a Certificate on a constant yield
method or as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate
will be considered to be DE MINIMIS for purposes of Section 1276 of the Code if
such market discount is less than 0.25% of the remaining stated redemption price
of such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, 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
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Regular Certificate as of the beginning of the accrual period, or (iii) in the
case of a REMIC Regular Certificate issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
original issue discount accrued in the accrual period bears to the total
original issue discount remaining on the REMIC Regular Certificate at the
beginning of the accrual period. Moreover, the Prepayment Assumption used in
calculating the accrual of original issue discount is also used in calculating
the accrual of market discount. Because the regulations referred to in this
paragraph have not been issued, it is not possible to predict what effect such
regulations might have on the tax treatment of a REMIC Regular Certificate
purchased at a discount in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includible in income at a rate that is
not significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the DE MINIMIS rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
PREMIUM. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such cost attributable to accrued qualified stated interest) greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of such a REMIC Regular Certificate may elect under
Section 171 of the Code to amortize such premium under the constant yield method
over the life of the Certificate. If made, such an election will apply to all
debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related debt instrument, rather than as a separate
interest deduction. The OID Regulations also permit Certificateholders to elect
to include all interest, discount and premium in income based on a constant
yield method, further treating the Certificateholder as having made the election
to amortize premium generally. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" above. The Committee Report states that the same
rules that apply to accrual of market discount (which rules will require use of
a Prepayment Assumption in accruing market discount with respect to REMIC
Regular Certificates without regard to whether such Certificates have original
issue discount) will also apply in amortizing bond premium under Section 171 of
the Code.
REALIZED LOSSES. Under Section 166 of the Code, both corporate holders
of the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire such Certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses 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
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the result of a realized loss ultimately will not be realized, the law is
unclear with respect to the timing and character of such loss or reduction in
income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES.
GENERAL. As residual interests, the REMIC Residual Certificates will be
subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the Mortgage Loans or as debt instruments issued
by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "--Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
regard to the timing or amount of cash distributions by the REMIC. Ordinary
income derived from REMIC Residual Certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Code on the deductibility of "passive losses".
A holder of a REMIC Residual Certificate that purchased such
Certificate from a prior holder of such Certificate also will be required to
report on its federal income tax return amounts representing its daily share of
the taxable income (or net loss) of the REMIC for each day that it holds such
REMIC Residual Certificate. Those daily amounts generally will equal the amounts
of taxable income or net loss determined as described above. The Committee
Report indicates that certain modifications of the general rules may be made, by
regulations, legislation or otherwise to reduce (or increase) the income of a
REMIC Residual Certificateholder that purchased such REMIC Residual Certificate
from a prior holder of such Certificate at a price greater than (or less than)
the adjusted basis (as defined below) such REMIC Residual Certificate would have
had in the hands of an original holder of such Certificate. The REMIC
Regulations, however, do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required
to report (or the tax liability associated with such income) may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC Residual Certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC Residual Certificates or unrelated deductions against
which income may be offset, subject to the rules relating to "excess
inclusions", residual interests without "significant value" and "noneconomic"
residual interests discussed below. The fact that the tax liability associated
with the income allocated to REMIC Residual Certificateholders may exceed the
cash distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders' after-tax rate of return.
TAXABLE INCOME OF THE REMIC. The taxable income of the REMIC will equal
the income from the Mortgage Loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue discount and reduced by any premium on
issuance) on the REMIC Regular Certificates (and any other class of REMIC
Certificates constituting "regular interests" in the REMIC
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not offered hereby), amortization of any premium on the Mortgage Loans, bad debt
losses with respect to the Mortgage Loans and, except as described below, for
servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount".
The issue price of a REMIC Certificate received in exchange for an interest in
the Mortgage Loans or other property will equal the fair market value of such
interests in the Mortgage Loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold, the
Master Servicer or the Trustee may be required to estimate the fair market value
of such interests in order to determine the basis of the REMIC in the Mortgage
Loans and other property held by the REMIC.
