Registration No. ________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of Incorporation
or Organization)
13-3439681
(I.R.S. Employer Identification No.)
Seven World Trade Center
New York, New York 10048
(212) 783-5635
(Address, Including Zip Code, and
Telephone Number, Including Area
Code, of Registrant's Principal
Executive Offices)
Gregory P. Petroski
Salomon Brothers Mortgage Securities VII, Inc.
Seven World Trade Center
New York, New York 10048
(212) 783-5635
(Name, Address, Including Zip Code,
and Telephone Number, Including
Area Code, of Agent For Service)
----------------
Copies to:
Richard M. Horowitz, Esq.
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
================================================================================
<PAGE>
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. |X|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=======================================================================================================================
Proposed Proposed
maximum maximum
Amount offering aggregate Amount of
Title of securities being price per offering registration
being registered registered (1) unit (2) price (2) fee (1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates
and Mortgage-Backed Notes, issued
in Series............................... $3,000,000,000.00 100% $3,000,000,000.00 $885,000.00
=======================================================================================================================
</TABLE>
(1) $2,634,170,986.03 aggregate principal amount of Mortgage Pass-Through
Certificates and Mortgage-Backed Notes registered by the Registrant under
Registration Statement No. 333-50153 referred to below and not previously
sold are proposed to be consolidated in this Registration Statement
concurrently with the effectiveness hereof pursuant to Rule 429. All
registration fees in connection with such unsold amount of Mortgage
Pass-Through Certificates and Mortgage-Backed Notes have been previously
paid by the Registrant under the foregoing Registration Statement.
Accordingly, the total amount proposed to be registered under the
Registration Statement as so consolidated as of the date of this filing is
$5,634,170,986.03.
(2) Estimated solely for the purposes of calculating the registration fee on
the basis of the proposed maximum aggregate offering price.
-------------------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 of the Securities Act of 1933, the Prospectuses
and Prospectus Supplements contained in this Registration Statement also relate
to the Registrant's Registration Statement on Form S-3 (Registration Statement
No. 333-50153). This Registration Statement, which is a new registration
statement, also constitutes a post-effective amendment to Registration Statement
No. 333-50153. Such post-effective amendment shall hereafter become effective
concurrently with the effectiveness of this Registration Statement in accordance
with Section 8(a) of the Securities Act of 1933.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET FURNISHED PURSUANT TO RULE 404(a)
ITEMS AND CAPTIONS IN FORM S-3 LOCATION IN PROSPECTUSES
<S> <C> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................................. Forepart of Registration
Statement and Outside Front
Cover Page of
Prospectuses**
2. Inside Front and Outside Back Cover Pages of
Prospectus..................................................... Inside Front Cover Page of
Prospectuses and Outside
Back Cover Page of
Prospectuses**
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges...................................... Summaries of Prospectus;
Special Considerations
4. Use of Proceeds................................................ Use of Proceeds**
5. Determination of Offering Price................................ *
6. Dilution....................................................... *
7. Selling Security Holders....................................... *
8. Plan of Distribution........................................... Method of Distribution**
9. Description of Securities to Be Registered..................... Outside Front Cover Page;
Summaries of Prospectus;
Description of the Trust
Funds; Description of the
Certificates**
10. Interests of Named Experts and Counsel......................... *
11. Material Changes............................................... Financial Information
12. Incorporation of Certain Information by Reference.............. Incorporation of Certain
Information by Reference
Disclosure of Commission Position on
13. Indemnification for Securities Act Liabilities................. See page II-2
- -------------------
* Answer negative or item inapplicable.
** To be completed or provided from time to time by Prospectus Supplement.
</TABLE>
<PAGE>
EXPLANATORY NOTE
This Registration Statement consists of (i) a basic prospectus
for use in a residential or multifamily transaction, (ii) a basic prospectus for
use in a commercial or multifamily transaction and (iii) four forms of
prospectus supplement (one form to be used in offering a Series of
Senior/Subordinate Certificates, the second form to be used in offering a Series
of Certificates with various combinations of Credit Support, the third form to
be used in offering a series of commercial or multifamily certificates and the
fourth form to be used in offering Mortgage-Backed Notes). Each basic prospectus
used (in either preliminary or final form) will be accompanied by the applicable
prospectus supplement.
<TABLE>
<CAPTION>
CONTENTS OF REGISTRATION STATEMENT
PAGE
<S> <C> <C>
Forms of Prospectus Supplement:
Version 1: Form of Prospectus Supplement relating to
a typical Senior/Subordinate Series............................................. S-1
Version 2: Form of Prospectus Supplement relating to
Certificates with various combinations
of Credit Support............................................................... S-1
Version 3: Form of Prospectus Supplement relating to
a typical Commercial or Multifamily Series...................................... S-1
Version 4: Form of Prospectus Supplement relating to
an offering of Mortgage-Backed Notes............................................ S-1
Basic Prospectuses:
Version 1: Form of Basic Prospectus for use in a
residential or multifamily transaction.......................................... 1
Version 2: Form of Basic Prospectus for use in a
commercial or multifamily transaction........................................... 1
</TABLE>
<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 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 September 2, 1998
[Version 1]
PROSPECTUS SUPPLEMENT
(To Prospectus Dated , 199_)
$ (APPROXIMATE)
SENIOR MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 199_-
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
MASTER SERVICER
The Series 199_- Certificates will consist of six classes of Senior Certificates
and three classes of Subordinate Certificates. Only five of the six classes of
the Senior Certificates, designated as Class A Certificates, Class B
Certificates, Class C Certificates, Class D Certificates and Class E
Certificates, are offered hereby (such classes collectively are hereinafter
referred to as the "Offered Certificates"). The Class A, Class B and Class C
Certificates are Targeted Amortization Certificates, and the Class D and Class E
Certificates are Variable Rate Certificates, as described herein. The sixth
class of Senior Certificates designated as Class F Certificates, and the
Subordinate Certificates are not offered hereby.
The Series 199_- Certificates represent in the aggregate the entire beneficial
ownership interest in a Trust Fund consisting primarily of a segregated pool of
conventional one- to four-family fixed rate first mortgage loans (the "Mortgage
Loans"). The Mortgage Loans have original terms to maturity of [15 to 30] years
and an aggregate principal balance as of, in the case of each Mortgage
Loan,the later of 1, 199_ and the date of origination (as to each
Mortgage Loan, the "Cut-off Date") of approximately $ , subject to a permitted
variance as described herein under "The Mortgage Pool". The initial Certificate
Principal Balance of the Senior Certificates represents approximately %
of the aggregate principal balance of the Mortgage Loans as of the close of
business on the respective Cut-off Dates. All of the Mortgage Loans were
originated by , and will be sold to Salomon Brothers Mortgage Securities VII,
Inc. (the "Depositor") on or prior to the date of initial issuance of the Series
199_- Certificates.
(COVER CONTINUED ON NEXT PAGE)
THE SERIES 199_- CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
THE DEPOSITOR, THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES.
NEITHER THE SERIES 199_- CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALLY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
INITIAL CERTIFICATE PASS-THROUGH SCHEDULED FINAL
PRINCIPAL BALANCE(1)(2) RATE DISTRIBUTION DATE
(3)
Class A ..... $ %
Class B .....
Class C .....
Class D ..... (4)
Class E ..... (5)
(1) Approximate, subject to adjustment as described herein.
(2) The initial Certificate Principal Balance of the Class F Certificates is $ .
(3) Determined on the basis of the assumptions set forth under "Yield on the
Certificates--Scheduled Final Distribution Dates and Weighted Average
Lives" as described herein.
(4) The Class D Certificates will accrue interest at a per annum rate of %
from 25, 199_ through 24, 199_. Thereafter, the Class D
Certificates will accrue interest during each succeeding Interest Accrual
Period at a per annum rate equal to the lesser of (a) % plus the arithmetic
mean of the London interbank offered rate quotations for one-month
Eurodollar deposits ("LIBOR"), determined monthly as set forth herein, and
(b) %.
(5) The Class E Certificates will accrue interest at a per annum rate of %
from 25, 199_ through 24, 199_. Thereafter, the Class E
Certificates will accrue interest during each succeeding Interest
Accrual Period at a per annum rate equal to the greater of (a) % and (b)
the lesser of (i) % and (ii) % minus the product of (x) and (y) LIBOR minus
%.
The Offered Certificates will be purchased by the Underwriter from the Depositor
and will be offered by the Underwriter from time to time to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the Depositor, will be % of
the aggregate initial Certificate Principal Balance of the Offered Certificates,
plus accrued interest on their respective initial Certificate Principal Balances
at their respective initial Pass-Through Rates from 1, 199_ in the case of the
Targeted Amortization Certificates and 25, 199_ in the case of the Variable
Rate Certificates.
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 at the office
of Salomon Smith Barney Inc., Seven World Trade Center, New York, New York
10048, on or about , 199_.
- ---------------------
SALOMON SMITH BARNEY
- --------------------------------------------------------------------------------
The date of this Prospectus Supplement is , 199_.
<PAGE>
Distributions on the Series 199_- 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 199_ (each, a "Distribution Date"). Distributions of
interest on the Offered Certificates of each class will be based on interest
accrued during the Interest Accrual Period (as defined herein) for such class on
the Certificate Principal Balance thereof and the then applicable Pass-Through
Rate thereon. Distributions in respect of principal of the Offered Certificates
will be made sequentially as described herein.
The yield to maturity on the Variable Rate Certificates will be extremely
sensitive to the rate and timing of principal payments (including prepayments)
on the Mortgage Loans, which may fluctuate significantly from time to time. A
slower than anticipated rate of principal payments on the Mortgage Loans could
adversely affect the yield to investors on the Variable Rate Certificates. See
"Yield on the Certificates" herein.
There is currently no secondary market for the Offered Certificates and there
can be no assurance that a secondary market for the Offered Certificates will
develop. Salomon Smith Barney Inc. (the "Underwriter") intends to establish a
market in the Offered Certificates, but is not obligated to do so. There is no
assurance that any such market, if established, will continue.
An election will be made to treat the Trust Fund as a "real estate mortgage
investment conduit" (a "REMIC") for federal income tax purposes. As described
more fully herein and in the Prospectus, the Offered Certificates will
constitute "regular interests" in the REMIC. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
The Offered Certificates offered by this Prospectus Supplement will be
part of a separate series of Certificates being offered by the Depositor
pursuant to its Prospectus dated _________________, 199_, of which this
prospectus supplement is a part and which accompanies this Prospectus
Supplement. The Prospectus contains important information regarding this
offering which is not contained herein, and prospective investors are urged to
read the Prospectus and this Prospectus Supplement in full.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
-iii-
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used but not defined herein shall have the meanings assigned
thereto in the Prospectus. An Index of Principal Definitions is included at the
end of the Prospectus.
Title of Series.......................Mortgage Pass-Through Certificates, Series
199_- (the "Certificates"). The
Certificates represent in the aggregate
the entire beneficial ownership interest
in a Trust Fund consisting primarily of a
pool of Mortgage Loans with an aggregate
principal balance of approximately $
as of, in the case of each Mortgage Loan,
the later of 1, 199_ and the date of
origination (as to each Mortgage Loan, the
"Cut-off Date"; hereinafter, reference to
the Cut-off Date in the case of more than
one Mortgage Loan shall be to the
respective Cut-off Dates for such Mortgage
Loans). The Series 199_- Certificates will
be issued pursuant to a Pooling and
Servicing Agreement, to be dated as of
1, 199_, among the Depositor, the Master
Servicer and the Trustee (the
"Agreement").
Senior Certificates...................The Senior Certificates have in the
aggregate an initial Certificate Principal
Balance of $ (approximate),
evidencing an initial Senior Percentage of
approximately %. The Offered
Certificates of each class will have the
following initial Certificate Principal
Balances:
Class A $
Class B $
Class C $
Class D $
Class E $
The Class A, Class B and Class C
Certificates are Targeted Amortization
Certificates, as hereinafter described.
The Pass-Through Rates on the Class A,
Class B and Class C Certificates are fixed
at % per annum. The Pass-Through Rates on
the Class D and Class E Certificates (the
"Variable Rate Certificates") are
adjustable based on fluctuations in LIBOR,
as described herein. The initial
Pass-Through Rate on the Class D
Certificates is % per annum and the
initial Pass-Through Rate on the Class E
Certificates is % per annum.
The Class F Certificates, which are not
offered hereby, have an initial
Certificate Principal Balance of $ and a
weighted average Pass-Through Rate as
described herein. The Class F Certificates
will be delivered to the Mortgage Loan
Seller as partial consideration for the
Mortgage Loans.
Subordinate Certificates..............The Subordinate Certificates are
designated as the Class G-1, Class G-2 and
Class R Certificates. The Class G-1
Certificates and the Class G-2
Certificates have in the aggregate an
initial Certificate Principal Balance of
$_______ (approximate), evidencing in the
aggregate an initial Subordinate
Percentage of approximately %. The Class R
Certificates, which have no Certificate
Principal
S-1
<PAGE>
Balance and no Pass-Through Rate,
represent the right to receive
distributions, if any, after the Senior
Certificates, the Class G-1 Certificates
and the Class G-2 Certificates have been
retired. The Subordinate Certificates,
which are not being offered hereby, may be
sold by the Depositor at any time in
accordance with the terms of the
Agreement.
Depositor of Mortgage Loans...........Salomon Brothers Mortgage Securities VII,
Inc., an indirect wholly-owned subsidiary
of Salomon Smith Barney Holdings Inc. and
an affiliate of the Underwriter. See "The
Depositor" in the Prospectus.
Master Servicer and Mortgage
Loan Seller.........................See "Pooling and Servicing Agreement - The
Master Servicer" herein.
Trustee...............................See "Pooling and Servicing Agreement - The
Trustee" herein.
The Mortgage Pool.....................The Mortgage Pool consists of fixed rate,
fully amortizing Mortgage Loans. The
Mortgage Loans are secured by first liens
on residential real properties (the
"Mortgaged Properties"). The Mortgage
Loans will have an aggregate principal
balance of approximately $ as of the
Cut-off Date, original terms to maturity
of [15 to 30] years and a weighted average
remaining term to maturity of
approximately years as of the Cut-off
Date. The Mortgage Loans will bear
interest at Mortgage Rates from
approximately % per annum to approximately
% per annum, with a weighted average
Mortgage Rate of approximately % per annum
as of the Cut-off Date. No Mortgage Loan
will have been originated later than or
have an initial scheduled due date later
than .
Interest Distributions................Holders of each class of Senior
Certificates will be entitled to receive
on each Distribution Date, to the extent
of the Available Distribution Amount for
such Distribution Date, distributions
allocable to interest in an aggregate
amount (with respect to any Distribution
Date, the "Interest Distribution Amount")
as follows: (a) in the case of each class
of Offered Certificates, interest accrued
during the related Interest Accrual Period
on the Certificate Principal Balance of
such Certificates immediately prior to
such Distribution Date at the then
applicable Pass-Through Rate for such
class, and (b) in the case of the Class F
Certificates, interest accrued during the
related Interest Accrual Period on the
Notional Amount of such Certificates for
such Distribution Date at the then
applicable weighted average Pass-Through
Rate for such class; in each case less the
allocable share for each such class of the
Net Prepayment Interest Shortfall (as
defined herein and allocated as described
herein), if any, for such Distribution
Date. The Interest Accrual Period for the
Targeted Amortization Certificates and the
Class F Certificates for any Distribution
Date is the one-month period preceding the
month in which such Distribution Date
occurs. The Interest Accrual Period for
the Variable Rate Certificates for any
S-2
<PAGE>
Distribution Date is the one-month period
commencing on the 25th day of the calendar
month preceding the month in which such
Distribution Date occurs and ending on the
24th day of the month in which such
Distribution Date occurs. All
distributions of interest will be based on
a 360-day year consisting of twelve 30-day
months. If the Available Distribution
Amount for any Distribution Date is less
than the Interest Distribution Amount for
such Distribution Date, the shortfall will
be added to the Interest Distribution
Amount distributable to holders of Senior
Certificates on subsequent Distribution
Dates, to the extent of available funds.
The Available Distribution Amount for any
Distribution Date includes scheduled
payments on the Mortgage Loans due during
the related Due Period and received on or
prior to the related Determination Date,
prepayments and other unscheduled
collections on the Mortgage Loans received
during the related Prepayment Period, any
Advances made by the Master Servicer for
the Distribution Date, and any amounts
paid by the Master Servicer to cover the
Prepayment Interest Shortfall (as defined
herein) for such Distribution Date, as
described herein, net of certain amounts
payable or reimbursable to the Master
Servicer and the Trustee. The Available
Distribution Amount for the first
Distribution Date will include cash to be
delivered to the Trustee on the Closing
Date in respect of each Mortgage Loan that
does not have a monthly payment due in
1992 in an amount equal to one month's
interest on each such Mortgage Loan at the
Net Mortgage Rate thereon. The Net
Mortgage Rate on any Mortgage Loan is
equal to the Mortgage Rate thereon minus %
per annum, which is the rate at which the
servicing fee is calculated (the
"Servicing Fee Rate").
The Due Period with respect to any
Distribution Date com mences 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 prior to the month in which such
Distribution Date occurs. The
Determination Date with respect to any
Distribution Date is the day of the month
in which such Distribution Date occurs or,
if such day is not a business day, on the
next preceding business day. See
"Description of the Certificates-Interest
Distributions".
Principal Distributions...............Holders of the Senior Certificates will be
entitled to receive on each Distribution
Date, in accordance with the sequential
priorities described herein, a
distribution allocable to principal equal
to the sum of the following amounts
(hereinafter referred to as the "Minimum
Principal Distribution Amount"): (i) the
then applicable Senior Percentage of all
scheduled principal payments due on the
S-3
<PAGE>
Mortgage Loans during the related Due
Period, regardless of whether received on
or prior to the related Determination
Date, (ii) the then applicable Senior
Prepayment Percentage of all prepayments
and certain other unscheduled principal
recoveries received with respect to the
Mortgage Loans in the related Prepayment
Period, (iii) with respect to any
defaulted Mortgage Loan that finally is
liquidated in the related Prepayment
Period, other than a Mortgage Loan as to
which a Special Hazard Loss in excess of
the Special Hazard Subordination Amount
(each as defined herein) has occurred, the
lesser of (a) the then applicable Senior
Liquidation Percentage of the net amount
of principal recovered and (b) the then
applicable Senior Percentage of the
Scheduled Principal Balance thereof and
(iv) with respect to any Mortgage Loan
that finally is liquidated in the related
Prepayment Period as to which a Special
Hazard Loss in excess of the Special
Hazard Subordination Amount has occurred
(a "Special Hazard Excess Loss"), the
Senior Percentage of the lesser of (a) the
net amount of principal recovered and (b)
the excess, it any, of the Scheduled
Principal Balance of such Mortgage Loan
over such Special Hazard Excess Loss.
Holders of Senior Certificates will be
entitled to additional distributions
allocable to principal in respect of
Unrecovered Senior Portions to the extent
described herein under "Description of the
Certificates-Principal Distributions".
On each Distribution Date as to which the
Senior Percentage is less than 100%, an
amount (hereinafter referred to as the
"Senior Principal Distribution Amount")
equal to the sum of (i) the lesser of (a)
the portion of the Available Distribution
Amount remaining after the Interest
Distribution Amount is distributed to the
Senior Certificateholders and (b) the
Minimum Principal Distribution Amount for
such Distribution Date plus, to the extent
not previously paid, the Minimum Principal
Distribution Amount for each prior
Distribution Date, and (ii) any amount
distributable in respect of Unrecovered
Senior Portions, will be distributed as
follows:
(w) first, in alphabetical
order of class
designation to the
holders of the
respective classes of
Targeted Amortization
Certificates, in each
case up to an amount
equal to the Targeted
Principal Distribution
Amount for such class
and such Distribution
Date;
(x) second, to the holders
of the Class D
Certificates and the
holders of the Class E
Certificates pro rata
based on the
Certificate Principal
Balances thereof, up
to an amount equal to
the Certificate
Principal Balances
thereof;
(y) third, in alphabetical
order of class
designation to the
holders of the
respective classes of
Targeted Amortization
Certificates, in each
case up to an
S-4
<PAGE>
amount equal to the
Certificate Principal
Balance thereof; and
(z) fourth, to the holders
of the Class F
Certificates, up to an
amount equal to the
Certificate Principal
Balance thereof.
The Targeted Principal Distribution Amount
for any class of Targeted Amortization
Certificates on any Distribution Date is
the amount, if any, necessary to reduce
the Certificate Principal Balance of such
class to the percentage of the initial
Certificate Principal Balance of such
class set forth in the Targeted Principal
Percentage table included herein under
"Description of the
Certificates--Principal Distributions".
In the event that the Senior Percentage
applicable to distributions on any
Distribution Date were to equal 100%,
which would result if the aggregate
Certificate Principal Balance of the
Subordinate Certificates were reduced to
zero due to allocations of Realized Losses
together with any distributions in respect
of principal, all priorities relating to
sequential distribution in respect of
principal among the various classes of
Senior Certificates will be disregarded,
and the Senior Principal Distribution
Amount will be distributed on such
Distribution Date and each succeeding
Distribution Date, to all classes of
Senior Certificates pro rata in accordance
with their respective outstanding
Certificate Principal Balances.
The Senior Percentage initially will be
approximately % and will be recalculated
after each Distribution Date as described
herein to reflect the entitlement of the
holders of the Senior Certificates to
subsequent distributions allocable to
principal. The Senior Prepayment
Percentage initially will be 100%;
starting on the Distribution Date
occurring in , it will decline in the
manner and subject to the conditions
described herein until , when it will
equal the then applicable Senior
Percentage. The Senior Liquidation
Percentage initially will be approximately
% and, for so long as the Class G-2
Certificates are outstanding, will be
recalculated after each Distribution Date
to equal the sum of the then applicable
Senior Percentage and the then applicable
percentage of distributions in respect of
principal to which the holders of the
Class G-2 Certificates are entitled,
subject to the subordination provisions
applicable to the Class G-2 Certificates.
After the Class G-2 Certificates have been
retired, the Senior Liquidation Percentage
will be 100%.
The application of the Senior Prepayment
Percentage (when it exceeds the Senior
Percentage) to determine amounts
distributable in respect of principal of
the Senior Certificates will have the
effect of accelerating the amortization of
the Senior Certificates. The corresponding
increase in the respective interest of the
Subordinate
S-5
<PAGE>
Certificates relative to that of the
Senior Certificates is intended to
preserve the availability of the
subordination provided by the Subordinate
Certificates. See "Description of the
Certificates--Allocation of Losses;
Subordination".
Allocation of Losses..................Subject to the limitations described
herein (including the limitation relating
to Special Hazard Losses), losses realized
on the Mortgage Loans will be allocated to
the Subordinate Certificates prior to
allocation to the Senior Certificates.
Special Hazard Losses in excess of the
Special Hazard Subordination Amount will
be allocated to all classes of
Certificates pro rata in accordance with
their respective outstanding Certificate
Principal Balances. The Special Hazard
Subordination Amount initially will be
approximately $ and will be subject to
reduction on each Distribution Date as
described herein. See "Description of the
Certificates--Allocation of Losses;
Subordination".
Special Prepayment
Considerations........................The rate of principal payments on the
Certificates collectively will depend on
the rate and timing of principal payments
(including prepayments, defaults and
liquidations) on the Mortgage Loans. As is
the case with mortgage pass-through
certificates generally, the Certificates
are subject to substantial inherent
cash-flow uncertainties because the
Mortgage Loans may be prepaid at any time.
Generally, when prevailing interest rates
are increasing, prepayment rates on
mortgage loans tend to decrease, resulting
in a reduced return of principal to
investors at a time when reinvestment at
such higher prevailing rates would be
desirable. Conversely, when prevailing
interest rates are declining, prepayment
rates on mortgage loans tend to increase,
resulting in a greater return of principal
to investors at a time when reinvestment
at comparable yields may not be possible.
The multiple class structure of the
Certificates results in the allocation of
prepayments among certain classes as
follows:
SEQUENTIALLY PAYING CLASSES: All classes
of the Certificates are subject to various
priorities for payment of principal as
described herein. Distributions on classes
having an earlier priority of payment will
be immediately affected by the prepayment
speed of the Mortgage Loans early in the
life of the Mortgage Pool. Distributions
on classes with a later priority of
payment will not be directly affected by
the prepayment speed until such time as
principal is distributable on such
classes; however, the timing of
commencement of principal distributions
and the weighted average lives of such
classes will be affected by the prepayment
speed experienced both before and after
the commencement of principal
distributions on such classes.
TARGETED AMORTIZATION CERTIFICATES:
Principal distributions on the Targeted
Amortization Certificates would be payable
S-6
<PAGE>
in amounts determined based on schedules
as described herein, if the prepayment
speed of the Mortgage Loans were to remain
at a constant level of approximately % of
the Standard Prepayment Assumption.
However, as discussed herein, actual
principal distributions are likely to
deviate from the described amounts,
because it is highly unlikely that the
actual prepayment speed of the Mortgage
Loans each month will remain at or near
___% of the Standard Prepayment
Assumption. If the Variable Rate
Certificates are retired before all of the
Targeted Amortization Certificates are
retired, the rate of principal
distributions and the weighted average
lives of the remaining Targeted
Amortization Certificates will become
significantly more sensitive to changes in
the prepayment speed of the Mortgage
Loans, and principal distributions thereon
will be more likely to deviate from the
described amounts. See the description
below and herein for a discussion of the
effect of the timing of distributions in
respect of principal on the Targeted
Amortization Certificates on the yield of
the Variable Rate Certificates.
VARIABLE RATE CERTIFICATES: Because of the
application of amounts available for
principal distributions among the
Certificates in any given month, first to
the Targeted Amortization Certificates up
to the described amounts and then to the
Variable Rate Certificates, the rate of
principal distributions and the weighted
average lives of the Variable Rate
Certificates will be extremely sensitive
to changes in the prepayment speed of the
Mortgage Loans. The sensitivity of the
Variable Rate Certificates to changes in
the prepayment speed will be significantly
greater than that of the Targeted
Amortization Certificates, or than the
sensitivity that a fractional undivided
interest in the Mortgage Loans would have.
SUBORDINATION FEATURES: As described
herein, during certain periods all or a
disproportionately large percentage of
principal prepayments on the Mortgage
Loans will be allocated among the Senior
Certificates, and during certain periods
none or a disproportionately small
percentage of such prepayments will be
distributed on the Class G-1 and Class G-2
Certificates. As a result, the weighted
average lives of the Class G-1 and Class
G-2 Certificates will be extended and, as
a relative matter, the subordination
afforded the Senior Certificates by the
Class G-1 and Class G-2 Certificates will
be increased.
See "Description of the
Certificates--Principal Distributions" and
"Yield on the Certificates" herein, and
"Maturity and Prepayment Considerations"
in the Prospectus.
Special Yield Considerations..........The yield to maturity on each respective
class of the Offered Certificates will
depend on the rate and timing of principal
payments (including prepayments, defaults
and liquidations) on the Mortgage Loans
and the allocation thereof (and of any
losses on the Mortgage Loans) to reduce
the Certificate
S-7
<PAGE>
Principal Balance of such class, as well
as other factors such as the then
applicable Pass-Through Rate (and any
adjustments thereto) and the purchase
price for such Certificates. The yield to
investors on any class of Offered
Certificates will be adversely affected by
any allocation thereto of prepayment
interest shortfalls on the Mortgage Loans,
which result from the payment of interest
only to the date of prepayment (rather
than a full month's interest) in
connection with prepayments in full to the
extent not offset by the Master Servicer's
compensation, and the lack of any
distribution of interest on the amount of
any partial prepayments.
In general, if a class of Offered
Certificates is 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 or purchase.
Conversely, if a class of Offered
Certificates is purchased at a discount
and principal distributions thereon occur
at a rate slower than that assumed at the
time of purchase, the investor's actual
yield to maturity will be lower than that
originally anticipated.
The proceeds to the Depositor from the
sale of the Offered Certificates were
determined based on a number of
assumptions, including a prepayment
assumption of % of the Standard Prepayment
Assumption and weighted average lives
corresponding thereto as set forth herein
under "Yield on the Certificates." The
yield assumptions for the respective
classes that are to be offered hereunder
will vary as determined at the time of
sale.
The multiple class structure of the
Certificates causes the yield of certain
classes to be particularly sensitive to
changes in the prepayment speed of the
Mortgage Loans and other factors, as
follows:
TARGETED AMORTIZATION CERTIFICATES: The
yield to investors on the Targeted
Amortization Certificates will be more
sensitive to the rate and timing of
principal payments on the Mortgage Loans
when the Certificate Principal Balances of
the Variable Rate Certificates are reduced
to zero. In addition, the rate of
principal prepayments on the Mortgage
Loans will affect the weighted average
lives of the Targeted Amortization
Certificates.
VARIABLE RATE CERTIFICATES: The Variable
Rate Certificates will likely experience
significant price and yield volatility due
to the companion nature thereof. Investors
should consider whether such volatility is
suitable to their investment needs. The
yield to investors on the Variable Rate
Certificates will be especially sensitive
to the rate of prepayments on the Mortgage
Loans. A slower than anticipated rate of
principal payments on the Mortgage Loans
could adversely affect the yield to
investors on the Variable Rate
Certificates. In addition, the yield on
the Variable Rate Certificates will be
S-8
<PAGE>
sensitive to fluctuations in the level of
LIBOR (as defined herein).
Advances..............................The Master Servicer is required to make
advances in respect of delinquent payments
of principal and interest, subject to the
limitations described herein. The Trustee
is obligated to make any such advance if
the Master Servicer fails in its
obligation to do so, to the extent
provided in the Agreement. See
"Description of the
Certificates--Advances" herein and
"Description of the Certificates--Advances
in respect of Delinquencies" in the
Prospectus.
Denominations.........................The Offered Certificates will be offered
in registered form, in minimum percentage
interests corresponding to initial
Certificate Principal Balances of
approximately $ and multiples of $ in
excess thereof, with one Offered
Certificate of each class evidencing an
amount equal to the remainder of the
aggregate initial Certificate Principal
Balance of the Offered Certificates of
such class.
Record Date...........................All distributions, other than the final
distribution on any class of Certificates,
will be made by or on behalf of the
Trustee to the persons in whose names the
Series 199_- Certificates are registered
at the close of business on , 199_ in
the case of the first Distribution Date
and on the last business day of the month
preceding the month in which the related
Distribution Date occurs for all
subsequent Distribution Dates. See
"Description of the Certificates--
General".
Optional Termination..................At its option, the Master Servicer may
purchase all of the Mortgage Loans in the
Trust Fund, and thereby effect termination
of the Trust Fund and early retirement of
the Series 199_- Certificates, on any
Distribution Date on which the aggregate
principal balance of the Mortgage Loans
remaining in the Trust Fund is less than
10% of the aggregate principal balance of
the Mortgage Loans as of the Cut-off Date.
See "Pooling and Servicing Agreement--
Termination" herein and "Description of
the Certificates-- Termination" in the
Prospectus.
Certain Federal Income Tax
Consequences..........................For federal income tax purposes, the Trust
Fund will be a "real estate mortgage
investment conduit" (a "REMIC"). The
Senior Certificates, the Class G-1
Certificates and the Class G-2
Certificates will constitute the "regular
interests" in the REMIC and generally will
be treated as debt instruments of the
Trust Fund for federal income tax
purposes. The Class R Certificates will
constitute the "residual interest" in the
REMIC.
The Offered Certificates will be treated
as "qualifying real property loans" under
Section 593(d) of the Internal Revenue
Code of 1986 (the "Code"), assets
described in Section 7701(a)(19)(C) of the
Code and "real estate assets" under
Section 856(c)(5)(A) of the Code,
generally in the same proportion that the
assets in the REMIC would be so
S-9
<PAGE>
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 such Certificates are treated
as "real estate assets" under Section
856(c)(5)(A) of the Code. The Offered
Certificates also will be treated as
"qualified mortgages" under Section
860G(a)(3)(C) of the Code.
The Offered Certificates may be treated
for federal income reporting purposes as
having been issued with original issue
discount. The prepayment assumption that
will be used in determining the rate of
accrual of market discount and original
issue discount for federal income tax
purposes is % of the Standard Prepayment
Assumption. No representation is made that
the Mortgage Loans will prepay at that
rate or at any other rate. See "Yield on
the Certificates" herein.
For further information regarding the
federal income tax con sequences of
investing in the Offered Certificates, see
"Cer tain Federal Income Tax Consequences"
herein and in the Prospectus.
Rating................................It is a condition to the issuance of the
Series 199_- Certificates that the Offered
Certificates be rated not lower
than " " by and " " by .
A security rating is not a recommendation
to buy, sell or hold securities and may be
subject to revision or withdrawal at any
time by the assigning rating organization.
A security rating does not address the
frequency of prepayments of Mortgage
Loans, or the corresponding effect on
yield to investors. See "Yield on the
Certificates" and "Rating" herein and
"Yield Considerations" in the Prospectus.
Legal Investment......................The Offered Certificates will constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so
long as they are rated as described herein
and, as such, will be legal investments
for certain entities to the extent
provided in SMMEA. SMMEA, however,
provides for state limitation on the
authority of such entities to invest in
"mortgage related securities", provided
that such restricting legislation is
enacted prior to October 3, 1992. The
predecessor to the Office of Thrift
Supervision ("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 such as the
Class D and Class E Certificates. Similar
policy statements have been issued by
regulators having jurisdiction over other
types of depository institutions.
Accordingly, all institutions whose
investment activities are
S-10
<PAGE>
subject to legal investment laws and
regulations or to review by regulatory
authorities should consult with their own
legal advisors in determining whether and
to what extent the Offered Certificates,
and particularly the Class D and Class E
Certificates, constitute legal investments
or are subject to restrictions on
investment. See "Legal Investment" herein
and in the Prospectus.
ERISA Considerations..................The U.S. Department of Labor has issued an
individual exemption, Prohibited
Transaction Exemption 89-89, to the
Underwriter that generally exempts from
the application of certain of the
prohibited transaction provisions of
Section 406 of the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), and the excise taxes imposed on
such prohibited transactions by Section
4975(a) and (b) of the Code and Section
502(i) of ERISA, transactions relating to
the purchase, sale and holding of
pass-through certificates underwritten by
the Underwriter such as the Offered
Certificates and the servicing and
operation of asset pools such as the
Mortgage Pool, provided that certain
conditions are satisfied. See "ERISA
Considerations" in the Prospectus.
S-11
<PAGE>
THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of approximately Mortgage Loans with an
aggregate principal balance outstanding as of the Cut-off Date, after deducting
payments of principal due on or before such date, of approximately $
(subject to a permitted variance of plus or minus %). The Mortgage Loans
are secured by first mortgages or deeds of trust or other similar security
instruments creating first liens on oneto four-family residential properties
consisting of detached or semi-detached one-family dwelling units, twoto
four-family dwelling units, townhouses, individual condominium units and
individual units in planned unit developments. The Mortgage Loans to be included
in the Mortgage Pool will be acquired by the Depositor from , in its
capacity as Mortgage Loan Seller. In addition, will be the
Master Servicer for the Certificates.
With respect to all but of the Mortgage Loans, the mortgagor represented
in its loan application that the Mortgaged Property would be owner-occupied as
its primary residence. Mortgage Loans, having an aggregate principal balance as
of the Cut-off Date of $ , will be secured by a second home.
Each Mortgage Loan with a Loan-to-Value Ratio at origination in excess of
80% is insured by a primary mortgage insurance policy. Each such insurance
policy provides coverage in an amount equal at least to the excess of the
original principal balance of the Mortgage Loan covered thereby plus accrued
interest thereon and related foreclosure expenses over 75% of the Value of the
related Mortgaged Property. Any Mortgage Loan having a Loan-to-Value Ratio of
less than or equal to 80% at origination is not so insured. No Mortgage Loan
will have a Loan-to-Value Ratio at origination exceeding %. There can be no
assurance that the Loan-to-Value Ratio of any Mortgage Loan is less than or
equal to its original Loan-to-Value Ratio.
All of the Mortgage Loans are subject to due-on-sale provisions typically
included in mortgage documents acceptable to FHLMC and FNMA.
The Mortgage Loans are expected to have the following characteristics as of
the Cut-off Date (when a characteristic of the Mortgage Loans is stated to be
possessed by a percentage of the Mortgage Loans in the Mortgage Pool, that
percentage represents the ratio of the aggregate principal balance of Mortgage
Loans having such characteristic to the aggregate principal balance of all
Mortgage Loans in the Mortgage Pool):
All of the Mortgage Loans have scheduled monthly payments due on the first
day of the month (with respect to each Mortgage Loan, a "Due Date").
Approximately % of the Mortgage Loans will have a first Due Date on or prior
to . Approximately % of the Mortgage Loans will have been originated after
and before , and will have a first Due Date of . See "Pooling and
Servicing Agreement-General" with respect to the obligation of the Mortgage Loan
Seller in connection with such Mortgage Loans.
Approximately % of the Mortgage Loans will have an original term to
maturity of approximately [15] years and approximately % of the Mortgage Loans
will have an original term to maturity of approximately [30] years. The weighted
average remaining term to maturity of the Mortgage Loans will be approximately
years and months. None of the Mortgage Loans will have a first Due
Date prior to , or will have a remaining term to maturity of less than
approximately years and months or greater than approximately years
and months.
The Mortgage Loans will have Mortgage Rates ranging from approximately %
per annum to approximately % per annum. The weighted average of the Mortgage
Rates will be approximately % per annum. The Mortgage Loans with an original
term to maturity of approximately [15] years will have a weighted average
Mortgage Rate of approximately % per annum and the Mortgage Loans with an
original term to maturity of approximately [30] years will have a weighted
average Mortgage Rate of approximately % per annum.
S-12
<PAGE>
The Mortgage Loans will have principal balances at origination of not less
than approximately $ or more than approximately $ and as of the Cut-off Date
of not less than approximately $ or more than approximately $ . The
Mortgage Loans will have an average outstanding principal balance as of the
Cut-off Date of approximately $ .
Approximately % of the Mortgage Loans will have Loan-to-Value Ratios at
origination exceeding 80%. The weighted average original Loan-to-Value Ratio of
the Mortgage Loans is % .
Approximately % of the Mortgage Loans will be secured by Mortgaged Properties
located in ;
approximately % of the Mortgage Loans will be secured by Mortgaged Properties
located in ;
approximately % of the Mortgage Loans will be secured by Mortgaged Properties
located in ;
approximately % of the Mortgage Loans will be secured by Mortgaged Properties
located in ;
approximately % of the Mortgage Loans will be secured by Mortgaged Properties
located in ;
approximately % of the Mortgage Loans will be secured by Mortgaged Properties
located in ;
approximately % of the Mortgage Loans will be secured by Mortgaged Properties
located in ;
approximately % of the Mortgage Loans will be secured by Mortgaged Properties
located in ;
more approximately % of the Mortgage Loans will be secured by Mortgaged
Properties located in ; and not more than approximately % of the Mortgage
Loans will be secured by Mortgaged Properties located in any one other state.
Not more than approximately % of the Mortgage Loans will be secured by
Mortgaged Properties located in any one zip code area.
Approximately % of the Mortgage Loans will be secured by detached or
semi-detached one-family dwelling units. Approximately % of the Mortgage Loans
will be secured by units in two- to four-family dwellings, individual
condominium units, individual units in planned unit developments or townhouses.
Approximately % of the Mortgage Loans are Mortgage Loans the proceeds of
which were used to refinance an existing mortgage loan.
Approximately % of the Mortgage Loans will be Buydown Mortgage Loans.
Underwriting Standards
All of the Mortgage Loans were originated by (in such capacity, the
"Mortgage Loan Seller"), generally in accordance with the underwriting criteria
specified in the Prospectus, except as described herein. [Description of
differences with Prospectus description under the heading "Mortgage Loan
Program-Underwriting Standards".]
Additional Information
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Series 199_-
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 Series 199_- 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 Series 199_- Certificates are issued, although the
range of Mortgage Rates and maturities and certain other characteristics of the
Mortgage Loans in the Mortgage Pool may vary.
A detailed description of the Mortgage Loans on Form 8-K (the "Form 8-K")
will be available to purchasers of Offered Certificates at or before initial
issuance of the Series 199_- Certificates and will be filed by the Depositor
with the Securities and Exchange Commission within fifteen days after such
initial issuance. The Form 8-K will specify the precise aggregate principal
balance of the Mortgage Loans included in the Trust Fund outstanding as of the
Cut-off Date and will set forth on a precise basis the other information
presented in this Prospectus Supplement on an approximate basis.
S-13
<PAGE>
YIELD ON THE CERTIFICATES
Delay in Distributions on the Targeted Amortization Certificates
The effective yield to holders of the Targeted Amortization Certificates
will be less than the yields otherwise produced by their respective Pass-Through
Rates and purchase prices because (i) on the first Distribution Date one month's
interest is payable thereon even though 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) in the case of the class or classes of Targeted
Amortization Certificates then receiving distributions in respect of principal,
during each Interest Accrual Period, interest accrues on a Certificate Principal
Balance that is less than the Certificate Principal Balance of such class or
classes actually outstanding for the first 24 days of such Interest Accrual
Period.