Subject to possible application of the DE MINIMIS rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant yield basis. See "--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Mortgage Loans
with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described above for accruing original issue
discount on the REMIC Regular Certificates. It is anticipated that each REMIC
will elect under Section 171 of the Code to amortize any premium on the Mortgage
Loans. Premium on any Mortgage Loan to which such election applies may be
amortized under a constant yield method, presumably taking into account a
Prepayment Assumption. Further, such an election would not apply to any Mortgage
Loan originated on or before September 27, 1985. Instead, premium on such a
Mortgage Loan should be allocated among the principal payments thereon and be
deductible by the REMIC as those payments become due or upon the prepayment of
such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original
issue discount) on the REMIC Regular Certificates (including any other class of
REMIC Certificates constituting "regular interests" in the REMIC not offered
hereby) equal to the deductions that would be allowed if the REMIC Regular
Certificates (including any other class of REMIC Certificates constituting
"regular interests" in the REMIC not offered hereby) were indebtedness of the
REMIC. Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount", except that the DE MINIMIS rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess
of the stated redemption price of such class (such excess "Issue Premium"), the
net amount of interest deductions that are allowed the REMIC in each taxable
year with respect to the REMIC Regular Certificates of such class will be
reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount".
As a general rule, the taxable income of a REMIC will be determined in
the same manner as if the REMIC were an individual having the calendar year as
its taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions Tax and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such
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deductions only to the extent they exceed in the aggregate two percent of the
taxpayer's adjusted gross income) will not be applied at the REMIC level so that
the REMIC will be allowed deductions for servicing, administrative and other
non-interest expenses in determining its taxable income. All such expenses will
be allocated as a separate item to the holders of REMIC Certificates, subject to
the limitation of Section 67 of the Code. See "--Possible Pass-Through of
Miscellaneous Itemized Deductions" below. If the deductions allowed to the REMIC
exceed its gross income for a calendar quarter, such excess will be the net loss
for the REMIC for that calendar quarter.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS. The adjusted basis of a
REMIC Residual Certificate will be equal to the amount paid for such REMIC
Residual Certificate, increased by amounts included in the income of the REMIC
Residual Certificateholder and decreased (but not below zero) by distributions
made, and by net losses allocated, to such REMIC Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account
any net loss for any calendar quarter to the extent such net loss exceeds such
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of such calendar quarter (determined without regard
to such net loss). Any loss that is not currently deductible by reason of this
limitation may be carried forward indefinitely to future calendar quarters and,
subject to the same limitation, may be used only to offset income from the REMIC
Residual Certificate. The ability of REMIC Residual Certificateholders to deduct
net losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the REMIC. However, such bases increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder
may not amortize its basis in a REMIC Residual Certificate, but may only recover
its basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder see "--Taxation of Owners of REMIC
Residual Certificates--General" above.
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
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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.
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 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
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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-toMarket 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.
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 consult with their tax advisors prior
to making an investment in such Certificates.
SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the selling Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Certificate. The adjusted basis of
a REMIC Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to such REMIC Regular Certificate (including
original issue discount and market discount income) and reduced (but not below
zero) by distributions on such REMIC Regular Certificate received by such
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described under "--Taxation of Owners
of REMIC Residual Certificates--Basis Rules, Net Losses and Distributions".
Except as provided in the following four paragraphs, any such gain or loss will
be capital gain or loss, provided such REMIC Certificate is held as a capital
asset (generally, property held for investment) within the meaning of Section
1221 of the Code. The Code as of the date of this Prospectus provides for a top
marginal tax rate of 39.6% for individuals and a maximum marginal rate for
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long-term capital gains of individuals of 28%. No such rate differential exists
for corporations. In addition, the distinction between a capital gain or loss
and ordinary income or loss remains relevant for other purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise
be capital gain will be treated as ordinary income to the extent such gain does
not exceed the excess, if any, of (i) the amount that would have been includible
in the seller's income with respect to such REMIC Regular Certificate assuming
that income had accrued thereon at a rate equal to 110% of the "applicable
Federal rate" (generally, a rate based on an average of current yields on
Treasury securities having a maturity comparable to that of the Certificate
based on the application of the Prepayment Assumption to such Certificate, which
rate is computed and published monthly by the IRS), determined as of the date of
purchase of such REMIC Regular Certificate, over (ii) the amount of ordinary
income actually includible in the seller's income prior to such sale. In
addition, gain recognized on the sale of a REMIC Regular Certificate by a seller
who purchased such REMIC Regular Certificate at a market discount will be
taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period such REMIC Certificate was held by such
holder, reduced by any market discount included in income under the rules
described above under "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" and "--Premium".