Prepayment Interest Shortfalls
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. Partial principal prepayments are applied on the first day of the
month of receipt, with a resulting reduction in interest payable for the month
in which the partial principal prepayment is made. The Master Servicer is
obligated to pay from its own funds those shortfalls attributable to prepayments
on Mortgage Loans during each Prepayment Period (as to the related Distribution
Date, the "Prepayment Interest Shortfall"), but only to the extent of its total
servicing compensation for the concurrent period. See "Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses".
Accordingly, to the extent that any shortfall exceeds the amount that the Master
Servicer is obligated to pay from its own funds, the effect of any such
principal prepayment 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 Senior Certificates and the Subordinate
Certificates on a pro rata basis, and will not be carried forward to any future
Distribution Date. See "Description of the Certificates--Interest
Distributions".
General Prepayment Considerations
The rate of principal payments on the Certificates, the aggregate amount of
distributions on the Certificates and the yield to maturity of the Certificates
will be directly related to the rate of payments of principal on the Mortgage
Loans. The rate of principal payments on the Mortgage Loans will in turn be
affected by the amortization schedules of such Mortgage Loans 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 by the Depositor, the Master Servicer
or the Mortgage Loan Seller, as the case may be). The Mortgage Loans may be
prepaid by the mortgagors at any time without payment of any prepayment fee or
penalty. All of the Mortgage Loans contain due-on-sale clauses. As described
under "Description of the Certificates--Principal Distributions" herein, all or
a disproportionately large percentage of principal prepayments on the Mortgage
Loans will be allocated to the Senior Certificates until the Distribution Date
occurring in . Prepayments, liquidations and purchases of the Mortgage Loans
will result in distributions to Certificateholders of amounts 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 an Offered Certificate may vary from
the anticipated yield will depend upon the degree to which it is purchased at a
discount or premium, the degree to which the timing of payments thereon is
sensitive to prepayments on the Mortgage Loans and, in the case of the Variable
Rate Certificates, the degree to which interest payments thereon are sensitive
to the level of LIBOR. An investor should carefully consider the associated
risks, including, in the case of the Class D Certificates, the risk that lower
than anticipated levels of LIBOR could
S-14
<PAGE>
result in an actual yield to such investor that is lower than the anticipated
yield and, conversely, in the case of the Class E Certificates, the risk that
higher levels of LIBOR than anticipated (especially if accompanied by a slower
than anticipated rate of principal payments on the Mortgage Loans) could result
in an actual yield to such investor that is significantly lower than the
anticipated yield. Further, in the case of any Offered Certificate purchased at
a discount (especially the Class E Certificates), an investor should consider
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.
It is highly unlikely that the Mortgage Loans will prepay at any constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate. Moreover, the timing of prepayments on the Mortgage Loans may
significantly affect the actual yield to maturity on the Offered Certificates,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation. In general, the earlier a prepayment
of principal on the Mortgage Loans, the greater will be the effect on the
investor's yield to maturity. 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 Certificates would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments.
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 fell 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 rose 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.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years. In addition, default rates generally are higher
for mortgage loans used to refinance an existing mortgage loan. In the event of
a borrower's default on a Mortgage Loan, there can be no assurance that recourse
beyond the specific Mortgaged Property pledged as security for repayment will be
available. See "The Mortgage Pool--Underwriting Standards".
As described herein under "Description of the Certificates--Interest
Distributions", if the Available Distribution Amount is less than the Interest
Distribution Amount for such Distribution Date, the shortfall will be added to
the Interest Distribution Amount distributable to holders of Senior Certificates
on subsequent Distribution Dates, to the extent of available funds. Such
shortfalls, if any, will affect the yield to maturity of the Offered
Certificates to the extent of interest on such shortfall for so long as it is
outstanding.
An amount equal to the Targeted Principal Distribution Amount (as defined
herein) for each class of Targeted Amortization Certificates is expected to be
available on each Distribution Date for the payment of principal on such class
assuming that (i) the Mortgage Loans have the characteristics described in Table
1 below (the "Assumed Mortgage Loan Characteristics"), (ii) no optional
termination as described under "Pooling and Servicing Agreement--Termination"
herein is exercised, (iii) principal prepayments on the Mortgage Loans occur at
a constant rate of % SPA until the Certificate Principal Balance of such class
is reduced to zero, (iv) scheduled monthly payments on the Mortgage Loans are
received on their respective Due Dates and (v) Prepayment Interest Shortfalls,
if any, are covered by application of the Master Servicer's servicing
compensation for the related Prepayment Periods.
S-15
<PAGE>
TABLE 1
ASSUMED MORTGAGE LOAN CHARACTERISTICS
Weighted
Original Remaining Average
Term Term Mortgage
Principal Balance to Maturity To Maturity Rate
(in Months) (in Months)
$ ......... [360] %
......... [180] %
- -------------------
$
When the Trust Fund is formed, the Mortgage Loans will have characteristics
different from those assumed in Table 1 above. Consequently, it is possible that
even if the rate of principal prepayments were to remain constant at % SPA at
all times, the amount available for distribution in respect of principal of any
class of the Targeted Amortization Certificates on any Distribution Date could
be more or less than the Targeted Principal Distribution Amount for such class
for such Distribution Date. Because any excess of the Senior Principal
Distribution Amount over the aggregate Targeted Principal Distribution Amount on
the Targeted Amortization Certificates for any Distribution Date will be
distributed on such Distribution Date, the amounts available for distribution in
respect of principal may be insufficient to meet the aggregate Targeted
Principal Distribution Amount on subsequent Distribution Dates even if
prepayments of the Mortgage Loans occur at a constant level of % SPA.
The timing of distributions in respect of principal of the Targeted
Amortization Certificates as described herein under the heading "Description of
the Certificates-Principal Distributions" is expected to be more stable than
would be the case if such classes were not Targeted Amortization Certificates.
See the description below for a discussion of the effect of the timing of
distributions in respect of principal on the Targeted Amortization Certificates
on the yield of the Variable Rate Certificates. However, to the extent
prepayments occur at a constant level lower than approximately % SPA, the Senior
Principal Distribution Amount on each Distribution Date may be insufficient to
make distributions in respect of principal of the Targeted Amortization
Certificates in amounts sufficient to reduce their respective Certificate
Principal Balances to the Targeted Principal Balances (as defined below) for
such Distribution Date, and the weighted average lives of such classes of
Certificates may be extended. To the extent that prepayments occur at a constant
level higher than % SPA, the weighted average lives of the Targeted Amortization
Certificates may be reduced. However, at certain constant prepayment rates above
approximately % SPA the weighted average lives of the Targeted Amortization
Certificates may be extended.
Whether the classes of Targeted Amortization Certificates receive
distributions in respect of principal equal to their Targeted Principal
Distribution Amounts on any Distribution Date will depend in part upon whether
the Variable Rate Certificates remain outstanding. Under certain prepayment
scenarios that include one or more periods of relatively fast prepayments, the
Certificate Principal Balances of the Variable Rate Certificates may be reduced
to zero before the Certificate Principal Balances of the classes of Targeted
Amortization Certificates are so reduced. In such case, all of the Senior
Principal Distribution Amount will be applied to the class or classes of
Targeted Amortization Certificates then entitled to receive distributions in
respect of principal as described above. Thus, when the Certificate Principal
Balances of the Variable Rate Certificates are reduced to zero, the rate of
distributions in respect of principal on the classes of Targeted Amortization
Certificates will become more sensitive to prepayment rates on the Mortgage
Loans.
Because the Variable Rate Certificates act as a companion class of
certificates to the Targeted Amortization Certificates and will receive on each
Distribution Date distributions in respect of principal in an amount not greater
than the excess of the Senior Principal Distribution Amount over the aggregate
Targeted
S-16
<PAGE>
Principal Distribution Amount for the Targeted Amortization Certificates for
such Distribution Date, distributions in respect of principal of the Variable
Rate Certificates will be especially sensitive to the rate of prepayments of the
Mortgage Loans. In addition, if the aggregate Targeted Principal Distribution
Amount on any Distribution Date equals or exceeds the Senior Principal
Distribution Amount, the Variable Rate Certificates will receive no
distributions in respect of principal on such Distribution Date.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
Standard Prepayment Assumption ("SPA"), assumes prepayment rates of 0.2% per
annum of the then outstanding principal balance of such mortgage loans in the
first month after origination and that this annual prepayment rate increases by
0.2% per annum each month thereafter through the thirtieth month after
origination and remains constant at 6% per annum in each month thereafter (such
assumption is referred to herein as "100% SPA"). The SPA does not purport to be
an historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans in the Mortgage Pool.
Table 2 below indicates the sensitivity of the annual cash flow, total cash
flow and pre-tax yield to maturity (corporate bond equivalent) of the Class E
Certificates at various percentages of SPA and under various LIBOR assumptions.
The yield calculations do not take into account variations that may occur in
the interest rates at which investors may be able to reinvest funds received by
them as payments on the Class E Certificates and consequently do not purport to
reflect the return on any investment in such class when such reinvestment rates
are considered. For purposes of these calculations, it is assumed, among other
things, that (i) the Mortgage Loans prepay at the specified constant percentage
of SPA, (ii) the Mortgage Loans have the Assumed Mortgage Loan Characteristics,
(iii) no optional termination described under "Pooling and Servicing
Agreement--Termination" herein is exercised, (iv) the initial Certificate
Principal Balance of the Class E Certificates is $ , (v) scheduled monthly
payments on the Mortgage Loans are received on their respective Due Dates, (vi)
Prepayment Interest Shortfalls, it any, are covered by application of the Master
Servicer's servicing compensation for the related Prepayment Periods, (vii) the
beneficial owners of the Offered Certificates receive distributions in cash on
the 25th day of each month in which such distributions are required to be made,
(viii) the aggregate purchase price of the Class E Certificates is % (including
accrued interest) of the initial Certificate Principal Balance thereof and (ix)
accrued interest payable on the Class E Certificates for the first Distribution
Date is calculated on the basis of a per annum rate equal to %.
TABLE 2
SENSITIVITY OF THE CLASS E CERTIFICATES TO PREPAYMENTS AND LIBOR
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Principal and % LIBOR % LIBOR % LIBOR % LIBOR
------------------------------------------------------------------------------- ----------------------
Interest SPA Prepayment SPA Prepayment SPA Prepayment SPA Prepayment
Payments During Assumption Assumption Assumption Assumption
Twelve ------------------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consecutive Months Through 100% 225% 350% 500% 100% 225% 350% 500% 100% 225% 350% 500% 100% 225% 350% 500%
---------------------------------------- -------------------------------------- -----------------------
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
</TABLE>
S-17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Payments*........... $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
======================================== ====================================== =======================
Pre-Tax Yield............. % % % % % % % % % % % % % % % %
</TABLE>
- ---------------------
* Total payments may not equal the sums of the respective columns due to
rounding.
The yields set forth in the preceding table were calculated by
determining the monthly discount rates that, when applied to the assumed stream
of cash flows to be paid on the Class E Certificates, would cause the discounted
present value of such assumed stream of cash flows to equal the assumed purchase
price of such Class E Certificates, and by converting such monthly rates to
corporate bond equivalent rates.
Notwithstanding the assumed prepayment rates reflected in the preceding
table, 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. Because the Mortgage Loans will have characteristics different from those
assumed in preparing the preceding table, the annual cash flows, total cash
flows and resulting pre-tax yields of the Class E Certificates may differ from
those shown, even if all of the Mortgage Loans prepay at the indicated constant
percentages of SPA.
Scheduled Final Distribution Dates and Weighted Average Lives
The Scheduled Final Distribution Date for each class of Offered
Certificates as shown on the front cover hereof is calculated as follows: (a) by
assuming, among other things, that (i) in the case of the Targeted Amortization
Certificates, principal payments on the Mortgage Loans are made at a rate such
that the Class A Certificates receive their Targeted Principal Distribution
Amount on the first Distribution Date, the Certificate Principal Balances of the
Variable Rate Certificates are reduced to zero on the first Distribution Date
and no subsequent principal prepayments on the Mortgage Loans are made; (ii) in
the case of the Variable Rate Certificates, no principal prepayments on the
Mortgage Loans are made; (iii) each of the Mortgage Loans has an original and a
remaining term to maturity of [360] months and bears interest at a rate of % per
annum; (iv) no optional termination as described under "Pooling and Servicing
Agreement--Termination" herein is exercised; and (v) scheduled monthly payments
on the Mortgage Loans are received on their respective Due Dates; and (b) by
adding one month to the date on which, under such assumptions, the final
distribution would be made on such class.
Because (i) certain of the Mortgage Loans have terms to maturity that
are shorter, and bear interest at rates that are lower, than the term to
maturity and rate assumed in calculating the Scheduled Final Distribution Dates,
(ii) the prepayment scenarios assumed for purposes of such calculations are
highly improbable and (iii) one month has been added to the dates determined on
the basis of the assumptions set forth in clause (a) of the preceding sentence,
the actual final distribution on any class of Offered Certificates is likely to
occur earlier, and could occur significantly earlier, than its Scheduled Final
Distribution Date.
Weighted average life refers to the amount of time that will elapse
from the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average lives of the
Offered Certificates will be influenced by the rate at which principal on the
Mortgage Loans included in the Trust Fund is paid, which may be in the form of
scheduled payments or prepayments (including prepayments of principal by the
borrower as well as amounts received by virtue of condemnation, insurance or
foreclosure with respect to the Mortgage Loans).
The rate of principal payments on the Mortgage Loans is expected to
have a greater effect on the weighted average lives of the classes of Variable
Rate Certificates than on the weighted average lives of the Targeted
Amortization Certificates. Moreover, the effect of principal payments on the
weighted average lives of the classes of Variable Rate Certificates may be
significantly greater than would be the case if the
S-18
<PAGE>
Series 199_- Certificates did not include classes of Targeted Amortization
Certificates. For example, on any Distribution Date, the Variable Rate
Certificates will receive as distributions in respect of principal only the
excess of the Senior Principal Distribution Amount for such Distribution Date
over the aggregate Targeted Principal Distribution Amount for the Targeted
Amortization Certificates for such Distribution Date. In particular, if a low
rate of prepayments causes the Senior Principal Distribution Amount to be equal
to or less than the aggregate Targeted Principal Distribution Amount for such
Distribution Date, the Variable Rate Certificates will receive no distributions
in respect of principal on such Distribution Date.
The following table indicates the percentage of the initial Certificate
Principal Balance of each class of Offered Certificates that would be
outstanding after each of the dates shown at various constant percentages of SPA
and the corresponding weighted average life of each such class of Offered
Certificates. The table is based on the assumptions set forth in clauses (i),
(ii), (iii) and (v) on page S-15 hereof. There are likely to be discrepancies
between the characteristics of the actual Mortgage Loans included in the
Mortgage Pool and the Assumed Mortgage Loan Characteristics. Any such
discrepancy may have an effect upon the percentages of the initial Certificate
Principal Balance outstanding (and the weighted average lives) of the classes of
the Offered Certificates set forth in the table. In addition, to the extent that
the actual Mortgage Loans included in the Mortgage Pool have characteristics
which differ from those assumed in preparing the table set forth below, each
class of the Offered Certificates may mature earlier or later than indicated by
the table. Based on the foregoing assumptions, the table indicates the weighted
average life of each class of Offered Certificates, and sets forth the
percentages of the initial Certificate Principal Balance of each class of
Offered Certificates that would be outstanding after each of the dates shown, at
various percentages of SPA. 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 Trust
Fund. Variations in the actual prepayment experience and the balance of the
Mortgage Loans that prepay may increase or decrease the percentages of initial
Certificate Principal Balance (and weighted average lives) shown in the
following table. Such variations may occur even if the average prepayment
experience of all such Mortgage Loans equals any of the specified percentages of
the prepayment assumption.
S-19
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF SPA
<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
SPA Prepayment SPA Prepayment SPA Prepayment
Assumption Assumption Assumption
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Distribution Date 0% 100% 225% 350% 500% 0% 100% 225% 350% 500% 0% 100% 225% 350% 500%
- ----------------- ---------------------------------------------- ----------------- ----------------
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
Weighted average life
(years) (1).............
</TABLE>
(1) The weighted average life of a Certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the Certificate to the related Distribution Date,
(b) adding the results, and (c) dividing the sum by the initial Certificate
Principal Balance of the Certificate.
S-20
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF SPA
Class D Class E
---------------------------- -------------------------
SPA Prepayment SPA Prepayment
Assumption Assumption
------------------------------------------------------
Distribution Date 0% 100% 225% 350% 500% 0% 100% 225% 350% 500%
- ----------------- ------------------------------------------------------
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
Weighted average life
(years) (1)............
- ------------------------
(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.
There is no assurance that prepayments of the Mortgage Loans will
conform to any of the levels of the SPA indicated in the tables above, or to any
other level, or that the actual weighted average life of any class of 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 life of any class of Offered Certificates is not
necessarily indicative of the weighted average life of such class that might be
calculated or projected under different or varying prepayment assumptions.
The characteristics of the Mortgage Loans may differ from those assumed
in preparing the tables above. In addition, it is unlikely that any Mortgage
Loan will prepay at the SPA model rate until maturity or that all of the
Mortgage Loans will prepay at the same rate. 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.
S-21
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 199_- Certificates will consist of six classes of Senior
Certificates, designated as Class A, Class B, Class C, Class D, Class E and
Class F Certificates, and three classes of Subordinate Certificates, designated
as Class G-1, Class G-2 and Class R Certificates. The Series 199_- Certificates
represent in the aggregate the entire beneficial ownership interest in a Trust
Fund consisting primarily of a pool of Mortgage Loans with an aggregate
principal balance of approximately $ as of the Cut-off Date. The Senior
Certificates have in the aggregate an initial Certificate Principal Balance of $
(approximate), evidencing an initial Senior Percentage of approximately %. The
Class G-1 Certificates and the Class G-2 Certificates have in the aggregate an
initial Certificate Principal Balance of $ (approximate), evidencing in the
aggregate an initial Subordinate Percentage of approximately %. The Class R
Certificates, which have no Certificate Principal Balance and no Pass-Through
Rate, represent the right to receive distributions in respect of the Trust Fund
after recrement of the Senior Certificates, the Class G-1 Certificates and the
Class G-2 Certificates. The Subordinate Certificates, which are not being
offered hereby, may be sold at any time by the Depositor in accordance with the
terms of the Agreement.
All distributions to holders of the Offered Certificates, other than
the final distribution on any class of Offered Certificates, will be made by or
on behalf of the Trustee to the persons in whose names such Offered Certificates
are registered at the close of business on each Record Date, which will be ,
199_ in the case of the first Distribution Date and the last business day of the
month preceding the month in which the related Distribution Date occurs for all
subsequent Distribution Dates. Such distributions will be made either (i) by
check mailed to the address of each such Certificateholder as it appears in the
Certificate Register or (ii) upon written request to the Trustee at least five
business days prior to the Record Date immediately prior to such Distribution
Date by any holder of Offered Certificates having an aggregate initial
Certificate Principal Balance of not less than $ , by wire transfer in
immediately available funds to the account of such Certificateholder specified
in the request. The final distribution on any class of Offered Certificates will
be made in like manner, but only upon presentment and surrender of such
Certificates at the corporate trust office of the Trustee or such other location
specified in the notice to Certificateholders of such final distribution.
Interest Distributions
Holders of each class of Senior Certificates will be entitled to
receive on each Distribution Date, to the extent of the Available Distribution
Amount for such Distribution Date, distributions allocable to interest in an
aggregate amount (with respect to any Distribution Date, the "Interest
Distribution Amount") as follows: (a) in the case of each class of Offered
Certificates, interest accrued during the related Interest Accrual Period on the
Certificate Principal Balance of such Certificates immediately prior to such
Distribution Date at the then applicable Pass-Through Rate for such class, and
(b) in the case of the Class F Certificates, interest accrued during the related
Interest Accrual Period on the Notional Amount of such Certificates for such
Distribution Date at the then applicable weighted average Pass-Through Rate for
such class; in each case less the allocable share for each such class of the
Prepayment Interest Shortfall, if any, for such Distribution Date to the extent
not covered by the application of the servicing compensation of the Master
Servicer for the related Prepayment Period (as to the related Distribution Date
and all classes of Certificates, the "Net Prepayment Interest Shortfall"). If
the Available Distribution Amount for any Distribution Date is less than the
Interest Distribution Amount for such Distribution Date, the shortfall will be
added to the Interest Distribution Amount distributable to holders of Senior
Certificates on subsequent Distribution Dates, to the extent of available funds.
See "Yield on the Certificates" herein. Any Net Prepayment Interest Shortfall
with respect to any Distribution Date will be allocated among the holders of the
Senior Certificates of each class, the holders of the Class G-1 Certificates and
the holders of the Class G-2 Certificates PARI PASSU based on the respective
amounts of interest accrued on such Certificates during their respective
Interest Accrual Periods for such Distribution Date.
S-22
<PAGE>
The Targeted Amortization Certificates will accrue interest during each
Interest Accrual Period at a fixed Pass-Through Rate equal to % per annum. The
Class D Certificates will accrue interest during the first Interest Accrual
Period for such class at a per annum rate of %. Thereafter, the Class D
Certificates will accrue interest during each succeeding Interest Accrual Period
at a per annum rate equal to the lesser of (a) % plus the arithmetic mean of the
London interbank offered rate quotations for one-month Eurodollar deposits
("LIBOR"), determined monthly as set forth below, and (b) %. The Class E
Certificates will accrue interest during the first Interest Accrual Period for
such class at a per annum rate of %. Thereafter, the Class E Certificates
will accrue interest during each succeeding Interest Accrual Period at a per
annum rate equal to the greater of (a) % and (b) the lesser of (i) % and (ii)
% minus the product of (x) and (y) LIBOR minus %. The Class F Certificates
will accrue interest during each Interest Accrual Period at the weighted average
of the Stripped Interest Rates on each of the Mortgage Loans. The Stripped
Interest Rate on a Mortgage Loan is equal to the Net Mortgage Rate thereon minus
% per annum. The Net Mortgage Rate on each Mortgage Loan is equal to the
Mortgage Rate thereon minus the rate per annum at which the Master Servicer's
servicing compensation is calculated.
The Interest Accrual Period for the Targeted Amortization Certificates
and the Class F Certificates for any Distribution Date is the one-month period
preceding the month in which such Distribution Date occurs. The Interest Accrual
Period for the Variable Rate Certificates for any Distribution Date is the
one-month period commencing on the 25th day of the calendar month preceding the
month in which such Distribution Date occurs and ending on the 24th day of the
month in which such Distribution Date occurs. All distributions of interest will
be based on a 360-day year consisting of twelve 30-day months.
As described herein, the Interest Distribution Amount for the Senior
Certificates is based on, among other things, the Certificate Principal Balance
of the Offered Certificates and the Notional Amount of the Class F Certificates.
The Certificate Principal Balance of any Offered Certificate as of any date of
determination is equal to the initial Certificate Principal Balance thereof,
reduced by the aggregate of (a) all amounts allocable to principal previously
distributed with respect to such Certificate and (b) any reductions in the
Certificate Principal Balance thereof deemed to have occurred in connection with
allocations of Realized Losses, as described below. The Notional Amount of the
Class F Certificates on any Distribution Date is equal to the aggregate of the
Scheduled Principal Balances of the Mortgage Loans as of the close of business
on the immediately preceding Distribution Date (or, in the case of the initial
Distribution Date, as of the close of business on the Cut-off Date).
Determination of LIBOR
The Pass-Through Rates on the Variable Rate Certificates for any
related Interest Accrual Period after the first such period will be determined
on the business day prior to the commencement of such Interest
Accrual Period (a "Rate Adjustment Date").
On each Rate Adjustment Date, the Trustee will determine LIBOR on the
basis of the offered LIBOR quotations of the Reference Banks (as defined below),
as such quotations are provided to the Trustee as of 11:00 a.m. (London time) on
such Rate Adjustment Date. As used herein with respect to a Rate Adjustment
Date, "business day" means a day on which banks are open for dealing in foreign
currency and exchange in London, New York City and Los Angeles; "Reference
Banks" means four leading banks engaged in transactions in Eurodollar deposits
in the international Eurocurrency market (i) with an established place of
business in London, (ii) whose quotations appear on the Reuters Screen LIBO Page
on the Rate Adjustment Date in question and (iii) which have been designated as
such by the Trustee and are able and willing to provide such quotations to the
Trustee on each Rate Adjustment Date; and "Reuters Screen LIBO Page" means the
display designated as page "LIBO" on the Reuters Monitor Money Rates Service (or
such otherpage as may replace the LIBO page on that service for the purpose of
displaying London interbank offered rate quotations of major banks). The initial
Reference Banks will be and .
If any Reference Bank designated by the Trustee should be removed from the
Reuters Screen LIBO Page or in any other way fails to meet the qualifications of
a Reference Bank, the Trustee may, in its sole discretion, designate an
alternative Reference Bank.
S-23
<PAGE>
On each Rate Adjustment Date, LIBOR for the next succeeding Interest
Accrual Period will be established by the Trustee as follows:
(i) If on any Rate Adjustment Date two or more of the Reference Banks
provide such offered rate quotations, LIBOR for the next Interest
Accrual Period will be the arithmetic mean of such offered rate
quotations (rounding such arithmetic mean upwards if necessary to the
nearest whole multiple of %);
(ii) If on any Rate Adjustment Date only one or none of the Reference
Banks provides such offered rate quotations, LIBOR for the next
Interest Accrual Period will be whichever is the higher of (x) LIBOR as
determined on the previous Rate Adjustment Date and (y) the rate per
annum (the "Reserve Interest Rate") determined by the Trustee to be
either (A) the arithmetic mean (rounding such arithmetic mean upwards
if necessary to the nearest whole multiple of %) of the one-month
Eurodollar lending rates that the New York City banks selected by the
Trustee are quoting, on the relevant Rate Adjustment Date, to the
principal London offices of leading banks in the London interbank
market or (B) in the event that the Trustee can determine no such
arithmetic mean, the lowest one-month Eurodollar lending rate that the
New York City banks selected by the Trustee are quoting on such Rate
Adjustment Date to leading European banks; and
(iii) If on any Rate Adjustment Date the Trustee is required but is
unable to determine the Reserve Interest Rate in the manner provided in
clause (ii) above, LIBOR for the next Interest Accrual Period will be
LIBOR as determined on the previous Rate Adjustment Date, or, in the
case of the first Rate Adjustment Date, %.
The establishment of LIBOR by the Trustee and the Trustee's subsequent
calculation of the PassThrough Rates applicable to the Variable Rate
Certificates for the relevant Interest Accrual Period, in the absence of
manifest error, will be final and binding. The Pass-Through Rates on the
Variable Rate Certificates applicable to the then current and the immediately
preceding Interest Accrual Periods may be obtained by telephoning the Trustee at
( ) .
Principal Distributions
Holders of the Senior Certificates will be entitled to receive on each
Distribution Date a distribution allocable to principal in the following amount
(hereinafter referred to as the "Minimum Principal Distribution Amount"):
(i) the product of (A) the then applicable Senior Percentage and (B)
the principal portion of all scheduled monthly payments on the Mortgage
Loans due during the related Due Period, regardless
of whether received on or prior to the related Determination Date;
(ii) the product of (A) the then applicable Senior Prepayment
Percentage and (B) the aggregate of the following amounts: (1) the
principal portion of all full and partial principal prepayments made by
the respective mortgagors during the related Prepayment Period, (2) the
net principal portion of all other unscheduled collections, including
Insurance Proceeds and Liquidation Proceeds, received during the
related Prepayment Period (other than with respect to any Mortgage Loan
that was finally liquidated during the related Prepayment Period), and
(3) the net principal portion of all proceeds of the repurchase (or, in
the case of a substitution, certain amounts representing a principal
adjustment) of any Mortgage Loan during the related Prepayment Period;
(iii) with respect to unscheduled recoveries allocable to principal of
any Mortgage Loan that was finally liquidated during the related
Prepayment Period (other than a Mortgage Loan as to which a Special
Hazard Loss in excess of the Special Hazard Subordination Amount has
occurred), the lesser of (A) the product of (1) the then applicable
Senior Liquidation Percentage and (2) the net principal portion of such
recovery and (B) the product of (1) the then applicable Senior
Percentage and (2) the Scheduled Principal Balance of the related
Mortgage Loan as of the close of business on the Distribution Date in
the month of liquidation; and
S-24
<PAGE>
(iv) with respect to unscheduled recoveries allocable to principal of
any Mortgage Loan that was finally liquidated during the related
Prepayment Period and as to which a Special Hazard Loss in excess of
the Special Hazard Subordination Amount has occurred (a "Special Hazard
Excess Loss"), the product of (A) the Senior Percentage and (B) the
lesser of (1) the net principal portion of such recovery and (2) the
excess, if any, of the Scheduled Principal Balance thereof as of the
close of business on the Distribution Date in the month of liquidation,
over such Special Hazard Excess Loss.
Holders of Senior Certificates also will be entitled to receive as a
distribution allocable to principal on any Distribution Date, in the event of
one or more Realized Losses incurred during the related Prepayment Period, other
than Special Hazard Excess Losses, an amount equal to the aggregate of the
related Unrecovered Senior Portions of such Realized Losses; but only to the
extent of the excess, if any, of the Available Distribution Amount for such
Distribution Date, over the aggregate of (i) the Interest Distribution Amount
for such Distribution Date, (ii) the Minimum Principal Distribution Amount for
such Distribution Date, (iii) to the extent not previously paid, the Minimum
Principal Distribution Amount for each preceding Distribution Date, and (iv) if
the Class G-2 Certificates remain outstanding, all interest and principal
payable on the Class G-1 Certificates on such Distribution Date. The Unrecovered
Senior Portion with respect to a Realized Loss is the amount, if any, by which
(i) the product of the then applicable Senior Percentage and the Scheduled
Principal Balance of the related Mortgage Loan exceeds (ii) the product of the
then applicable Senior Liquidation Percentage and the net amount of principal
recovered in connection with the liquidation of the related Mortgage Loan.
Payments to the holders of the Senior Certificates on any Distribution Date in
respect of any Unrecovered Senior Portion will be made only with respect to
Realized Losses incurred in connection with Mortgage Loans that were finally
liquidated during the related Prepayment Period.
On each Distribution Date as to which the Senior Percentage is less
than 100%, an amount (hereinafter referred to as the "Senior Principal
Distribution Amount") equal to the sum of (i) the lesser of (a) the portion of
the Available Distribution Amount remaining after the Interest Distribution
Amount is distributed to the Senior Certificateholders and (b) the Minimum
Principal Distribution Amount for such Distribution Date plus, to the extent not
previously paid, the Minimum Principal Distribution Amount for each preceding
Due Date, and (ii) any amount distributable in respect of Unrecovered Senior
Portions, will be distributed as follows:
first, in alphabetical order of class designation to the
holders of the respective classes of Targeted Amortization
Certificates, in each case up to an amount equal to the Targeted
Principal Distribution Amount for such class and such Distribution
Date;
second, to the holders of the Class D Certificates and the
holders of the Class E Certificates, pro rata based on the Certificate
Principal Balances thereof, up to an amount equal to the Certificate
Principal Balances thereof;
third, in alphabetical order of class designation to the
holders of the respective classes of Targeted Amortization
Certificates, in each case up to an amount equal to the Certificate
Principal Balance thereof; and
fourth, to the holders of the Class F Certificates, up to an
amount equal to the Certificate Principal Balance thereof.
The Targeted Principal Distribution Amount for any class of Targeted
Amortization Certificates on any Distribution Date is the amount, if any,
necessary to reduce the Certificate Principal Balance of such class to an amount
(as to such class and Distribution Date, the "Targeted Principal Balance") equal
to the product of the initial Certificate Principal Balance of such class and
the applicable percentage (as to such class and Distribution Date, the "Targeted
Principal Percentage") set forth in the following table.
S-25
<PAGE>
TARGETED PRINCIPAL PERCENTAGE
Class A Class B Class C
Distribution Date Percentage Percentage Percentage
- ----------------- ---------- ---------- ----------
.................. % % %
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
The Targeted Principal Percentages of the initial Certificate Pl
Balances were calculated assuming that (i) prepayments on the Mortgage Loans
occur at a constant rate of % SPA and (ii) the Mortgage Loans have the Assumed
Mortgage Loan Characteristics.
There is no assurance that the Senior Principal Distribution Amount for
any Distribution Date will equal the aggregate Targeted Principal Distribution
Amount for the Targeted Amortization Certificates for such Distribution Date. In
addition, after the aggregate Certificate Principal Balance of the Variable Rate
Certificates is reduced to zero, the aggregate Certificate Principal Balance of
the Targeted Amortization Certificates, to the extent still outstanding on any
Distribution Date, will be reduced below the aggregate Targeted Principal
Balance thereof for such Distribution Date, if the Senior Principal Distribution
Amount exceeds the aggregate Targeted Principal Distribution Amount. Any excess
of the Senior Principal Distribution Amount over the aggregate Targeted
Principal Distribution Amount for any Distribution Date will be distributed to
the holders of the Offered Certificates in accordance with the priorities set
forth above. Moreover, the ability to distribute the Targeted Principal
Distribution Amount for any class of Targeted
S-26
<PAGE>
Amortization Certificates will not be maintained by the averaging of principal
prepayment rates on the Mortgage Loans over several Distribution Dates. There is
no assurance that distributions in reduction of the Certificate Principal
Balance of the Targeted Amortization Certificates of any class will not end
significantly earlier or later than the first Distribution Date for which the
Targeted Principal Percentage for such class is equal to zero percent as shown
in the above table. See "Yield on the Certificates" herein for a further
discussion of the effect of prepayments, liquidations and repurchases of the
Mortgage Loans on the rate of payments of principal and on the weighted average
lives of the Offered Certificates.
In the event that the Senior Percentage applicable to distributions on
any Distribution Date were to equal 100%, which would result if the aggregate
Certificate Principal Balance of the Subordinate Certificates were reduced to
zero due to allocations of Realized Losses together with any distributions in
respect of principal, all priorities relating to sequential distributions in
respect of principal among the various classes of Senior Certificates will be
disregarded, and the Senior Principal Distribution Amount will be distributed on
such Distribution Date, and each succeeding Distribution Date, to all classes of
Senior Certificates pro rata in accordance with their respective outstanding
Certificate Principal Balances.
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, and reduced by the principal portion of
all monthly payments due on or before the date of determination, whether or not
received, and by all amounts allocable to unscheduled principal that were
distributed to Certificateholders on or before the date of determination, and as
further reduced to the extent that any Realized Loss thereon has been allocated
to one or more classes of Certificates on or before the date of determination.
See "Allocation of Losses; Subordination" herein.
The Senior Prepayment Percentage for each Distribution Date is the
percentage indicated below for the period during which such Distribution Date
occurs:
Distribution Date Senior Prepayment Percentage
----------------- ----------------------------
through .... 100%
through .... Senior Percentage, plus 70% of the difference between
the Senior Percentage and 100%
through .... Senior Percentage, plus 60% of the difference between
the Senior Percentage and 100%
through .... Senior Percentage, plus 40% of the difference between
the Senior Percentage and 100%
through .... Senior Percentage, plus 20% of the difference between
the Senior Percentage and 100%
and thereafter ...... Senior Percentage;
provided, however, that the application of the foregoing reduction provisions is
subject to satisfaction of certain criteria regarding amortization, delinquency
and loss experience of the Mortgage Loans, and provided further, that if the
Senior Percentage as of any Distribution Date is greater than the initial Senior
Percentage, the Senior Prepayment Percentage for such Distribution Date shall be
100%.
The Senior Percentage initially will be approximately % and on each
Distribution Date will be adjusted to reflect the then current entitlement of
the holders of the Senior Certificates to distributions of scheduled payments of
principal in respect of the Mortgage Loans, based on the aggregate Certificate
Principal Balance of the Senior Certificates and the aggregate of the Scheduled
Principal Balances of the Mortgage Loans in the Trust Fund.
The Senior Liquidation Percentage initially will be approximately % and
on each Distribution Date, for so long as the Class G-2 Certificates are
outstanding, will be adjusted to reflect the then current entitlement of the
holders of the Senior Certificates under certain circumstances to distributions
allocable to principal of Mortgage Loans that finally are liquidated, based on
the aggregate Certificate Principal Balance of the Senior Certificates and the
Class G-2 Certificates and the aggregate of the Scheduled
S-27
<PAGE>
Principal Balances of the Mortgage Loans in the Trust Fund. The Senior
Liquidation ercentage will be 100% after the Class G-2 Certificates have been
retired.
Advances
Subject to the following limitations, the Master Servicer will be
obligated to advance or cause to be advanced on or before each Distribution Date
its own funds, or funds in the Certificate Account that are not included in the
Available Distribution Amount for such Distribution Date, in an amount equal to
the aggregate of payments of principal and interest (adjusted to the applicable
Net Mortgage Rate) that were due during the related Due Period and which were
delinquent on the related Determination Date (any such advance, an "Advance").
The Master Servicer will be obligated to make Advances regardless of
whether such Advances are deemed to be recoverable from the related Mortgage
Loans, to the extent that the Class G-2 Certificates remain outstanding.
Thereafter, such Advances in respect of any Mortgage Loan are required to be
made only to the extent they are deemed by the Master Servicer to be recoverable
from related late collections,
Insurance Proceeds or Liquidation Proceeds.
All Advances will be reimbursable to the Master Servicer either (a)
from late collections, Insurance Proceeds and Liquidation Proceeds from the
Mortgage Loan as to which such unreimbursed Advance was made or (b) from any
portion of the Available Distribution Amount remaining on any Distribution Date
after payment to the holders of the Senior Certificates of the Interest
Distribution Amount and Senior Principal Distribution Amount and after payment
to the holders of the Class G-1 Certificates of all interest and principal due
thereon. For purposes of the foregoing, all reimbursements of Advances in the
manner described in (b) above shall be allocated, to the extent practicable, to
specific monthly payments which have been delinquent for the longest period of
time, which allocations shall be conclusive for purposes of future
reimbursements of Advances. In addition, if the Class G-2 Certificates are no
longer outstanding, any Advances previously made in respect of any Mortgage Loan
that are deemed by the Master Servicer to be nonrecoverable from related late
collections, Insurance Proceeds or Liquidation Proceeds may be reimbursed to the
Master Servicer out of any funds in the Certificate Account prior to
distributions on the Senior Certificates. Any failure by the Master Servicer to
make an Advance as required under the Pooling and Servicing Agreement will
constitute an event of default thereunder, in which case the Trustee, as
successor Master Servicer, will be obligated to make any such Advance, in
accordance with the terms of the Pooling and Servicing Agreement.
Allocation of Losses; Subordination
The Certificate Principal Balance of a Certificate outstanding at any
time represents the 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 a Certificate will be reduced only by amounts actually distributed
thereon that are allocable to principal, and by allocation of Realized Losses
thereto. Realized Losses, other than Special Hazard Excess Losses, will be
allocated to the Senior Certificates only after the Certificate Principal
Balances of the Class G-2 Certificates and the Class G-1 Certificates have been
reduced to zero through distributions in respect of principal or through the
allocation of Realized Losses. Any Special Hazard Excess Losses will be
allocated among each class of Senior Certificates and Subordinate Certificates
in proportion to their outstanding Certificate Principal Balances. 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 following the Prepayment Period in which the Realized Loss was
incurred.
The Special Hazard Subordination Amount initially will be approximately
$ and on each Distribution Date will be reduced to equal the lesser of (a) the
initial Special Hazard Subordination Amount minus the sum of (i) all Special
Hazard Losses that occurred during or prior to the related Prepayment Period and
(ii) the Adjustment Amount for such Distribution Date and (b) the then
outstanding aggregate Certificate Principal Balance of the Class G-1
Certificates and the Class G-2 Certificates. The Adjustment Amount, as
S-28
<PAGE>
calculated on 1 of each year, commencing 1, 199_, and applicable to
each of the twelve succeeding Distribution Dates, will equal the amount, if any,
by which the initial Special Hazard Subordination Amount minus the amount
described in clause (i) of the immediately preceding sentence exceeds the
greater of (x) the aggregate principal balance of the Mortgage Loans then
outstanding times the greater of (1) % and (2) the then highest
percentage of Mortgage Loans, by principal balance, secured by Mortgaged
Properties located in any one zip code area and (y) times the outstanding
principal balance of the largest Mortgage Loan then outstanding.