REMIC Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from
the sale of a REMIC Certificate by a bank or thrift institution to which such
section applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include such
net capital gain in total net investment income for the taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
Except as may be provided in Treasury regulations yet to be issued, if
the seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six 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 TAX AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions" (a "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions a prohibited transaction means
the disposition of a Mortgage Loan, the receipt of income from a source other
than a Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the REMIC Certificates. It is not anticipated that any REMIC
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on
which the REMIC issues all of its interests could result in the imposition of a
tax on the REMIC equal to 100% of the value of the
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contributed property (a "Contributions Tax"). Each related 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, Special Servicer, Manager or Trustee in any case
out of its own funds, provided that such person has sufficient assets to do so,
and provided further that such tax arises out of a breach of such person's
obligations under the related Agreement and in respect of compliance with
applicable laws and regulations. Any such tax not borne by a Master Servicer,
Special Servicer, Manager or 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 each
Agreement, and will be discussed in any Prospectus Supplement relating to the
offering of any REMIC Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (ii) a statement under penalties of perjury that such record
holder is not a disqualified organization.
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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 or the Master Servicer, which generally will hold at
least a nominal amount of REMIC Residual Certificates, will file REMIC federal
income tax returns on behalf of the related REMIC, and will be designated as and
will act as the "tax matters person" with respect to the REMIC in all respects.
As the tax matters person, the Trustee or the Master Servicer, as the
case may be, 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 related REMIC's tax return and may in some circumstances be bound by a
settlement agreement between the Trustee or the Master Servicer, as the case may
be, as 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
to the related REMIC, in a manner to be provided in Treasury regulations, 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 REMIC Residual Certificates, including
income, excess
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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
either the Trustee or the Master Servicer.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES
Payments of interest and principal, as well as payments of proceeds
from the sale of REMIC Certificates, may be subject to the "backup withholding
tax" under Section 3406 of the Code at a rate of 31% if recipients of such
payments fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from such tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against such recipient's federal income
tax. Furthermore, certain penalties may be imposed by the IRS on a recipient of
payments that is required to supply information but that does not do so in the
proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES
A REMIC Regular Certificateholder that is not a "United States Person"
(as defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not, unless otherwise disclosed in the
related Prospectus Supplement, be subject to United States federal income or
withholding tax in respect of a distribution on a REMIC Regular Certificate,
provided that the holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States Person and providing the name and
address of such Certificateholder). For these purposes, "United States Person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in, or under the laws of, the United States or
any political subdivision thereof, or an estate whose income is subject to
United States federal income tax regardless of its source, or a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. It is possible that
the IRS may assert that the foregoing tax exemption should not apply with
respect to a REMIC Regular Certificate held by a REMIC Residual
Certificateholder that owns directly or indirectly a 10% or greater interest in
the REMIC Residual Certificates. If the holder does not qualify for exemption,
distributions of interest, including distributions in respect of accrued
original issue discount, to such holder may be subject to a tax rate of 30%,
subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on such
United States shareholder's allocable portion of the interest income received by
such controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be
included in the estate of a non-resident alien individual and would not be
subject to United States estate taxes. However, Certificateholders who are
non-resident alien individuals should consult their tax advisors concerning this
question.
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 Agreement.
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
With respect to each series of Grantor Trust Certificates, counsel to
the Depositor will deliver its opinion to the effect that, assuming compliance
with all provisions of the related Agreement, the related Grantor Trust Fund
will be classified as a grantor trust under subpart E, part I of subchapter J of
the Code
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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 interest paid to the holders of Grantor Trust
Fractional Interest Certificates issued with respect to such Grantor Trust Fund
will be referred to as a "Grantor Trust Strip Certificate". A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES. In the case of Grantor
Trust Fractional Interest Certificates, unless otherwise disclosed in the
related Prospectus Supplement, counsel to the Depositor will deliver an opinion
that, in general, Grantor Trust Fractional Interest Certificates will represent
interests in (i) "loans . . . secured by an interest in real property" within
the meaning of Section 7701(a)(19)(C)(v) of the Code; (ii) "obligation[s]
(including any participation or Certificate of beneficial ownership therein)
which . . .[are] principally secured by an interest in real property" within the
meaning of Section 860G(a)(3) of the Code; and (iii) "real estate assets" within
the meaning of Section 856(c)(5)(B) of the Code. 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.