The Certificate Principal Balance of any Senior Certificate will bear
interest at its then applicable Pass-Through Rate for so long as it is
outstanding. In order to maximize the likelihood of distribution in full of the
Certificate Principal Balance of each Senior Certificate, plus interest, holders
of Senior Certificates will have a prior right, on each Distribution Date, to
the Available Distribution Amount, to the extent necessary to satisfy the
Interest Distribution Amount and the Senior Principal Distribution Amount. The
Minimum Principal Distribution Amount is subject to adjustment on each
Distribution Date to reflect the then applicable Senior Percentage, Senior
Prepayment Percentage and Senior Liquidation Percentage, each of which may be
increased (to not more than 100%) in the event of Realized Losses on the
Mortgage Loans as described herein under "--Principal Distributions".
Application of the Senior Prepayment Percentage (when it exceeds the Senior
Percentage) to determine the Minimum Principal Distribution Amount will
accelerate the amortization of the Senior Certificates relative to the actual
amortization of the Mortgage Loans. To the extent that the Senior Certificates
are amortized faster than the Mortgage Loans, the percentage interest evidenced
by the Senior Certificates in the Trust Fund will be decreased (with a
corresponding increase in the interest in the Trust Fund evidenced by the
Subordinate Certificates), thereby increasing, as a relative matter, the
subordination afforded by the Subordinate Certificates.
Because (i) the holders of the Senior Certificates have a prior right
on each Distribution Date to the Available Distribution Amount, to the extent
necessary to satisfy the Interest Distribution Amount and the Senior Principal
Distribution Amount, and (ii) through upward adjustments of the Senior
Percentage, the Senior Prepayment Percentage and the Senior Liquidation
Percentage as described under "-- Principal Distributions", the holders of the
Senior Certificates would be entitled to distributions in respect of principal
based on a larger share of future collections of principal of the Mortgage
Loans, any shortfalls in the amounts that otherwise would be distributable to
Certificateholders, whether resulting from Mortgage Loan delinquencies or
Realized Losses (other than Special Hazard Excess Losses), will be borne by the
holders of the Subordinate Certificates, to the extent of the aggregate
Certificate Principal Balance thereof, prior to their being borne by the holders
of the Senior Certificates. However, as long as the Class G-2 Certificates
remain outstanding, the holders of the Senior Certificates will be entitled to
distributions on each Distribution Date in respect of Unrecovered Senior
Portions only to the extent that the Available Distribution Amount for such
Distribution Date exceeds the aggregate of (i) the Interest Distribution Amount
for such Distribution Date, (ii) the Minimum Principal Distribution Amount for
such Distribution Date, (iii) to the extent not previously paid, the Minimum
Principal Distribution Amount for each preceding Distribution Date, and (iv) all
interest and principal payable on the Class G-1 Certificates on such
Distribution Date (such excess, if any, the "Remaining Amount"). If the
Unrecovered Senior Portions exceed the Remaining Amount, there will be a
consequent increase in the Senior Percentage and, in certain circumstances, in
the Senior Prepayment Percentage and the Senior Liquidation Percentage. Although
increases in the Senior Percentage, the Senior Prepayment Percentage and the
Senior Liquidation Percentage represent an increased entitlement of the holders
of the Senior Certificates to future cash flows from the Mortgage Loans, under
certain limited circumstances the holders of the Senior Certificates could bear
losses on the Mortgage Loans that they would not have borne if their entitlement
to receive distributions in respect of Unrecovered Senior Portions was not,
during the period that the Class G-2 Certificates were outstanding, subject to
the entitlement of the holders of the Class G-1 Certificates to receive
distributions in respect of interest and principal.
POOLING AND SERVICING AGREEMENT
General
S-29
<PAGE>
The Series 199_- Certificates will be issued pursuant to the
Agreement, a form of which is filed as an exhibit to the Registration Statement.
A Report on Form 8-K relating to the Certificates containing a copy of the
Agreement as executed will be filed by the Depositor with the Securities and
Exchange Commission within fifteen days of initial issuance of the Certificates.
The Trust Fund created under the Agreement will consist of (i) the Mortgage
Loans, (ii) all payments on or collections in respect of the Mortgage Loans due
after the Cut-off Date, together with any proceeds thereof, (iii) cash to be
delivered to the Trustee by the Mortgage Loan Seller on the Closing Date in
respect of each Mortgage Loan that does not have a monthly payment due in
in an amount equal to one month's interest on each such Mortgage Loan at
the Net Mortgage Rate thereon, (iv) any Mortgaged Properties acquired on behalf
of Certificateholders by foreclosure or by deed in lieu of foreclosure, and any
revenues received thereon, (v) the rights of the Trustee under all insurance
policies required to be maintained pursuant to the Agreement and (vi) the rights
of the Depositor under the Mortgage Loan Purchase Agreement between the
Depositor and the Mortgage Loan Seller. Reference is made to the Prospectus for
important information in addition to that set forth herein regarding the Trust
Fund, the terms and conditions of the Agreement and the Offered Certificates.
The Offered Certificates will be transferable and exchangeable at the corporate
trust offices of the Trustee, located in and at the offices of its agent in
New York, New York. The Trustee will serve as Certificate Registrar. The
Depositor will provide to a prospective or actual Certificateholder without
charge, on written request, a copy (without exhibits) of the Agreement. Requests
should be addressed to the Secretary, Salomon Brothers Mortgage Securities VII,
Inc., Seven World Trade Center, New York, New York 10048.
Assignment of the Mortgage Loans
The Depositor will deliver to the Trustee with respect to each Mortgage
Loan (i) the mortgage note endorsed without recourse to the Trustee by the
Mortgage Loan Seller 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 from the Mortgage Loan Seller to
the Trustee, reflecting the transfer of the Mortgage Loan. Such assignments with
respect to Mortgage Loans secured by Mortgaged Properties located in California
will not be recorded. The assignments of mortgage relating to Mortgaged
Properties located in other states are required to be recorded by the Master
Servicer in the appropriate public offices for real property records. The above
procedures are intended to protect the interests of the Certificateholders;
however, the Mortgage Loan Seller, in its capacity as Master Servicer, will have
access to the Mortgage Loan files. In the event that the Mortgage Loan Seller
transfers a mortgage note secured by a Mortgaged Property located in California
and assigns the related mortgage to a bona fide purchaser for value without
notice of the rights of the Certificateholders, the rights of the Trust Fund in
the related Mortgage Loan may be adversely affected.
The Master Servicer
The Mortgage Loans will be serviced by (in such capacity, the "Master
Servicer") pursuant to the Pooling and Servicing Agreement. The Master Servicer
is a .
The executive offices of the Master Servicer are located at
telephone number ( ) .
At , 199_, the Master Servicer provided servicing for $ aggregate
principal amount of mortgage loans, substantially all of which are being
serviced for third parties.
Loan Production
The following table sets forth the number and dollar amount of the
Master Servicer's mortgage loan production for the periods indicated.
S-30
<PAGE>
Mortgage Loan Production
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992
------ ------ ------ ------ ------ -----
(Amounts in Millions, except Average Loan Balances)
<S> <C> <C> <C> <C> <C> <C>
Total Loans
Number of Loans......................
Volume of Loans...................... $ $ $ $ $ $
Average Loan Balance................... $ $ $ $ $ $
</TABLE>
Delinquency and Foreclosure Experience
The following table sets forth the delinquency and foreclosure
experience by number of residential mortgage loans funded and serviced by the
Master Servicer, as a percentage of all such mortgage loans, as of the dates
indicated.
Delinquency and Foreclosure Experience
<TABLE>
<CAPTION>
At ,
-------------------------------------------
1989 1990 1991 1992 1993 1994
--------- --------- --------- --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Delinquent Mortgage Loans:
30 days................ % % % % % %
60 days................
90 days or more........
Total of delinquencies.......... % % % % % %
======== ======== ======== ======== ======== ========
Foreclosures pending*........... % % % % % %
======== ======== ======== ======== ======== ========
</TABLE>
- --------------------
* Includes bankruptcies which preclude foreclosures.
The Trustee
, a national banking association, will act as Trustee
for the Series 199_- Certificates pursuant to the Agreement. The Trustee's
principal executive offices are located at , and its telephone number
is ( ) .
Servicing and Other Compensation and Payment of Expenses
The principal compensation to be paid to the Master Servicer in respect
of its master servicing activities for the Series 199_- Certificates will be
equal to accrued interest at the Servicing Fee Rate on the Scheduled Principal
Balance of each Mortgage Loan in the Mortgage Pool. The Servicing Fee Rate as to
each Mortgage Loan is equal to % per annum. As additional servicing
compensation, the Master Servicer is entitled to retain all assumption fees,
prepayment penalties and late payment charges, to the extent collected from
mortgagors, together with any interest or other income earned on funds held in
the Certificate Account and any escrow accounts. The Master Servicer's servicing
compensation is subject to reduction in any month to cover shortfalls in
collections of interest resulting from principal prepayments in full or in part.
See "Yield on the Certificates" herein. The Master Servicer is obligated to pay
certain insurance premiums and certain ongoing expenses associated with the
Mortgage Pool and incurred by the Master Servicer in connection with its
responsibilities under the Agreement. See "Description of the
Certificates-Retained Interest; Servicing Compensation and Payment of Expenses"
in the Prospectus for information regarding expenses payable by the Master
Servicer and "Certain Federal Income Tax Consequences" herein regarding certain
taxes payable by the Master Servicer.
S-31
<PAGE>
Voting Rights
At all times, % of all Voting Rights will be allocated among all
holders of the Senior Certificates, the Class G-1 Certificates and the Class G-2
Certificates in proportion to the then outstanding Certificate Principal
Balances of their respective Certificates, and % of all Voting Rights will be
allocated among holders of the Class R Certificates in proportion to the
percentage interests in such class evidenced by their respective Certificates.
Termination
The circumstances under which the obligations created by the Agreement
will terminate in respect of the Series 199_- Certificates are described in
"Description of the Certificates--Termination" in the Prospectus. The Master
Servicer will have the right to purchase all remaining Mortgage Loans in the
Mortgage Pool and thereby effect early retirement of the Series 199_-
Certificates on any Distribution Date, once the aggregate principal balance of
the Mortgage Loans at the time of purchase is less than 10% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date. In the event the
Master Servicer exercises such option, the portion of the purchase price
allocable to the Offered Certificates of each class will be, to the extent of
available funds, 100% of their then aggregate outstanding Certificate Principal
Balance plus one month's accrued interest thereon at the then applicable
Pass-Through Rate plus any previously accrued but unpaid interest thereon. In no
event will the trust created by the Agreement for the Certificates continue
beyond the expiration of 21 years from the death of the survivor of the person
or persons named in the Agreement. See "Description of the
Certificates--Termination" in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Trustee will make an election to treat the Trust Fund evidenced by
the Series 199_- Certificates as a "real estate mortgage investment conduit" (a
"REMIC"). The Senior Certificates, the Class G-1 Certificates and the Class G-2
Certificates will be designated "regular interests" in the REMIC, and the Class
R Certificates will be designated as the "residual interest" in the REMIC.
The Offered Certificates will be treated as "qualifying real property
loans" under Section 593(d) of the Internal Revenue Code of 1986 (the "Code"),
assets described in Section 7701(a)(19)(C) of the Code and "real estate assets"
under Section 856(c)(5)(A) of the Code, generally in the same proportion that
the assets in the REMIC 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)(5)(A) of the Code. The Offered Certificates also will be
treated as "qualified mortgages" under Section 860G(a)(3)(C) of the Code. See
"Certain Federal Income Tax Consequences--REMICs--Characterization of
Investments in REMIC Certificates" in the Prospectus.
The Offered Certificates may be treated as having been issued with
original issue discount for federal income tax reporting purposes. The
prepayment assumption that will be used in determining the rate of accrual of
market discount and original issue discount for federal income tax purposes is %
of the Standard Prepayment Assumption. No representation is made that the
Mortgage Loans will prepay at that rate or at any other rate. See "Certain
Federal Income Tax Consequences--REMICs --Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the Prospectus.
It is not anticipated that the Trust Fund will engage in any
transactions that would subject it to the prohibited transactions tax as defined
in Section 860F(a)(2) of the Code, the contributions tax as defined in Section
860G(d) of the Code or the tax on net income from foreclosure property as
defined in Section 860G(c) of the Code. However, in the event that any such tax
is imposed on the Trust Fund, such tax will be borne (i) by the Trustee, if the
Trustee has breached its obligations under the Agreement and in respect of
compliance with applicable laws and regulations, (ii) the Master Servicer, if
the Master Servicer has breached its obligations under the Agreement and in
respect of compliance with applicable laws and regulations, and (iii) otherwise
by the Trust Fund, with a resulting reduction in amounts otherwise
S-32
<PAGE>
distributable to Certificateholders. See "Description of the
Certificates--General" and "Certain Federal Income Tax
Consequences--REMICs--Prohibited Transactions Tax and Other Taxes" in the
Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated , 199_ (the "Underwriting Agreement"), the Depositor has agreed
to sell and Salomon Smith Barney Inc. (the "Underwriter"), an affiliate of the
Depositor, has agreed to purchase the classes of Certificates offered by this
Prospectus Supplement. The Underwriter is obligated to purchase all classes of
Certificates offered by this Prospectus
Supplement if it purchases any.
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 % of
the aggregate initial Certificate Principal Balance of the Offered Certificates,
plus accrued interest on their respective initial Certificate Principal Balances
at their respective initial Pass-Through Rates from 1, 199_, in the case of the
Targeted Amortization Certificates, and 25, 199_, in the case of the Variable
Rate Certificates. 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 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.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates--Reports to Certificateholders", which will
include information as to the outstanding principal balance of the Offered
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Offered
Certificates will be available through any other source. In addition, the
Depositor is not aware of any source through which price information about the
Offered Certificates will be generally available on an ongoing basis. The
limited nature of such information regarding the Offered Certificates may
adversely affect the liquidity of the Offered Certificates, even if a secondary
market for the Offered Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be
passed upon for the Depositor and the Underwriter by Thacher Proffitt & Wood,
New York.
RATING
It is a condition to the issuance of the Series 199_- Certificates that
the Offered Certificates be rated not lower than " " by
(" ") and " " by
(" ").
The ratings of on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions on the
underlying mortgage loans to which they are entitled. rating opinions address
the structural, legal and issuer-related aspects associated with the
certificates, including the nature of the underlying Mortgage Loans. ratings on
pass-through certificates do not represent any assessment of the likelihood that
principal prepayments will be made by mortgagors or the degree to which such
prepayments might differ from that originally anticipated. The rating does not
address the possibility that Certificateholders might suffer a lower than
anticipated yield.
ratings on mortgage pass-through certificates address the
likelihood of the receipt by Certificateholders of payments required under the
Agreement. ratings take into consideration the credit quality of the mortgage
pool, structural and legal aspects associated with the Certificates, and the
S-33
<PAGE>
extent to which the payment stream on the mortgage pool is adequate to make
payments required under the Certificates. rating on the Offered
Certificates does not, however, constitute a statement regarding frequency of
prepayments on the mortgages.
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.
LEGAL INVESTMENT
The Offered Certificates will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
for so long as they are rated as described herein and, as such, will be legal
investments for certain entities to the extent provided in SMMEA. SMMEA,
however, provides for state limitation on the authority of such entities to
invest in "mortgage related securities" provided that such restrictive
legislation was enacted prior to October 3, 1992. Certain states have enacted
legislation which overrides the preemption provisions of SMMEA. Institutions
whose investment activities are subject to legal investment laws and regulations
or to review by certain regulatory authorities may be subject to restrictions on
investment in the Offered Certificates. The Federal Financial Institutions
Examination Council, which includes the Board of Governors of the Federal
Reserve System (the "FRB"), the Federal Deposit Insurance Corporation (the
"FDIC"), the National Credit Union Administration (the "NCUA"), the Comptroller
of the Currency (the "OCC") and the Office of Thrift Supervision (the "OTS"),
has issued a supervisory policy statement (the "Policy Statement") that is
applicable to all depository institutions (to the extent adopted by their
respective federal regulators), setting forth guidelines for and imposing
significant restrictions on investments in "high-risk mortgage securities". The
Policy Statement generally indicates that a mortgage derivative product will be
deemed to be high-risk if it exhibits greater price volatility than a benchmark
fixed-rate thirty-year mortgage backed pass-through security. According to the
Policy Statement, prior to purchase, a depository institution would be required
to determine whether a mortgage derivative product that it is considering
acquiring is high-risk, and if so that the proposed acquisition would reduce the
institution's overall interest rate risk. Reliance on analysis and documentation
obtained from a securities dealer or other outside party without internal
analysis by the institution would be unacceptable, and a failure to adhere to
the monitoring, reporting and diligence requirements would be considered an
unsafe and unsound practice. There can be no assurance as to which classes of
the Offered Certificates would be treated as high-risk under the Policy
Statement. The Policy Statement has been adopted by the FRB, the FDIC, the OCC
and the OTS with an effective date of February 10, 1993, and may be considered
by the NCUA at a later date.
A predecessor to the OTS, the Office of Regulatory Activities of the
Federal Home Loan Bank System, 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. In addition, the NCUA has issued regulations governing federal
credit union investments which prohibit investment in certain specified types of
securities. In the event the NCUA adopts the Policy Statement, it is likely that
the regulations issued by the NCUA will take precedence in the event of a
conflict with the Policy Statement. Similar policy statements and regulations
have been issued by other regulators having jurisdiction over other types of
depository institutions. Any such institution should consult its own legal
advisors in determining whether and to what extent there may be restrictions on
its ability to invest in the Offered Certificates. See "Legal Investment" in the
Prospectus.
S-34
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any information
or to make any representations other than those contained in this Prospectus
Supplement or the Prospectus in connection with the offer made by this
Prospectus Supplement and the Prospectus and, if given or made, such information
or representations must not be relied upon as having been authorized by the
Underwriter. Neither the delivery of this Prospectus nor any sale made hereunder
shall under any circumstances create any implication that there has been no
change since the date hereof. This Prospectus Supplement and the prospectus do
not constitute an offer or solicitation by anyone in any jurisdiction in which
such offer or solicitation is not authorized or in which the person making such
offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such solicitation.
-------------
TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
Summary of Prospectus Supplement............................S-
The Mortgage Pool...........................................S-
Yield on the Certificates...................................S-
Description of the Certificates.............................S-
Pooling and Servicing Agreement.............................S-
Certain Federal Income Tax Consequences.....................S-
Method of Distribution......................................S-
Legal Opinions..............................................S-
Rating......................................................S-
Legal Investment............................................S-
PROSPECTUS
Summary of Prospectus...........................................
The Mortgage Pools..............................................
Use of Proceeds.................................................
Yield Considerations............................................
Maturity and Prepayment Considerations..........................
The Depositor...................................................
Mortgage Loan Program...........................................
Description of the Certificates.................................
Description of Credit Support...................................
Description of Primary Insurance Policies.......................
Certain Legal Aspects of Mortgage Loans.........................
Certain Federal Income Tax Consequences.........................
ERISA Considerations............................................
Legal Investment................................................
Methods of Distribution.........................................
Legal Matters...................................................
Financial Information...........................................
Index of Principal Definitions..................................
Until , 199_, all dealers effecting transactions in the Certificates,
whether or not participating in this distribution, may be required to deliver a
Prospectus Supplement and the Prospectus in which it relates. This delivery
requirement is in addition to the obligation of dealers to deliver a Prospectus
Supplement and Prospectus when acting as Underwriters and with respect to their
unsold allotments or subscriptions.
================================================================================
================================================================================
$ (APPROXIMATE)
SENIOR MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 199_-
SALOMON BROTHERS MORTGAGE
SECURITIES VII, INC.
DEPOSITOR
MASTER SERVICER
SALOMON SMITH BARNEY
- -------------------------------------------
---------------------------------------------------
PROSPECTUS SUPPLEMENT
DATED --------, 199-
<PAGE>
<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 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 September 2, 1998
Prospectus Supplement [Version 2]
(To Prospectus Dated , 199_)
(APPROXIMATE)
Mortgage Pass-Through Certificates, Series 199_-
Variable Pass-Through Rate
Salomon Brothers Mortgage Securities VII, Inc.
Depositor
MASTER SERVICER
The Series 199_- Certificates will consist of a single class of Certificates
representing the entire beneficial ownership interest in a Trust Fund consisting
primarily of a segregated pool of conventional one- to four-family adjustable
rate first mortgage loans (the "Mortgage Loans"). The Mortgage Loans have
original terms to maturity of [15 or 30] years and an aggregate principal
balance as of , 199_ (the "Cut-off Date") of approximately $ ,
subject to a permitted variance as described herein under "The Mortgage Pool".
All of the Mortgage Loans were originated or acquired by
, and will be sold to Salomon Brothers Mortgage Securities
VII, Inc. (the "Depositor") on or prior to the date of initial issuance of the
Certificates.