GRANTOR TRUST STRIP CERTIFICATES. Even if Grantor Trust Strip
Certificates evidence an interest in a Grantor Trust Fund consisting of Mortgage
Loans that are "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code, and "real estate assets"
within the meaning of Section 856(c)(5)(A) of the Code, and the interest on
which is "interest on obligations secured by mortgages on real property" within
the meaning of Section 856(c)(3)(A) 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
GENERAL. Holders of a particular series of Grantor Trust Fractional
Interest Certificates generally will be required to report on their federal
income tax returns their shares of the entire income from the Mortgage Loans
(including amounts used to pay reasonable servicing fees and other expenses) and
will be entitled to deduct their shares of any such reasonable servicing fees
and other expenses. Because of stripped interests, market or original issue
discount, or premium, the amount includible in income on account of a Grantor
Trust Fractional Interest Certificate may differ significantly from the amount
distributable thereon representing interest on the Mortgage Loans. Under Section
67 of the Code, an individual, estate or trust holding a Grantor Trust
Fractional Interest Certificate directly or through certain pass-through
entities will be allowed a deduction for such reasonable servicing fees and
expenses only to the extent that the aggregate of such holder's miscellaneous
itemized deductions exceeds two percent of such holder's adjusted gross income.
In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of
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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 a Mortgage Asset. 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 a Master Servicer, a
Special Servicer, any Sub-Servicer or their respective affiliates necessary to
determine whether the preceding "safe harbor" rules apply.
IF STRIPPED BOND RULES APPLY. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code, subject, however, to the discussion below regarding the treatment of
certain stripped bonds as market discount bonds and the discussion regarding DE
MINIMIS market discount. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--Market Discount" below. Under the stripped bond rules,
the holder of a Grantor Trust Fractional Interest Certificate (whether a cash or
accrual method taxpayer) will be required to report interest income from its
Grantor Trust Fractional Interest Certificate for each month in an amount equal
to the income that accrues on such Certificate in that month calculated under a
constant yield method, in accordance with the rules of the Code relating to
original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser of 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" below) and the yield of such
Grantor Trust Fractional Interest Certificate to such holder. Such yield would
be computed as 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, a Master
Servicer, a Special Servicer, any Sub-Servicer or their respective affiliates,
but will include such Certificateholder's share of any reasonable servicing fees
and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption, with respect to certain categories of debt
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instruments, and regulations could be adopted applying those provisions to the
Grantor Trust Fractional Interest Certificates. It is unclear whether those
provisions would be applicable to the Grantor Trust Fractional Interest
Certificates or whether use of a reasonable prepayment assumption may be
required or permitted without reliance on these rules. It is also uncertain, if
a prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any holder, at the
time of purchase of the Grantor Trust Fractional Interest Certificate by that
holder. Certificateholders are advised to consult their tax advisors concerning
reporting original issue discount in general and, in particular, whether a
prepayment assumption should be used in reporting original issue discount with
respect to Grantor Trust Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired
at a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a discount or a premium generally will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Mortgage Loan that is allocable to such Certificate and the portion of
the adjusted basis of such Certificate that is allocable to such
Certificateholder's interest in the Mortgage Loan. If a prepayment assumption is
used, it appears that no separate item of income or loss should be recognized
upon a prepayment. Instead, a prepayment should be treated as a partial payment
of the stated redemption price of the Grantor Trust Fractional Interest
Certificate and accounted for under a method similar to that described for
taking account of original issue discount on REMIC Regular Certificates. See
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount". It is unclear whether any other adjustments would be required to
reflect differences between an assumed prepayment rate and the actual rate of
prepayments.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Depositor nor any other person 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.
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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, even if the stripped bond rules do not 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. For a definition of "stated redemption price," see
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount"
above. In general, the issue price of a Mortgage Loan will be the amount
received by the borrower from the lender under the terms of the Mortgage Loan,
less any "points" paid by the borrower, and the stated redemption price of a
Mortgage Loan will equal its principal amount, unless the Mortgage Loan provides
for an initial "teaser," or below-market interest rate. The determination as to
whether original issue discount will be considered to be DE MINIMIS will be
calculated using the same test as in the REMIC discussion. See "--Taxation of
Owners of REMIC Regular Certificates--Original Issue Discount" above.
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 or
Master Servicer, as applicable, in preparing information returns to the
Certificateholders and the IRS.
If original issue discount is in excess of a DE MINIMIS amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption for certificates backed
by whole mortgage loans not subject to the stripped bond rules. However, Section
1272(a)(6) of the Code may require that a prepayment assumption be made in
computing yield with respect to all mortgage-backed securities.
Certificateholders are advised to consult their own tax advisors concerning
whether a prepayment assumption should be used in reporting original issue
discount with respect to Grantor Trust Fractional Interest Certificates.