Principal and interest on the Certificates are payable on the 25th day of each
month or, if such day is not a business day, then on the next succeeding
business day, beginning in 199_ (each, a "Distribution Date"). As
described more fully herein, distributions of interest on the Certificates will
be based on the then applicable Variable Pass-Through Rate, which, subject to
the limitations described herein, is equal to the weighted average of the
adjustable mortgage interest rates on the Mortgage Loans, net of servicing
compensation, determined in the manner described herein. The Variable
Pass-Through Rate initially is equal to % per annum.
There is currently no secondary market for the Certificates and there can be no
assurance that a secondary market for the Certificates will develop. Salomon
Brothers Inc (the "Underwriter") intends to establish a market in the
Certificates, but is not obligated to do so. There is no assurance that any such
market, if established, will continue.
No election will be made to treat the Trust Fund as a "real estate mortgage
investment conduit" for federal income tax purposes. See "Certain Federal Income
Tax Consequences" herein and in the Prospectus.
THE SERIES 199_- CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
THE DEPOSITOR, THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE SERIES 199_- CERTIFICATES NOR THE UNDERLYING MORTGAGE
LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
The Certificates will be purchased by the Underwriter from the Depositor and
will be offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the Depositor from the sale of the Certificates, before
deducting expenses payable by the Depositor, will be % of the aggregate initial
Certificate Principal Balance of the Certificates, plus accrued interest thereon
at the initial Variable Pass-Through Rate from , 199_.
The 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 Certificates will be made at the office of
Salomon Smith Barney Inc., Seven World Trade Center, New York, New York 10048,
on or about , 199_.
- -----------------------
SALOMON SMITH BARNEY
- --------------------------------------------------------------------------------
The date of this Prospectus Supplement is ,199_.
-ii-
<PAGE>
The Certificates offered by this Prospectus Supplement will be part of
a separate series of Certificates being offered by the Depositor pursuant to its
Prospectus dated , 199_, of which this Prospectus Supplement is a part
and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
-iii-
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used but not defined herein shall have the meanings assigned
thereto in the Prospectus. An Index of Principal Definitions is included at
the end of the Prospectus.
Title of Series................ Mortgage Pass-Through Certificates, Series
199_- (the "Certificates"). The Certificates
will be issued in a single class and represent
the entire beneficial ownership interest in a
Trust Fund consisting primarily of a pool of
Mortgage Loans with an aggregate principal
balance of approximately $ as of , 199_
(the "Cut-off Date"). The Certificates will be
issued pursuant to a Pooling and Servicing
Agreement, to be dated as of , 199_,
among the Depositor, the Master Servicer and
the Trustee (the "Agreement").
Depositor of Mortgage Loans.... Salomon Brothers Mortgage Securities VII, Inc.,
an indirect wholly-owned subsidiary of Salomon
Inc and an affiliate of Salomon Smith Barney
Holdings Inc. See "The Depositor" in the
Prospectus.
Master Servicer and Mortgage
Loan Seller................... See "Pooling and Servicing Agreement -- The
Master Servicer" herein.
Trustee........................ See "Pooling and Servicing Agreement--The
Trustee" herein.
The Mortgage Pool.............. The Mortgage Pool consists of adjustable rate,
fully amortizing Mortgage Loans. The Mortgage
Loans are secured by first liens on residential
real properties (the "Mortgaged Properties").
The Mortgage Loans have original terms to
maturity of [15 or 30] years and, as of the
Cut-off Date, are expected to have a weighted
average remaining term to maturity of
approximately months. The Mortgage Rate on each
Mortgage Loan is subject to annual adjustment
on the adjustment date applicable thereto (each
such date, an "Adjustment Date") to equal the
sum of the Index (as described below) and a
fixed percentage amount (a "Gross Margin"),
subject to annual and lifetime rate caps as
described herein. Substantially all of the
Mortgage Loans were originated with an initial
Mortgage Rate below the sum of the applicable
Index and Gross Margin, rounded as described
herein. See "The Mortgage Pool" herein.
The Index...................... [to be provided]
Variable Pass-Through Rate..... The Variable Pass-Through Rate on each
Distribution Date on the Certificates will
equal the weighted average, as determined for
each related Due Period (as defined below), of
the Net Mortgage Rates on each of the Mortgage
Loans. The initial Variable Pass-Through Rate
is equal to % per annum. The Net Mortgage Rate
on each Mortgage Loan is equal to the then
current Mortgage Rate minus the rate at
S-1
<PAGE>
which the servicing fee (as to each Mortgage
Loan, the "Servicing Fee Rate") accrues. The
Servicing Fee Rate with respect to each
Mortgage Loan will equal approximately % per
annum. See "Description of the
Certificates-Interest Distributions" and
"Pooling and Servicing Agreement-- Servicing
and Other Compensation and Payment of Expenses"
herein.
Distributions General.......... Holders of the Certificates will be entitled to
receive on each Distribution Date, to the
extent of the Available Distribution Amount for
such Distribution Date, distributions allocable
to interest and principal, as described herein.
All distributions will be made by or on behalf
of the Trustee 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 related
Distribution Date occurs.
The Available Distribution Amount for any
Distribution Date includes scheduled payments
on the Mortgage Loans due during the related
Due Period and received on or prior to the
related Determination Date, prepayments and
other unscheduled collections received during
the related Prepayment Period, any P&I Advances
made by the Master Servicer for the
Distribution Date and any amounts paid by the
Master Servicer to cover the Interest Shortfall
(as defined herein) for such Distribution Date,
net of certain amounts reimbursable to the
Master Servicer and the Trustee.
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
the day of the month in which such
Distribution Date occurs or, if such day is not
a business day, then on the immediately
preceding business day. See "Description of the
Certificates--General" herein.
Interest Distributions......... Holders of the Certificates will be entitled to
receive on each Distribution Date, to the
extent of the Available Distribution Amount for
such Distribution Date, distributions allocable
to interest in an aggregate amount equal to
thirty days' interest accrued on the
Certificate Principal Balance of the
Certificates at the Variable Pass-Through Rate
for such Distribution Date, less the Net
Interest Shortfall (as defined herein), if any,
for such Distribution Date (with respect to any
Distribution Date, the "Interest Distribution
Amount"). See "Description of the
Certificates--Interest Distributions" herein.
S-2
<PAGE>
Principal Distributions........ Holders of the Certificates will be entitled to
receive on each Distribution Date, to the
extent of the portion of the Available
Distribution Amount remaining after the
Interest Distribution Amount is distributed to
such holders, a distribution allocable to
principal equal to the sum of (i) all scheduled
principal payments due on the Mortgage Loans
during the related Due Period and received on
or prior to the related Determination Date or
as to which a P&I Advance was made in respect
of such Distribution Date and (ii) all
prepayments and all other unscheduled principal
recoveries received with respect to the
Mortgage Loans in the related Prepayment Period
(with respect to any Distribution Date, the
"Principal Distribution Amount"). See
"Description of the Certificates--Principal
Distributions" herein.
Special Prepayment
Considerations............... The rate of principal payments on the
Certificates will depend on the rate and timing
of principal payments (including prepayments,
defaults and liquidations) on the Mortgage
Loans. As is the case with mortgage
pass-through certificates generally, the
Certificates are subject to substantial
inherent cash-flow uncertainties because the
Mortgage Loans may be prepaid at any time.
Generally, when prevailing interest rates are
increasing, prepayment rates on mortgage loans
tend to decrease, resulting in a reduced return
of principal to investors 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 in crease, resulting
in a greater return of principal to investors
at a time when reinvestment at comparable
yields may not be possible.
Special Yield Considerations... The yield to maturity on the Certificates will
depend on the rate and timing of principal
payments (including prepayments, defaults and
liquidations) on the Mortgage Loans and the
allocation thereof (and of any losses on the
Mortgage Loans) to reduce the Certificate
Principal Balance of such Certificates, as well
as other factors such as the then applicable
Variable Pass-Through Rate (and any adjustments
thereto) and the purchase price for such
Certificates. The yield to maturity on the
Certificates will be lower than that otherwise
produced if larger than anticipated principal
prepayments are made on the Mortgage Loans
having Net Mortgage Rates higher than the
Variable Pass-Through Rate. In addition, the
yield to investors on the Certificates will be
adversely affected by any allocation thereto of
Net Interest Shortfalls on the Mortgage Loans.
In general, if the 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
S-3
<PAGE>
to maturity will be lower than that assumed at
the time of purchase. Conversely, if the
Certificates are purchased at a discount and
principal distributions thereon occur at a rate
slower than that assumed at the time of
purchase, the investor's actual yield to
maturity will be lower than that originally
anticipated.
The proceeds to the Depositor from the sale of
the Certificates were determined based on a
number of assumptions, including a prepayment
assumption of % of the Standard Prepayment
Assumption and weighted average lives
corresponding thereto. The yield assumptions
for the Certificates that are to be offered
hereunder will vary as determined at the time
of sale. See "Yield on the Certificates"
herein.
Advances....................... The Master Servicer is required to make a P&I
Advance to the Certificateholders in respect of
delinquent payments of principal and interest
on the Mortgage Loans, subject to the
limitations described herein. [Pool Insurer]
will be required under the Mortgage Pool
Insurance Policy described below to make any
such P & I Advance if the Master Servicer fails
in its obligation to do so. The advance
obligations of the Master Servicer and [Pool
Insurer] are subject to a dollar limitation
acceptable to in connection with its
ruling of the Certificates. See "Description of
the Certificates--P & I Advances" herein and
"Description of the Certificates-- Advances in
respect of Delinquencies" in the Prospectus.
Mortgage Pool Insurance and
Other Insurance and
Credit Support............... A mortgage pool insurance policy will be
obtained covering defaults on the Mortgage
Loans (the "Mortgage Pool Insurance Policy").
The Mortgage Pool Insurance Policy will be
provided by and will be in an initial
amount equal to not less than % of the
aggregate principal balance of the Mortgage
Loans as of the Cut-off Date. Each Mortgage
Loan is required to be covered by a standard
hazard insurance policy (a "Primary Hazard
Insurance Policy"). In addition, each Mortgage
Loan with a loan-to-value ratio at origination
in excess of 80% will be insured by a primary
mortgage insurance policy covering the amount
of such Mortgage Loan in excess of 75% of the
original value of the related Mortgaged
Property (a "Primary Mortgage Insurance
Policy"). The Mortgage Loans also will be
covered by a special hazard insurance policy
(the "Special Hazard Insurance Policy") issued
by . Credit support to
cover certain losses in connection with
bankruptcy proceedings will be pro vided in the
form and in the amount acceptable to
in connection with its rating of the
Certificates.
The amount of coverage under the foregoing
insurance policies and credit support is
limited in amount, and payment
S-4
<PAGE>
thereunder is subject to certain conditions and
limitations. In the event losses occur that are
not covered by such insurance or credit
support, or losses occur in amounts exceeding
such coverage, such losses will be borne by
Certificateholders. See "Description of the
Certificates--Insurance and Related
Arrangements" herein and "Description of Credit
Support" in the Prospectus.
Denominations.................. The Certificates will be issued in registered
form in minimum percentage interests
corresponding to initial Certificate Principal
Balances of approximately $ and multiples
of $ in excess thereof, with one
Certificate evidencing an amount equal to the
remainder of the aggregate initial Certificate
Principal Balance of the Certificates.
Optional Termination........... At its option, the Master Servicer may purchase
all of the Mortgage Loans in the Trust Fund,
together with any properties in respect thereof
acquired by the Trustee for the benefit of the
Certificateholders, and thereby effect
termination of the Trust Fund and early
retirement of the Certificates, on any
Distribution Date on which the aggregate
principal balance of the Mortgage Loans and any
such properties remaining in the Trust Fund is
less than 10% of the aggregate principal
balance of the Mortgage Loans as of the Cut-off
Date. See "Pooling and Servicing
Agreement--Termination" herein and "Description
of the Certificates--Termination" in the
Prospectus.
Certain Federal Income Tax
Consequences................. For federal income tax purposes, the Trust Fund
will be classified as a grantor trust and not
as an association that is taxable as a
corporation. Under Proposed OID Regulations as
defined in the Prospectus), original issue
discount may be created with respect to a
Mortgage Loan when the rate that would be
produced at its origination by the sum of the
Index and the related Gross Margin, rounded as
described herein, is greater than the initial
Mortgage Rate on such Mortgage Loan. Investors
should consult their own tax advisors as to the
application of the Proposed OID Regulations to
the Mortgage Loans. The Certificates will be
treated as assets described in Section
7701(a)(19)(C) of the Internal Revenue Code of
1986 (the "Code"), "qualifying real property
loans" under Section 593(d) of the Code,"
qualified mortgages" under Section
860G(a)(3)(A) of the Code, "real estate assets"
under Section 856(C)(5)(A) of the Code, and the
interest thereon will be treated as "interest
on obligations secured by mortgages on real
property" under Section 856(c)(3)(B) of the
Code. For further information regarding the
federal income tax consequences of investing in
the Certificates, see "Certain Federal Income
Tax Consequences" herein and in the Prospectus.
S-5
<PAGE>
Rating It is a condition to the issuance of the
Certificates that the Certificates be rated not
lower than by . The rating
does not address the frequency of prepayments of
Mortgage Loans. 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.
See "Yield on the Certificates" and Rating"
herein and "Yield Considerations" in the
Prospectus.
Legal Investment............... The Certificates will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") for so long as they are rated as
described herein and, as such, will be legal
investments for certain entities to the extent
provided in SMMEA. SMMEA, however, provides for
state limitation on the authority of such
entities to invest in "mortgage related
securities", provided that such restricting
legislation is enacted prior to October 3,
1992. See "Legal Investment" herein and in the
Prospectus.
ERISA Considerations........... The U.S. Department of Labor has issued an
individual exemption, Prohibited Transaction
Exemption 89-89, to the Underwriter that
generally exempts from the application of
certain of the prohibited transaction
provisions of Section 406 of the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), and the excise taxes imposed
on such prohibited transactions by Section
4975(a) and (b) of the Code and Section 502(i)
of ERISA, transactions relating to the
purchase, sale and holding of pass-through
certificates underwritten by the Underwriter
such as the Certificates and the servicing and
operation of asset pools such as the Mortgage
Pool, provided that certain conditions are
satisfied. See "ERISA Considerations" in the
Prospectus.
S-6
<PAGE>
THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of approximately Mortgage Loans
with an aggregate principal balance outstanding as of the Cut-off Date, after
deducting payments of principal due on or before such date, of approximately
$ (subject to a permitted variance of plus or minus %). The
Mortgage Loans are secured by first mortgages or deeds of trust or other similar
security instruments creating first liens on oneto four-family residential
properties consisting of detached or semi-detached one-family dwelling units,
twoto four-family dwelling units, townhouses, individual condominium units and
individual units in planned unit developments. The Mortgage Loans to be included
in the Mortgage Pool will be acquired by the Depositor from ,
in its capacity as Mortgage Loan Seller, pursuant to a Mortgage Loan Purchase
Agreement between the Depositor and . In addition,
will be the Master Servicer for the Certificates.
Each Mortgage Loan had a Mortgage Rate at origination of not less than
% and not more than % per annum. On the first Adjustment Date with
respect to each Mortgage Loan, and on each annual Adjustment Date thereafter,
the Mortgage Rate on each Mortgage Loan will be adjusted to equal the sum of (i)
[index description] (the "Index") and (ii) the Gross Margin; provided, however,
that the Mortgage Rate will not increase or decrease by more than % on any
related Adjustment Date (the "Periodic Rate Cap") and will not exceed a
specified maximum Mortgage Rate over the life of the Mortgage Loan (the
"Lifetime Rate Cap"). Effective with the first payment due on a Mortgage Loan
after each related Adjustment Date, the monthly payment will be adjusted to an
amount that will amortize fully the outstanding principal balance of the
Mortgage Loan over its remaining term, and pay interest at the Mortgage Rate as
so adjusted. Due to the application of the Periodic Rate Caps and Lifetime Rate
Caps, the Mortgage Rate on each Mortgage Loan, as adjusted on any related
Adjustment Date, may be less than the sum of the applicable Index and Gross
Margin, rounded as described herein. See "The Index" herein.
The Mortgage Loans are expected to have the following characteristics as of
the Cut-off Date (where relevant, expressed as a percentage of the aggregate
principal balance of the Mortgage Loans having such characteristics relative to
the aggregate principal balance of all of the Mortgage Loans):
The Mortgage Loans will have Mortgage Rates ranging from % to
%, Net Mortgage Rates ranging from % to %, Gross Margins ranging
from % to %, Lifetime Rate Caps ranging from % to % and maximum
Lifetime Net Mortgage Rates ranging from % to %. The weighted average
of the Mortgage Rates will be approximately %, the weighted average of the
Net Mortgage Rates will be %, the weighted average Gross Margin will be
approximately %, the weighted average Lifetime Rate Cap will be
approximately % and the weighted average maximum Lifetime Net Mortgage Rate
will be %.
The first Adjustment Date on each Mortgage Loan will occur either ,
or months from the origination date thereof. The latest first
Adjustment Date on any Mortgage Loan occurs in and the weighted average next
Adjustment Date for all of the Mortgage Loans is .
All of the Mortgage Loans have monthly payments due on the first day of
each month (each, a "Due Date"). Mortgage Loans, with an aggregate principal
balance of $ as of the Cut-off Date, have an original term to maturity of
[15] years; all of the remaining Mortgage Loans have original terms to maturity
of [30] years. The weighted average remaining term to maturity of the Mortgage
Loans will be approximately years and months. None of the Mortgage
Loans will have a first Due Date prior to or will have a remaining
term to maturity of less than approximately years and months
or greater than approximately years and months.
The Mortgage Loans will have principal balances at origination of not less
than $ or more than $ and principal balances as of the Cut-off
Date of not less than approximately $ or more than approximately $ .
The Mortgage Loans will have an average outstanding principal balance as of the
Cut-off Date of approximately $ .
Not more than approximately % of the Mortgage Loans will have
Loan-to-Value Ratios at origination exceeding 80%, all of which are insured by
Primary Mortgage Insurance Policies. Each such insurance policy
S-7
<PAGE>
provides coverage in an amount equal at least to the excess of the original
principal balance of the Mortgage Loan covered thereby plus accrued interest
thereon and related foreclosure expenses over 75% of the Value of the related
Mortgaged Property. Any Mortgage Loan having a Loan-to-Value Ratio of less than
or equal to 80% at origination is not so insured. No Mortgage Loan will have a
Loan-to-Value Ratio at origination exceeding %. There can be no assurance
that the Loan-to-Value Ratio of any Mortgage Loan is less than or equal to its
Loan-to Value Ratio as of the date of origination thereof.
Approximately % of the Mortgage Loans will be secured by Mortgaged
Properties located in ; approximately % of the Mortgage Loans will be
secured by Mortgaged Properties located in ; and approximately % of the
Mortgage Loans will be secured by Mortgaged Properties located in the . Not
more than approximately % of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area.
With respect to not less than approximately % of the Mortgage Loans, the
mortgagor represented in its loan application that the Mortgaged Property would
be owner-occupied as a primary residence. Not less than approximately % of
the Mortgage Loans will be secured by detached one-family dwelling units. Not
more than approximately % of the Mortgage Loans will be secured by units in
two- to four-family dwellings, individual condominium units, individual units in
planned unit developments or townhouses. Not more than approximately % of
the Mortgage Loans are Mortgage Loans the proceeds of which were used to
refinance an existing mortgage loan.
The Mortgage Loans secured by Mortgaged Properties that are owner-occupied
as primary residences do not contain "due-on-sale" clauses and are subject to
assumption by purchasers of the Mortgaged Properties who meet the credit
requirements and underwriting standards as described under "Underwriting
Standards". If a Mortgage Loan is assumed by a qualified buyer, a reasonable
assumption fee may be paid which will be retained by the Master Servicer as
additional servicing compensation. All Mortgage Loans secured by Mortgaged
Properties that are not owner-occupied as primary residences contain customary
"due-on-sale" clauses.
Not more than approximately % of the Mortgage Loans were originated
pursuant to a limited documentation program, as described herein under
"Underwriting Standards".
Certain of the Mortgage Loans were subject to buydown agreements at
origination, however, the buydown period with respect to each such Mortgage Loan
has expired and all related buydown funds have been applied.