Certificateholders should refer to the related Prospectus Supplement with
respect to each series to determine whether and in what manner the original
issue discount rules will apply to Mortgage Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will also
be required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage Loans
held in the related Trust Fund, approximately in proportion to the ratio such
excess bears to such Certificate's allocable portion of the aggregate original
issue discount remaining to be accrued on such Mortgage Loans. The adjusted
issue price of a Mortgage Loan on any given day equals the sum of (i) the
adjusted issue price (or, in the case of the first accrual period, the issue
price) of such Mortgage Loan at the beginning of the accrual period that
includes such day and (ii) the daily portions of original issue discount for all
days during such accrual period prior to such day. The adjusted issue price of a
Mortgage Loan at the beginning of any accrual period will equal the issue price
of such Mortgage Loan, increased by the aggregate amount of original issue
discount with respect to such Mortgage Loan that accrued in prior accrual
periods, and reduced by the amount of any payments made on such Mortgage Loan in
prior accrual periods of amounts included in its stated redemption price.
Unless otherwise provided in the related Prospectus Supplement, the
Trustee or Master Servicer, as applicable, 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.
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MARKET DISCOUNT. If the stripped bond rules do not apply to a 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
under rules similar to those described in "--Taxation of Owners of REMIC Regular
Interests--Market Discount" above.
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 apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
holder's option: (i) on the basis of a constant yield method, (ii) in the case
of a Mortgage Loan issued without original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the Mortgage Loan as of the beginning of the accrual period, or
(iii) in the case of a Mortgage Loan issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
original issue discount accrued in the accrual period bears to the total
original issue discount remaining at the beginning of the accrual period. The
prepayment assumption, if any, used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. The effect
of using a prepayment assumption could be to accelerate the reporting of such
discount income. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a Mortgage Loan purchased at a discount in the
secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans may be considered to be
DE MINIMIS and, if so, will be includible in income under DE MINIMIS rules
similar to those described in "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above within the exception that it is
less like that a prepayment assumption will be used for purposes of such rules
with respect to the Mortgage Loans.
Further, under the rules described in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount", 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).
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It is unclear whether a prepayment assumption should be used in
computing amortization of premium allowable under Section 171 of the Code. If
premium is not subject to amortization using a prepayment assumption and a
Mortgage Loan prepays in full, the holder of a Grantor Trust Fractional
Interest Certificate acquired at a premium should recognize a loss equal to the
difference between the portion of the prepaid principal amount of the Mortgage
Loan that is allocable to the Certificate and the portion of the adjusted basis
of the Certificate that is allocable to the Mortgage Loan. If a prepayment
assumption is used to amortize such premium, it appears that such a loss would
be unavailable. Instead, if a prepayment assumption is used, a prepayment should
be treated as a partial payment of the stated redemption price of the Grantor
Trust Fractional Interest Certificate and accounted for under a method similar
to that described for taking account of original issue discount on REMIC Regular
Certificates. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount". It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption 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 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" below 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. Regulations could be
adopted applying those provisions to the Grantor Trust Strip Certificates. It is
unclear whether those provisions would be applicable to the Grantor Trust Strip
Certificates or whether use of a prepayment assumption may be required or
permitted in the absence of such regulations. It is also uncertain, if a
prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Strip Certificate or, with respect to any subsequent holder, at the time
of purchase of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. However, neither the Depositor nor any other person will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be
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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 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, 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, 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
Regulations or their principles were applied to Grantor Trust Strip
Certificates, the amount of income reported with respect thereto would be
substantially similar to that described under "Taxation of Owners of Grantor
Trust Strip Certificates".
Certificateholders should consult their tax advisors concerning the
possible application of the contingent payment rules to the Grantor Trust Strip
Certificates.
SALES OF GRANTOR TRUST CERTIFICATES
Any gain or loss, equal to the difference between the amount realized
on the sale or exchange of a Grantor Trust Certificate and its adjusted basis,
recognized on such sale or exchange of a Grantor Trust Certificate by an
investor who holds such Grantor Trust Certificate as a capital asset, will be
capital gain or loss, except to the extent of accrued and unrecognized market
discount, which will be treated as ordinary income, and (in the case of banks
and other financial institutions) except as provided under Section 582(c) of the
Code. The adjusted basis of a Grantor Trust Certificate generally will equal its
cost, increased by any income reported by the seller (including original issue
discount and market discount income) and reduced (but not below zero) by any
previously reported losses, any amortized premium and by any distributions with
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respect to such Grantor Trust Certificate. The Code as of the date of this
Prospectus provides a top marginal tax rate of 39.6% for individuals and a
maximum marginal rate for long-term capital gains of individuals of 28%. No such
rate differential exists for corporations. In addition, the distinction between
a capital gain or loss and ordinary income or loss remains relevant for other
purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be
partially or wholly ordinary and not capital in certain circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income, as will gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Code. Furthermore, a portion of
any gain that might otherwise be capital gain may be treated as ordinary income
to the extent that the Grantor Trust Certificate is held as part of a
"conversion transaction" within the meaning of Section 1258 of the Code. A
conversion transaction generally is one in which the taxpayer has taken two or
more positions in the same or similar property that reduce or eliminate market
risk, if substantially all of the taxpayer's return is attributable to the time
value of the taxpayer's net investment in such transaction. The amount of gain
realized in a conversion transaction that is recharacterized as ordinary income
generally will not exceed the amount of interest that would have accrued on the
taxpayer's net investment at 120% of the appropriate "applicable Federal rate"
(which rate is computed and published monthly by the IRS) at the time the
taxpayer enters into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income items from
the transaction.
Finally, a taxpayer may elect to have net capital gain taxed 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 or Master Servicer, as applicable, will furnish to each holder of a
Grantor Trust 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 or Master Servicer, as applicable, 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,
the Special Servicer or any Sub-Servicer, and such other customary factual
information as the Depositor or the reporting party deems necessary or desirable
to enable holders of Grantor Trust Certificates to prepare their tax returns and
will furnish comparable information to the IRS 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 IRS will agree with the Trustee's or Master Servicer's, as the
case may be, information reports of such items of income and expense. Moreover,
such information reports, even if otherwise accepted as accurate by the IRS,
will in any event be accurate only as to the initial Certificateholders that
bought their Certificates at the representative initial offering price used in
preparing such reports.
BACKUP WITHHOLDING
In general, the rules described in "--REMICs--Backup Withholding with
Respect to REMIC Certificates" will also apply to Grantor Trust Certificates.
FOREIGN INVESTORS
In general, the discussion with respect to REMIC Regular Certificates
in "--REMICs--Foreign Investors in REMIC Certificates" 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.
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STATE AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences", potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Offered Certificates. State tax law may differ substantially from the
corresponding federal law, and the discussion above does not purport to describe
any aspect of the income tax laws of any state or other jurisdiction. Therefore,
potential investors should consult their own tax advisors with respect to the
various tax consequences of investments in the Offered Certificates.
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 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 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
the 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 the 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
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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 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.
The DOL issued an individual exemption, Prohibited Transaction Exemption
91-23 (56 Fed. Reg. 15936, April 18, 1991) (the "Exemption"), to Salomon Smith
Barney Inc. (formerly known as Smith Barney 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
Smith Barney Inc., (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with Salomon
Smith Barney 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 Ratings Services, a division of McGraw-Hill
Companies, Inc., 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 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
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Sections 4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through
(D) of the Code, in connection with the direct or indirect sale, exchange,
transfer, holding or the direct or indirect acquisition or disposition in the
secondary market of Certificates by a Plan or with Plan Assets. 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 and (3) the holding of Certificates by a Plan or with
Plan Assets.
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.
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") 84-14, regarding
transactions effected by a "qualified professional asset manager"; PTCE 90-1,
regarding transactions by insurance company pooled separate accounts; PTCE
91-38, regarding transactions 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
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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 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 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 statements in at least one of (i), (ii), (iii),
(iv), (v) or (vi) is correct: (i) the transferee is an insurance company and (a)
the source of funds used to purchase such 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 Certificates; (ii) the transferee is an
insurance company and (a) the source of funds used to purchase such Certificates
is an insurance company general account, (b) the requirements of Sections 401(c)
of ERISA and the DOL Regulations to be promulgated thereunder have been
satisfied and will continue to be satisfied and (c) the insurance company
represents that it understands that the operation of the general account after
December 31, 1998 may affect its ability to continue to hold the Certificates
after the date which is 18 months after the 401(c) Regulations become final and
unless the Exemption, a class exemption issued by the DOL or an exception under
401(c) of ERISA is then available for the continued holding of Certificates, if
the assets of the general account constitute Plan Assets, it will dispose of the
Certificates prior to the date which is 18 months after the 401(c) Regulations
become final; (iii) the transferee is an insurance company and (a) the source of
funds used to purchase such Certificates is an "insurance company pooled
separate account" (as such term is defined in PTCE 90-1), (b) the conditions set
forth in PTCE 90-1 have been satisfied and (c) there is no Plan, together with
all other Plans maintained by the same employer (or any "affiliate" thereof, as
defined in PTCE 90-1) or by the same employee organization, with assets which
exceed 10% of the total of all assets in such pooled separate account (as
determined under PTCE 90-1) as of the date of the acquisition of such
Certificates; (iv) the transferee is a bank and (a) the source of funds used to
purchase such Certificates is a "collective investment fund" (as defined in PTCE
91-38), (b) the conditions set forth in PTCE 91-38 have been satisfied and (c)
there is no Plan, the interests of which together with the interests of any
other Plans maintained by the same employer or employee organization in the
collective investment fund do not exceed 10% of the total of all assets in the
collective investment fund (as determined under PTCE 91-38) as of the date of
acquisition of such Certificates; (v) the transferee is a "qualified
professional asset manager" described in PTCE 84-14 and the conditions set forth
in PTCE 84-14 have been satisfied
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and will continue to be satisfied; or (vi) the transferee is an "in-house asset
manager" described in PTCE 96- 23 and the conditions set forth in PTCE 96-23
have been satisfied and will continue to be satisfied.