THE INDEX
[provide description of index]
UNDERWRITING STANDARDS
The Mortgage Loans were originated or acquired by the Mortgage Loan Seller
or by its affiliates or were purchased by the Mortgage Loan Seller from
unaffiliated financial institutions or other entities approved by HUD as
mortgagees. All of the Mortgage Loans were originated generally in accordance
with the underwriting criteria generally described in the Prospectus, except as
described below. Prior to the issuance of the Certificates, each Mortgage Loan
originated within the 12 month period preceding the Cut-off Date, and a sample
of all other Mortgage Loans originated prior to such time, will be reviewed by
[Pool Insurer] to ensure compliance with its credit, appraisal and underwriting
standards. [Description of differences with Prospectus description under the
heading "Mortgage Loan Program--Underwriting Standards."]
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Certificates,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise, if the Depositor deems such removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the Mortgage Pool prior to the issuance of the
Certificates unless including such mortgage loans would materially alter the
characteristics of the Mortgage
S-8
<PAGE>
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 in the Mortgage Pool may vary.
A detailed description of the Mortgage Loans on Form 8-K (the "Form 8-K")
will be available to purchasers of Certificates at or before initial issuance of
the Certificates and will be filed with the Securities and Exchange Commission
within fifteen days after such initial issuance. The Form 8-K will specify the
precise aggregate principal balance of the Mortgage Loans included in the Trust
Fund outstanding as of the Cut-off Date and will set forth on a precise basis
the other information presented in this Prospectus Supplement on an approximate
basis.
YIELD ON THE CERTIFICATES
The rate of principal payments on the Certificates, the aggregate amount of
distributions on the Certificates and the yield to maturity of the Certificates
will be directly related to the rate of payments of principal on the Mortgage
Loans. The rate of principal payments on the Mortgage Loans will in turn be
affected by the amortization schedules (which will change periodically to
accommodate adjustments to the Mortgage Rates as described above under "The
Mortgage Pool-General") of the 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 by the Depositor, the Master Servicer or the
Mortgage Loan Seller, as the case may be). The Mortgage Loans may be prepaid by
the mortgagors at any time without payment of any prepayment fee or penalty.
Prepayments, liquidations and purchases of the Mortgage Loans will result in
distributions to Certificateholders of amounts 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.
All of the Mortgage Loans are adjustable rate mortgage loans. The yield to
maturity of the Certificates will be affected by the Mortgage Rates and the
monthly payments on the Mortgage Loans as they adjust from time to time. The
Variable Pass-Through Rate on the Certificates for each Distribution Date will
be equal to the weighted average of the then applicable Net Mortgage Rates on
the Mortgage Loans. As described herein under "Description of the
Certificates-Interest Distributions", the Net Mortgage Rate on any Mortgage Loan
at any time is equal to the then applicable Mortgage Rate minus the Servicing
Fee Rate. A Mortgage Loan with a relatively high Gross Margin and a relatively
low Lifetime Rate Cap will reach its maximum lifetime Net Mortgage Rate at a
lower Index value than a Mortgage Loan with a relatively low Gross Margin and a
relatively high Lifetime Rate Cap at the same Index value. In addition,
disproportionate principal payments (whether resulting from differences in
amortization schedules, payments due on scheduled maturity or full or partial
prepayments) on Mortgage Loans having Net Mortgage Rates higher or lower than
the then current Variable Pass-Through Rate may affect the yield on the
Certificates. The yield to maturity of the Certificates will be lower than that
otherwise produced if larger than anticipated principal prepayments are made on
the Mortgage Loans having Net Mortgage Rates higher than the Variable
Pass-Through Rate.
The timing of prepayments on the Mortgage Loans may significantly affect an
investor's actual yield to maturity, even if the average rate of principal
payments experienced over time is consistent with an investor's expectation. In
general, the earlier a prepayment of principal on the Mortgage Loans, the
greater will be the effect on the investor's yield to maturity. 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 Certificates would not be fully offset
by a subsequent like reduction (or increase) in the rate of principal payments.
When a claim is paid under certain insurance policies, including the
Mortgage Pool Insurance Policy, accrued interest is paid only to the date of
payment of the claim, without regard to when such payment will be distributed to
Certificateholders. When a principal prepayment in full is made on a Mortgage
Loan, the
S-9
<PAGE>
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. Partial principal prepayments are applied on the first day of the
month of receipt, with a resulting reduction in interest payable for the month
in which the partial principal prepayment is made (as to any Distribution Date,
the aggregate interest shortfall resulting from insurance claims paid and
prepayments made during the related Prepayment Period is the "Interest
Shortfall"). The Master Servicer is obligated to pay from its own funds only
those Interest Shortfalls attributable to prepayments made by mortgagors, but
only to the extent that its total servicing compensation for the related Due
Period exceeds the Minimum Servicing Compensation (as defined herein) for such
Due Period. See "Pooling and Servicing Agreement--Servicing and Other
Compensation and Payment of Expenses" herein. Accordingly, to the extent that
any Interest Shortfall exceeds the amount that the Master Servicer is obligated
to pay from its own funds (as to any Distribution Date, such excess is the "Net
Interest Shortfall"), the effect of any such principal prepayments made and
insurance claims paid during any Prepayment Period will be to reduce the amount
of interest collected that is available for distribution to Certificateholders.
See "Description of the Certificate--Interest Distributions" herein.
The Depositor is not aware of any publicly available statistics relating to
the principal prepayment experience of adjustable rate mortgage loans over an
extended period of time, and the Depositor's experience with respect to
adjustable rate mortgage loans is insufficient to draw any conclusions with
respect to the expected prepayment rates on the Mortgage Loans comprising the
Mortgage Pool. 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 fell significantly below the then current
Mortgage Rates on the Mortgage Loans or significantly below the Lifetime Rate
Caps on the Mortgage Loans, the rate of prepayment (and refinancing) would be
expected to increase. Conversely, if prevailing mortgage rates rose
significantly above the then current 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.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years, although little data are available with respect
to the rate of default on adjustable rate mortgage loans. Increases in required
monthly payments on the Mortgage Loans in excess of those assumed in
underwriting such Mortgage Loans may result in a default rate higher than that
on mortgage loans with fixed mortgage rates. In addition, default rates
generally are higher for mortgage loans used to refinance an existing mortgage
loan. In the event of a borrower's default on a Mortgage Loan, there can be no
assurance that recourse beyond the specific Mortgaged Property pledged as
security for repayment will be available. See "The Mortgage Pool--Underwriting
Standards" herein and, with respect to protection against borrower default
included in the Trust Fund, see "Description of the Certificates-- Insurance and
Related Arrangements" herein.
The Mortgage Rates on the Mortgage Loans will adjust annually (although not
on the same Adjustment Dates) and increases in the Mortgage Rates on the
Mortgage Loans will be limited by the Periodic Rate Caps and by Lifetime Rate
Caps on the Mortgage Loans. In addition, the Mortgage Rate on each Mortgage Loan
will be based on the Index (which may not rise and fall consistently with
interest rates on adjustable rate residential mortgage loans or other objective
indices of interest rates generally) plus the related Gross Margin (which may be
different from then current margins on residential mortgage loans). See "The
Mortgage Pool-The Index" herein. As a result, the Mortgage Rates on the Mortgage
Loans (and therefore the Variable Pass-Through Rate) at any time may not equal
the prevailing rates for similar adjustable rate mortgage loans, and the rate of
prepayment may be lower or higher than would otherwise be anticipated in light
of prevailing rates.
The effective yield to the holders of Certificates will be lower than the
yield otherwise produced by the Variable Pass-Through Rate and purchase price
because monthly distributions will not be made to such holders until the 25th
day (or if such day is not a business day, then on the next succeeding business
day) of the month following the month in which interest accrues on the Mortgage
Loans.
S-10
<PAGE>
Certain of the Mortgage Loans are subject to assumption as described above
under "The Mortgage Pool-General" herein. The extent to which the Mortgage Loans
are assumed by purchasers of the Mortgaged Properties rather than prepaid by the
related mortgagors in connection with the sales of the Mortgaged Properties will
affect the weighted average life of the Certificates. See "Maturity and
Prepayment Considerations" in the Prospectus.
S-11
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will consist of a single class representing the entire
beneficial ownership interest in a Trust Fund consisting primarily of a pool of
Mortgage Loans, with an aggregate principal balance of approximately $
as of , 199_ (the "Cut-off Date").
All distributions will be made by or on behalf of the Trustee to the
persons in whose names the Certificates are registered at the close of business
on each Record Date, which will be the last business day of the month preceding
the month in which the related Distribution Date occurs. Such distributions will
be made either by check mailed to the address of each Certificateholder as it
appears in the Certificate Register or, upon written request to the Trustee no
later than five business days prior to the Record Date for such Distribution
Date by any holder of Certificates having an aggregate initial Certificate
Principal Balance of not less than $ , by wire transfer in immediately
available funds to the account of such Certificateholder specified in the
request.
INTEREST DISTRIBUTIONS
Holders of the Certificates will be entitled to receive on each
Distribution Date, to the extent of the Available Distribution Amount for such
Distribution Date, distributions allocable to interest in an aggregate amount
equal to thirty days' interest accrued on the Certificate Principal Balance of
the Certificates at the Variable Pass-Through Rate for such Distribution Date,
less the Net Interest Shortfall, if any, for such Distribution Date (with
respect to any Distribution Date, the "Interest Distribution Amount"). See
"Yield on the Certificates" herein.
The Variable Pass-Through Rate on the Certificates for each Distribution
Date will equal the weighted average of the Net Mortgage Rates on each of the
Mortgage Loans determined for the respective Adjustment Dates applicable to the
Due Date immediately preceding such Distribution Date. The initial Variable
Pass-Through Rate is equal to % per annum. The Net Mortgage Rate on a Mortgage
Loan is equal to the then applicable Mortgage Rate minus the Servicing Fee Rate,
which will be approximately % per annum.
The Certificate Principal Balance of any Certificate as of any date of
determination is equal to the initial Certificate Principal Balance thereof,
reduced by the aggregate of (a) all amounts allocable to principal previously
distributed with respect to such Certificate and (b) any reductions in the
Certificate Principal Balance thereof deemed to have occurred in connection with
allocations of Realized Losses (as defined in the Prospectus), as described
below.
PRINCIPAL DISTRIBUTIONS
Holders of the Certificates will be entitled to receive on each
Distribution Date, to the extent of the portion of the Available Distribution
Amount remaining after the Interest Distribution Amount is distributed to such
holders, a distribution allocable to principal in the following aggregate amount
(with respect to any Distribution Date, the "Principal Distribution Amount"):
(i) the principal portion of all scheduled monthly payments on the Mortgage
Loans due during the related Due Period and received on or prior to the
related Determination Date or as to which a P & I Advance
was made in respect of such Distribution Date; and
(ii) the aggregate of the following amounts: (1) the principal portion of
all full and partial principal prepayments made by the respective
mortgagors during the related Prepayment Period, (2) the principal portion
of all other unscheduled collections, including Insurance Proceeds and
Liquidation Proceeds received during the related Prepayment Period, and (3)
the principal portion of all proceeds of the purchase or repurchase during
the related Prepayment Period (or, in the case of a substitution, certain
amounts representing a principal adjustment) of any Mortgage Loan
(including any converted Mortgage Loan) as required by the Pooling and
Servicing Agreement.
S-12
<PAGE>
P&I ADVANCES
Subject to the following limitations, prior to each Distribution Date the
Master Servicer will be obligated to advance its own funds, or funds held in the
Certificate Account that are in excess of the Available Distribution Amount for
such Distribution Date, in an aggregate amount equal to the aggregate of
payments of principal and interest (net of servicing compensation) that were due
during the related Due Period and delinquent on the Determination Date, plus
certain amounts representing interest not covered by any current net income on
Mortgaged Properties acquired on behalf of Certificateholders by foreclosure or
deed in lieu of foreclosure (each, an "REO Property"). Such advances (each, a "
P & I Advance") are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, Insurance
Proceeds or Liquidation Proceeds. No P & I Advances will be made by the Master
Servicer with respect to Interest Shortfalls (i.e., those shortfalls in interest
collections attributable to prepayments and payments of certain insurance
claims, as described herein under "Yield on the Certificates"); however, subject
to the limitations described herein under "Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses", an
adjustment to the Master Servicer's servicing compensation will be made to cover
certain Interest Shortfalls. The failure by the Master Servicer to make a P & I
Advance as required under the Pooling and Servicing Agreement will constitute,
under certain circumstances, an Event of Default thereunder, in which case the
Trustee or another entity acting as Master Servicer will be obligated to make
any such P & I Advance, subject to the limitations set forth in the Pooling and
Servicing Agreement. In the event that the Master Servicer or any successor
thereto fails to make a required P & I Advance, [Pool Insurer] will be required,
upon notice from the Trustee, to make the P & I Advance, subject to the terms
and conditions of the Mortgage Pool Insurance Policy. See "Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses", and
"Insurance and Related Arrangements" herein. The advance obligations of the
Master Servicer and [Pool Insurer] are subject to a dollar limitation,
acceptable to in connection with its rating of the Certificates.
ALLOCATION OF LOSSES
The Certificate Principal Balance of a Certificate outstanding at any time
represents the 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 a
Certificate will be reduced only by amounts actually distributed thereon that
are allocable to principal, and by allocation of Realized Losses thereto. The
coverage described below under "Insurance and Related Arrangements" is designed
to protect Certificateholders from certain losses and other shortfalls on the
Mortgage Loans. As a result, Realized Losses will occur only if such losses are
not so covered, or to the extent coverage in respect thereof has been exhausted.
INSURANCE AND RELATED ARRANGEMENTS
GENERAL. All of the Mortgage Loans are the subject of insurance coverage
provided by the Mortgage Pool Insurance Policy and the Special Hazard Insurance
Policy. In addition, each Mortgage Loan is covered by a Primary Hazard Insurance
Policy as described under "Description of Primary Insurance Policies" in the
Prospectus. Each Mortgage Loan that had a loan-to-value ratio at origination in
excess of 80% also will be covered by a Primary Mortgage Insurance Policy.
MORTGAGE POOL INSURANCE POLICY. The Master Servicer will obtain a Mortgage
Pool Insurance Policy to cover losses (subject to the limitations described
herein) by reason of default of the mortgagors, to the extent such losses are
not covered by any Primary Mortgage Insurance Policy. Subject to the limitations
described herein, the Mortgage Pool Insurance Policy will cover losses by reason
of default in payments on the Mortgage Loans in an initial amount equal to not
less than % of the aggregate principal balance of the Mortgage Loans on the
Cut-off Date. The Master Servicer will pay the premiums for such policy, will
present claims thereunder on behalf of itself, the Trustee and
Certificateholders and, subject to certain limitations set forth in the Pooling
and Servicing Agreement, will use its best reasonable efforts to maintain such
policy during the term of the Pooling and Servicing Agreement, unless coverage
thereunder has been exhausted through the payment of claims.
[Describe Pool Insurer]
S-13
<PAGE>
The Mortgage Pool Insurance Policy is not a blanket policy against loss,
since claims thereunder may only be made respecting particular defaulted
Mortgage Loans and only upon satisfaction of certain conditions precedent
described below. The Mortgage Pool Insurance Policy will not cover losses due to
a failure to pay or denial of a claim under a Primary Mortgage Insurance Policy,
except for Fraud Losses (as defined below) to the extent described below.
The Mortgage Pool Insurance Policy will provide that no claims may be
validly presented thereunder in respect of any Mortgage Loan unless (i) any
required Primary Mortgage Insurance Policy is in effect and a claim thereunder
has been submitted and settled, (ii) the Primary Hazard Insurance Policy has
been kept in force and real estate taxes and other protection and preservation
expenses have been paid, (iii) if there has been physical loss or damage to the
Mortgaged Property, it has been restored to its condition (reasonable wear and
tear excepted) at the effective date of the Mortgage Pool Insurance Policy, and
(iv) the insured has acquired good and merchantable title to the Mortgaged
Property free and clear of liens except certain permitted encumbrances. Upon
satisfaction of these conditions, [Pool Insurer] will have the option either (i)
to purchase the property securing the defaulted Mortgage Loan at a price equal
to the principal balance thereof plus accrued and unpaid interest at the
Mortgage Rate to the date of purchase and certain expenses incurred by the
Master Servicer on behalf of the Trustee and Certificateholders, or (ii) to pay
the amount by which the sum of the principal balance of the defaulted Mortgage
Loan plus accrued and unpaid interest at the Mortgage Rate to the date of
payment of the claim and the aforementioned expenses exceeds the proceeds
received from an approved sale of the Mortgaged Property, in either case net of
certain amounts paid or assumed to have been paid under any related Primary
Mortgage Insurance Policy. In each case, [Pool Insurer]'s obligation will be
reduced by any amount received pursuant to any applicable Primary Mortgage
Insurance Policy.
The Mortgage Pool Insurance Policy will not insure (and many Primary
Mortgage Insurance Policies may not insure) against loss sustained by reason of
a default arising from, among other things, (i) fraud or negligence in the
origination or servicing of a Mortgage Loan, including misrepresentation by the
mortgagor or the originator of the Mortgage Loan, except for certain Fraud
Losses as described below, (ii) failure to construct a Mortgaged Property in
accordance with plans and specifications and (iii) a claim in respect of a
defaulted Mortgage Loan occurring when the servicer of such Mortgage Loan, at
the time of default or thereafter, was not approved by the applicable insurer. A
failure of coverage attributable to one of the foregoing events might result in
a breach of the representations made by the Master Servicer under the Pooling
and Servicing Agreement or the Mortgage Loan Seller under the Mortgage Loan
Purchase Agreement and in such event might give rise to an obligation on the
part of the Master Servicer or the Mortgage Loan Seller to purchase the
defaulted Mortgage Loan if the breach materially and adversely affects the
interests of Certificateholders and cannot be cured by the Master Servicer or
the Mortgage Loan Seller.
Subject to the limitations described below, [Pool Insurer] has agreed to
waive its rights to deny a claim under the Mortgage Pool Insurance Policy
resulting from a loss sustained by reason of a default arising from fraud,
dishonesty or misrepresentation in connection with the related Mortgage Loan,
including loss by reason of the denial of coverage under any related Primary
Mortgage Insurance Policy because of such fraud, dishonesty or misrepresentation
(a "Fraud Loss"). It is anticipated that the maximum coverage provided by the
Mortgage Pool Insurance Policy with respect to Fraud Losses will be limited to
(i) during the first year after issuance of the Certificates, % of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date and (ii) during
the through year after issuance of the Certificates, the
lesser of (a) % of the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date and (b) the excess of % of the original aggregate
principal balance of the Mortgage Loans over the aggregate amount of payments
made by [Pool Insurer] in respect of Fraud Losses. In addition, coverage
provided by the Mortgage Pool Insurance Policy with respect to Fraud Losses will
be reduced by an amount equal to the Purchase Price paid in connection with any
required purchase by the Master Servicer or the Mortgage Loan Seller of a
Mortgage Loan as to which a Fraud Loss has occurred, net of any net liquidation
proceeds received with respect to the related Mortgage Loan. Any Fraud Losses in
excess of the applicable limitations or any Fraud Losses occurring more than
years after the issuance of the Certificates will not be covered by the
Mortgage Pool Insurance Policy and will be borne by Certificateholders if the
Master Servicer or the Mortgage Loan Seller breaches its obligation to purchase
the related Mortgage Loan. The required amount
S-14
<PAGE>
of coverage provided by the Mortgage Pool Insurance Policy with respect to Fraud
Losses will be established by in connection with its rating of the
Certificates and may differ from the amount described herein.
Pursuant to the Mortgage Pool Insurance Policy, [Pool Insurer] will agree
to make any P&I Advance if the Master Servicer is obligated but fails to make
such P&I Advance and [Pool Insurer] receives notice thereof from the Trustee as
provided in the Mortgage Pool Insurance Policy. [Pool Insurer] will not be
obligated to advance more than four months of delinquent installments of
principal and interest with respect to a Mortgage Loan unless foreclosure
proceedings are commenced prior to the expiration of such four-month period, in
which case [Pool Insurer] will continue to make P&I Advances so long as such
foreclosure proceedings are diligently pursued, or stayed pursuant to bankruptcy
proceedings. Any such P&I Advance will be reimbursable to [Pool Insurer] by
reduction of the amount of the claim payable by [Pool Insurer] with respect to
the related Mortgage Loan or otherwise as provided in the Mortgage Pool
Insurance Policy. If P&I Advances by [Pool Insurer] exceed the amount of the
claim payable by [Pool Insurer] with respect to the related Mortgage Loan, [Pool
Insurer] will be entitled to reimbursement therefor from collections on
unrelated Mortgage Loans prior to making distributions to Certificateholders.