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.
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 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 WOULD 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
Unless otherwise specified in the related Prospectus Supplement, the
Offered Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Offered Certificates constitute legal investments for them.
Generally, only classes of Offered Certificates that (i) are rated in
one of the two highest rating categories by one or more Rating Agencies and (ii)
are part of a series evidencing interests in a Trust Fund consisting of loans
secured by, among other things, a single parcel of real estate upon which is
located a dwelling or mixed residential and commercial structure, such as
certain Multifamily Loans, originated by types of Originators specified in SMMEA
will be "mortgage related securities" for purposes of SMMEA. "Mortgage related
securities" are legal investments to the same extent that, under applicable law,
obligations issued by or guaranteed as to principal and interest by the United
States or any agency or instrumentality thereof constitute legal investments for
persons, trusts, corporations, partnerships, associations, business trusts and
business entities (including depository institutions, insurance companies and
pension funds created pursuant to or existing under the laws of the United
States or of any state, the authorized investments of which are subject to state
regulation). Under SMMEA, if a state enacted legislation prior to October 3,
1991 specifically limiting the legal investment authority of any such entities
with respect to "mortgage related securities", the Certificates would constitute
legal investments for entities subject to such legislation only to the extent
provided in such legislation. SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in "mortgage related securities", or
require the sale or other disposition of such securities, so long as such
contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented
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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.
All depository institutions considering an investment in the
Certificates should review the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on the Selection of Securities Dealers
and Unsuitable Investment Practices (to the extent adopted by their respective
regulators), setting forth, in relevant part, certain investment practices
deemed to be unsuitable for an institution's investment portfolio, as well as
guidelines for investing in certain types of mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Certificates or to
purchase Offered 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 Offered Certificates constitute legal
investments for such investors.
METHOD OF DISTRIBUTION
The Offered 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 Offered Certificates will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Salomon Smith Barney Inc. ("Salomon
Smith Barney") 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 Offered Certificates agreed to
be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of Offered
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 Offered
Certificates will be distributed by Salomon Smith Barney acting as agent or in
some cases as principal with respect to Offered Certificates that it has
previously purchased or agreed to purchase. If Salomon Smith Barney acts as
agent in the sale of Offered Certificates, Salomon Smith Barney will receive a
selling commission with respect to such Offered Certificates, depending on
market conditions, expressed as a percentage of the aggregate Certificate
Balance or notional amount of such Offered Certificates 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 Smith Barney elects to
purchase Offered Certificates as principal, Salomon Smith Barney 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 Offered Certificates of such series.
The Depositor will indemnify Salomon Smith Barney and any underwriters
against certain civil liabilities, including liabilities under the Securities
Act of 1933, or will contribute to payments Salomon Smith Barney and any
underwriters may be required to make in respect thereof.
In the ordinary course of business, Salomon Smith Barney 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 Offered Certificates will be sold
primarily to institutional investors. Purchasers of Offered 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
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connection with reoffers and sales by them of Offered 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 an
investment grade rating category 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, including
certain federal income tax consequences, will be passed upon for the Depositor
and Salomon Smith Barney Inc. by Thacher Proffitt & Wood, New York, New York.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Certificates and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any class of Offered Certificates
that they shall have been rated not lower than investment grade, that is, in one
of the four highest rating categories, by a Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped interest certificates in extreme cases might fail to recoup their
initial investments.
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.
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INDEX OF PRINCIPAL DEFINITIONS
Page
----
401(c) Regulations............................................................86
Accrual Certificates......................................................10, 28
Accrued Certificate Interest..................................................30
ARM Loans.....................................................................22
Available Distribution Amount.................................................29
Book-Entry Certificates.......................................................28
Cash Flow Agreement.....................................................1, 9, 24
CERCLA....................................................................18, 57
Certificate Account....................................................8, 24, 37
Certificate Balance.......................................................10, 30
Certificate Owners............................................................34
Certificateholders.............................................................5
Certificates...................................................................7
Class Exemptions..............................................................86
Closing Date..................................................................63
Code......................................................................12, 61
Commercial Loans..............................................................20
Commission.....................................................................5
Committee Report..............................................................63
Contingent Payment Regulations................................................82
Contributions Tax.............................................................73
Cooperatives..................................................................20
CPR...........................................................................26
Credit Support.......................................................1, 8, 9, 24
Crime Control Act.............................................................60
Cut-off Date..................................................................11
Debt Service Coverage Ratio...................................................21
Definitive Certificates.......................................................28
Depositor..................................................................7, 20
Determination Date............................................................29
Distribution Date.............................................................10
DOL...........................................................................84
DOL Regulations...............................................................84
DTC........................................................................5, 34
Due Period....................................................................29
Equity Participation..........................................................23
ERISA.....................................................................12, 84
ERISA Plans...................................................................84
Exchange Act...................................................................5
Excluded Plan.................................................................86
Exemption.................................................................12, 85
Exemption Rating Agencies.....................................................85
FDIC..........................................................................37
Garn Act......................................................................59
Grantor Trust Certificates....................................................12
Grantor Trust Fractional Interest Certificate.................................76
Grantor Trust Fund............................................................61
Grantor Trust Strip Certificate...............................................76
Indirect Participants.........................................................34
Insurance Proceeds............................................................38
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Page
----
IRS...........................................................................63
Issue Premium.................................................................68
L/C Bank......................................................................51
Liquidation Proceeds..........................................................38
Loan-to-Value Ratio...........................................................21
Lock-out Date.................................................................23
Lock-out Period...............................................................23
Mark-to-Market Regulations....................................................71
Master Servicer................................................................7
MBS.....................................................................1, 7, 20
MBS Agreement.................................................................23
MBS Issuer....................................................................23
MBS Servicer..................................................................23
MBS Trustee...................................................................23
Mortgage Asset Seller.........................................................20
Mortgage Assets.........................................................1, 7, 20
Mortgage Loans..........................................................1, 7, 20
Mortgage Notes................................................................20
Mortgage Rate..............................................................8, 22
Mortgaged Properties..........................................................20
Mortgages.................................................................20, 52
Multifamily Loans.............................................................20
Net Leases....................................................................21
Net Operating Income..........................................................21
Nonrecoverable Advance........................................................31
Offered Certificates...........................................................1
OID Regulations...............................................................61
Originator....................................................................20
Participants..................................................................34
Parties in Interest...........................................................84
Pass-Through Rate.............................................................10
Permitted Investments.........................................................38
Plan..........................................................................12
Plan Assets...................................................................84
Plans.........................................................................84
Prepayment Assumption.....................................................63, 78
Prepayment Premium............................................................23
Prohibited Transactions Tax...................................................72
PTCE..........................................................................86
PTCE 83-1.....................................................................86
Purchase Price................................................................37
Rating Agency.................................................................13
Record Date...................................................................29
Related Proceeds..............................................................31
Relief Act....................................................................60
REMIC.........................................................................61
REMIC Certificates............................................................61
REMIC Provisions..............................................................61
REMIC Regular Certificates....................................................12
REMIC Regulations.............................................................61
REMIC Residual Certificates...................................................12
REO Property..................................................................40
REO Tax.......................................................................41
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Page
----
Residual Owner................................................................67
Retained Interest.............................................................45
RICO..........................................................................60
Salomon Smith Barney......................................................12, 89
Senior Certificates.......................................................10, 28
Servicing Standard............................................................40
SMMEA.........................................................................88
SPA...........................................................................26
Special Servicer...............................................................7
Spread Certificates.......................................................10, 28
Stripped Interest Certificates............................................10, 28
Stripped Principal Certificates...........................................10, 28
Sub-Servicer..................................................................41
Sub-Servicing Agreement.......................................................41
Subordinate Certificates..................................................10, 28
Superlien.....................................................................57
Tax Favored Plans.............................................................84
Tiered MBS..............................................................1, 7, 20
Tiered REMICs.................................................................62
Title V.......................................................................60
Trust Assets...................................................................5
Trust Fund..................................................................1, 7
Trustee........................................................................7
UCC...........................................................................53
Underwriter...................................................................85
United States Person..........................................................75
Value.........................................................................21
Voting Rights.................................................................19
Warranting Party..............................................................36
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