The obligation of [Pool Insurer] to make any P&I Advance is subject to a dollar
limitation acceptable to in connection with its rating of
the Certificates. See "P&I Advances" herein.
The original amount of coverage under the Mortgage Pool Insurance Policy
will be reduced over the life of the Certificates by the aggregate dollar amount
of claims paid less the aggregate of the net amounts realized by [Pool Insurer]
upon disposition of all foreclosed 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.
Accordingly, if aggregate net claims paid under the Mortgage Pool Insurance
Policy reach the original policy limit, coverage under the Mortgage Pool
Insurance Policy will be exhausted and any further Realized Losses will be borne
by holders of the Certificates. In addition, in the event of exhaustion of
coverage under such policy, the Master Servicer would not be obligated to make a
P&I Advance in respect of any delinquent Mortgage Loan unless the Master
Servicer could determine that such P&I Advance would be recoverable to it from
the proceeds of the liquidation of such Mortgage Loan or otherwise. See "P&I
Advances" herein.
Since the 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 [Pool Insurer], such policy will not provide coverage
against hazard losses. 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 full replacement cost of such losses. Further,
no coverage in respect of special hazard losses will cover all risks, and the
amount of any such coverage will be limited. In addition, if any property
securing a defaulted Mortgage Loan is damaged and proceeds, if any, from the
related Primary Hazard Insurance Policy or the Special Hazard Insurance Policy
are insufficient to restore the damaged property to a condition sufficient to
permit recovery under the Mortgage Pool Insurance Policy, the Master Servicer is
not required to expand its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to the
Certificateholders on liquidation of the Mortgage Loan after reimbursement of
the Master Servicer for its expenses and (ii) that such expenses will be
recoverable by it through proceeds of the sale of the property or proceeds of
the Mortgage Pool Insurance Policy or any related Primary Mortgage Insurance
Policy. See "Special Hazard Insurance Policy" herein. As a result, Realized
Losses resulting from certain hazard risks will not be insured against and
therefore will be borne by Certificateholders.
If the Mortgage Pool Insurance Policy is cancelled or terminated for any
reason other than the exhaustion of the coverage thereunder, the Master Servicer
will use its best reasonable efforts to obtain a comparable policy from an
insurer that is acceptable to in connection with its rating of the
Certificates. The replacement policy will provide coverage in an amount equal to
the then remaining coverage amount of the Mortgage Pool Insurance Policy;
provided, however, that if the premium cost of the replacement policy exceeds
the premium cost of the Mortgage Pool Insurance Policy, the coverage amount of
the replacement policy will be reduced so that the premium cost therefor will
not exceed the premium cost of the Mortgage Pool Insurance Policy.
S-15
<PAGE>
SPECIAL HAZARD INSURANCE POLICY. The Master Servicer will obtain a Special
Hazard Insurance Policy covering the Mortgage Loans. The Master Servicer will
pay the premiums for such policy, will present claims thereunder on behalf of
itself, the Trustee and Certificateholders and, subject to certain limitations
set forth in the Pooling and Servicing Agreement, will use its best reasonable
efforts to maintain such policy during the term of the Mortgage Pool Insurance
Policy, unless coverage under the Special Hazard Insurance Policy has been
exhausted through the payment of claims.
The Special Hazard Insurance Policy will, subject to limitations described
below, protect Certificateholders from (i) loss by reason of damage to Mortgaged
Properties caused by certain hazards) including earthquakes and, to a limited
extent, tidal waves and related water damage) not insured against under the
standard form of Primary Hazard Insurance Policy for the respective states in
which the Mortgaged Properties are located or under a flood insurance policy if
the Mortgaged Property is located in a federally designated flood area, and (ii)
loss from partial damage caused by reason of the application of the co-insurance
clause contained in Primary Hazard Insurance Policies. See "Description of
Primary Insurance Policies--Primary Hazard Insurance Policies" in the
Prospectus. The Special Hazard Insurance Policy will not cover losses occasioned
by war, civil insurrection, certain governmental actions, errors in design,
faulty workmanship or materials (except under certain circumstances), nuclear
reaction, chemical contamination and certain other risks. The Special Hazard
Insurance Policy will provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the property securing the Mortgage Loan has been
kept in force and other protection and preservation expenses have been paid by
the Master Servicer. It is anticipated that aggregate claims under the Special
Hazard Insurance Policy will be limited to a maximum of % of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date or _____ the
unpaid principal balance of the largest Mortgage Loan as of the Cut-off Date,
whichever is greater. The required amount of coverage provided by the Special
Hazard Insurance Policy will be established by in connection with its
rating of the Certificates and may differ from the amount described herein.
Subject to the foregoing limitations, the Special Hazard Insurance Policy
will provide that, where there has been damage to property securing a foreclosed
Mortgage Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the Primary Hazard Insurance Policy or
flood insurance policy, if any, maintained by the mortgagor or the Master
Servicer, the insurer will pay the lesser of (i) the cost of repair or
replacement of such 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 such property by foreclosure or deed in lieu of foreclosure, plus
accrued interest at the Mortgage Rate to the date of claim settlement and
certain expenses incurred by the Master Servicer with respect to such property.
If the unpaid principal balance plus accrued interest and certain expenses is
paid by the insurer, the amount of further coverage under the Special Hazard
Insurance Policy will be reduced by such amount less any net proceeds from the
sale of the property. Any amount paid as the cost of repair of the property will
further reduce coverage by such amount.
If the Special Hazard Insurance Policy is cancelled or terminated for any
reason other than the exhaustion of the coverage thereunder, the Master Servicer
will use its best reasonable efforts to obtain a comparable policy from an
insurer that is acceptable to in connection with its rating of the
Certificates. The replacement policy will provide coverage in an amount equal to
the then remaining coverage amount of the Special Hazard Insurance Policy;
provided, however, that if the premium cost of the replacement policy exceeds
the premium cost of the Special Hazard Insurance Policy, the coverage amount of
the replacement policy will be reduced so that the premium cost therefor will
not exceed the premium cost of the Special Hazard Insurance Policy.
[Describe Special Hazard Insurer]
COVERAGE IN RESPECT OF CERTAIN ADDITIONAL LOSSES AND SHORTFALLS. In the
event of a personal bankruptcy of a mortgagor, the bankruptcy court may
establish the value of the Mortgaged Property at an amount less than the then
outstanding principal balance of the Mortgage Loan secured by such Mortgaged
Property (a "Deficient Valuation"). The amount of the secured debt could be
reduced to such value, and the holder of such Mortgage Loan thus would become an
unsecured creditor to the extent that the outstanding principal balance of such
Mortgage Loan exceeds the value so assigned to the Mortgaged Property by the
bankruptcy court. In addition, certain other modifications of the terms of a
Mortgage Loan can result in connection with
S-16
<PAGE>
a bankruptcy proceeding, including the reduction of the amount of the monthly
payment on the related Mortgage Loan (a "Debt Service Reduction"). See "Certain
Legal Aspects of Mortgage Loans" in the Prospectus.
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a mortgagor who enters military service
after the origination of such mortgagor's Mortgage Loan (including a mortgagor
who was in reserve status and is called to active duty after origination of the
Mortgage Loan), shall not be charged interest (including fees and charges) above
an annual rate of 6% during the period of such mortgagor's active duty status,
unless a court orders otherwise upon application of the lender. The Relief Act
applies to mortgagors 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
mortgagors who enter military service (including reservists who are called to
active duty) after origination of the related Mortgage Loan, no information can
be provided as to the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of the Master Servicer to collect full amounts of
interest on certain of the Mortgage Loans. In addition, the Relief Act imposes
limitations that would impair the ability of the Master Servicer to foreclose on
an affected Mortgage Loan during the mortgagor's period of active duty status,
and under certain circumstances, during an additional three months thereafter.
Thus, in the event that such a Mortgage Loan goes into default, there may be
delays and losses occasioned by the inability to realize upon the Mortgaged
Property in a timely fashion.
Pursuant to the Pooling and Servicing Agreement, [Mortgage Loan Seller]
will provide credit support in an amount acceptable to in
connection with its rating of the Certificates to cover Deficient Valuations,
Debt Service Reductions and shortfalls in collections of interest payments due
to application of the Relief Act. Such credit support may be in the form of
funds deposited into a separate account, a letter of credit, a mortgagor
bankruptcy bond or another method acceptable to . Any such
losses and shortfalls not covered by such credit support, or in excess of the
amount of such credit support, will be borne by Certificateholders.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, a form of which is filed as an exhibit to the Registration Statement.
A Form 8-K relating to the Certificates containing a copy of the Agreement as
executed will be filed with the Securities and Exchange Commission within
fifteen days of initial issuance of the Certificates. The Trust Fund created
under the Agreement will consist of (i) the Mortgage Loans, (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 REO Properties and any revenues
received thereon, (iv) the rights of the Trustee under all insurance policies
required to be maintained pursuant to the Agreement and (v) the rights of the
Depositor under the Mortgage Loan Purchase Agreement between the Depositor and
the Mortgage Loan Seller. Reference is made to the Prospectus for important
information in addition to that set forth herein regarding the Trust Fund, the
terms and conditions of the Pooling and Servicing Agreement and the
Certificates. The Certificates will be transferable and exchangeable at the
corporate trust offices of the Trustee, located in
and at the offices of its agent in New York, New York. The Trustee will serve as
Certificate Registrar. The Depositor will provide to a prospective or actual
Certificateholder without charge, on written request, a copy (without exhibits)
of the Pooling and Servicing Agreement. Requests should be addressed to the
Secretary, Salomon Brothers Mortgage Securities VII, Inc., Seven World Trade
Center, New York, New York 10048.
ASSIGNMENT OF THE MORTGAGE LOANS
The Depositor will deliver to the Trustee with respect to each Mortgage
Loan (i) the mortgage note endorsed without recourse to the Trustee by the
Mortgage Loan Seller to reflect the transfer of the Mortgage Loan to the Trust
Fund, (ii) the original mortgage with evidence of recording indicated thereon,
promptly after receipt thereof from the applicable recorder's office, and (iii)
an assignment of the mortgage in recordable form from the Mortgage Loan Seller
to the Trustee, reflecting the transfer of the Mortgage Loan to the Trust Fund.
The assignments of mortgage are required to be recorded by the Master Servicer
in the appropriate
S-17
<PAGE>
public offices for real property records, except with respect to Mortgage Loans
secured by Mortgaged Properties located in states where, in the opinion of
counsel acceptable to the Trustee, such recording is not necessary to protect
the interest of the Trustee in such Mortgage Loans. The above procedures are
intended to protect the interests of the Certificateholders; however, the
Mortgage Loan Seller, in its capacity as Master Servicer, will have access to
the Mortgage Loan files. In the event that the Mortgage Loan Seller transfers a
mortgage note secured by a Mortgaged Property located in any state where an
assignment of mortgage has not been recorded and assigns the related mortgage to
a bona fide purchaser for value without notice of the rights of the
Certificateholders, the rights of the Trust Fund in the related Mortgage Loan
may be adversely affected.
COLLECTION ACCOUNT AND DISTRIBUTION ACCOUNT
The Certificate Account for the Certificates is comprised of two separate
accounts. The Master Servicer is required to deposit all amounts received with
respect to the Mortgage Loans, net of its servicing compensation, into an
account held for the benefit of Certificateholders (the "Collection Account").
As described under "Description of the Certificates--P&I Advances" herein,
amounts on deposit in the Collection Account may under certain circumstances be
applied by the Master Servicer toward the making of any required P&I Advances of
delinquent Mortgage Loan payments or toward reimbursement of P&I Advances
previously made by it. On or before the second business day immediately
preceding each Distribution Date, the Master Servicer will withdraw the
Available Distribution Amount for such Distribution Date from the Collection
Account and deliver such amount to the Trustee for deposit into an account
maintained by the Trustee for the benefit of the Certificateholders (the
"Distribution Account"). The Master Servicer will be entitled to all interest or
other income earned on amounts held in the Collection Account and the
Distribution Account (which may be invested in Permitted Investments, as defined
in the Prospectus).
THE MASTER SERVICER
will act as Master Servicer (in such capacity, the
"Master Servicer") for the Certificates pursuant to the Pooling and Servicing
Agreement. The Master Servicer is a
The executive offices of the Master Servicer are located at
, telephone number ( )
The following table presents information on the Master Servicer's portfolio
of loans secured by one- to four- family residences, including both loans owned
and serviced by the Master Servicer and mortgage loans serviced for others,
setting forth the number and principal balance of such mortgage loans. As of
, of these loans, approximately $ in principal amount were
owned by the Master Servicer and approximately $ in principal amount
were owned by other entities. The table also presents loss (recovery/gain)
experience for the portfolio of mortgage loans owned in whole or in part by the
Master Servicer. There can be no assurance that the loss (recovery/gain)
experience will continue.
<TABLE>
<CAPTION>
Years Ended December 31, Quarters Ended
------------------------------------------- -----------------------------
1993 1992 1991 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total portfolio principal balance............ $ $ $ $ $
Total portfolio principal loans (number of
loans).....................................
Loss (recovery/gain) experience:
Loan charge-offs, net of (recoveries)... $ $ $ $ $
Loss (gains) on sales of foreclosed
properties............................ $ $ $ $ $
------------- ------------ ------------ ------------- -------------
Total................................... $ $ $ $ $
============= ============ ============ ============= =============
</TABLE>
S-18
<PAGE>
The following table indicates the Master Servicer's delinquency experience
as of the dates indicated, expressed as a percentage of the total number of
mortgage loans secured by one- to four- family residences in its combined
portfolio of loans owned by the Master Servicer and loans serviced for others.
The percentages expressed below include mortgage loans in the process of
foreclosure.
<TABLE>
<CAPTION>
Number of
Number of Mortgage Loans Mortgage Loans
(% of Total Portfolio) (% of Total Portfolio)
As of December 31, As of ,
-------------------------------------------- --------------------------------
1993 1992 1991 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of days delinquent
30-59..................................... % % % % %
60-89..................................... % % % % %
90 or more................................ % % % % %
In foreclosure............................ % % % % %
------------- ------------ ------------ -------------- ---------------
Subtotal.................................. % % % % %
Second Mortgages.......................... % % % % %
------------- ------------ ------------ -------------- ---------------
Total..................................... % % % % %
============= ============ ============ ============== ===============
</TABLE>
The following table indicates the Master Servicer's delinquency experience
as of the dates indicated, expressed as a percentage by aggregate principal
amount of the mortgage loans secured by one- to four- family residences in its
combined portfolio of loans owned by the Master Servicer and loans serviced for
others.
<TABLE>
<CAPTION>
Dollar Amount of
Dollar Amount of Mortgage Loans Mortgage Loans (%
60 or More Days Delinquent (% of Total Portfolio) of Total Portfolio)
(or in Foreclosure) As of December 31, As of ,
- -------------------------------------- ----------------------------------------------- --------------------------------
1993 1992 1991 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
First mortgages....................... % % % % %
Second mortgages...................... % % % % %
</TABLE>
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect of
its master servicing activities for the Certificates will be equal to accrued
interest at the Servicing Fee Rate on the Scheduled Principal Balance of each
Mortgage Loan in the Mortgage Pool. The Servicing Fee Rate as to each Mortgage
Loan is equal to approximately % per annum. As additional servicing
compensation, the Master Servicer is entitled to retain all assumption fees,
prepayment penalties and late payment charges, to the extent collected from
mortgagors, together with any interest or other income earned on funds held in
the Certificate Account and any escrow accounts. The Master Servicer's servicing
compensation in excess of its Minimum Servicing Compensation is subject to
reduction in any month to cover Interest Shortfalls resulting from principal
prepayments in full or in part. The Minimum Servicing Compensation in respect of
any Due Period is equal to approximately one twelfth of % times the
Scheduled Principal Balance of each outstanding Mortgage Loan. See "Yield on the
Certificates" herein. The Master Servicer is obligated to pay
S-19
<PAGE>
certain insurance premiums, including without limitation premiums on the
Mortgage Pool Insurance Policy and Special Hazard Insurance Policy, and certain
ongoing expenses, including without limitation compensation of the Trustee,
associated with the Mortgage Pool and incurred by the Master Servicer in
connection with its responsibilities under the Pooling and Servicing Agreement.
See "Description of the Certificates-- Retained Interest; Servicing Compensation
and Payment of Expenses" in the Prospectus for information regarding expenses
payable by the Master Servicer.
The Master Servicer will be required to take all action necessary to
present claims under any insurance policies to the applicable insurer on behalf
of the Trustee and the Certificateholders. If the Master Servicer undertakes
litigation or retains outside attorneys or investigators, the costs thereof will
be borne by the Trust Fund. The Master Servicer will not be required to advance
funds for the conduct of such litigation or the hiring of such outside attorneys
or investigators if the Master Servicer reasonably believes that such advances
will not be promptly reimbursed.
THE TRUSTEE
, a national banking association, will act as Trustee
for the Certificates pursuant to the Pooling and Servicing Agreement. The
Trustee's principal executive offices with respect to the Pooling and Servicing
Agreement are located at
and its telephone number is .
VOTING RIGHTS
At all times, all Voting Rights will be allocated among all holders of the
Certificates in proportion to the then outstanding Certificate Principal
Balances of their respective Certificates.
TERMINATION
The circumstances under which the obligations created by the Pooling and
Servicing Agreement will terminate in respect of the Certificates are described
in "Description of the Certificates-- Termination" in the Prospectus. The Master
Servicer will have the right to purchase all remaining Mortgage Loans and any
REO Properties in the Mortgage Pool and thereby effect early retirement of the
Certificates, once the aggregate principal balance of the Mortgage Loans and any
REO Properties at the time of purchase is less than 10% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date. In the event the
Master Servicer exercises such option, the purchase price distributed with
respect to each Certificate will be 100% of its then outstanding Certificate
Principal Balance plus thirty days' interest thereon at the applicable Variable
Pass-Through Rate plus any previously unpaid interest thereon. In no event will
the trust created by the Pooling and Servicing Agreement for the Certificates
continue beyond the expiration of 21 years from the death of the survivor of the
person or persons named in the Pooling and Servicing Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Trust Fund will be classified as a
grantor trust and not as an association that is taxable as a corporation. No
election will be made to treat the Trust Fund as a real estate mortgage
investment conduit for federal income tax purposes. The Certificates will be
treated as assets described in Section 7701(a) (19) (C) of the Internal Revenue
Code of 1986 (the "Code"), "qualifying real property loans" under Section 593(d)
of the Code, "obligation[s] (including any participation or certificate of
beneficial ownership therein) that [are] principally secured by an interest in
real property" under Section 860G(a) (3) (A) of the Code, "real estate assets"
under
S-20
<PAGE>
Section 856 (c) (5) (A) of the Code, and the interest thereon will be treated as
"interest on obligations secured by mortgages on real property" under Section
856(c) (3) (B) of the Code.
It is anticipated that interest income will be reported to the Internal
Revenue Service and to Certificateholders in accordance with the Mortgage Rate
on each Mortgage Loan. However, because the Mortgage Rates on the Mortgage Loans
are initially less than the sum of the related Index and the related Gross
Margin, rounded as described herein, the Mortgage Loans may be treated as having
been issued with original issue discount. Although not entirely certain, the
rules of the Code relating to original issue discount would apply to a Mortgage
Loan by assuming that such Mortgage Loan bears interest in each period after its
origination at the rate such Mortgage Loan would bear in such period if the
Index remained constant over the life of such Mortgage Loan at its value as of
the date of its origination. Applying this assumption would effectively convert
such Mortgage Loan to a fixed rate debt instrument to which the rules described
in the Prospectus under the heading "Taxation of Owners of Grantor Trust
Fractional Interest Certificates--If Stripped Bond Rules Do Not Apply" could be
applied. The application of these rules would require the amount of interest
income (including original issue discount) reported with respect to the Mortgage
Loans to be greater than the interest accrued and paid at the Variable
Pass-Through Rate, until the accrual period in which the Mortgage Rates on the
Mortgage Loans, assuming the Index on the respective origination dates remained
constant, would first have reached the sum of the Index and the related Gross
Margin, rounded as described herein. If interest actually distributed with
respect to an accrual period differed from the amount of interest that would
have been distributed at the assumed rate, an adjustment would be made in the
income of such period to reflect such difference.
An insignificant percentage of the Mortgage Loans were originated before
July 18, 1984, which Mortgage Loans will not be eligible for exemption from U.S.
withholding tax. See "Certain Federal Income Tax Consequences--Grantor Trust
Funds--Foreign Investors" in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences" in
the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated , 199_ (the "Underwriting Agreement"), the Depositor
has agreed to sell and Salomon Smith Barney Inc. (the "Underwriter"), an
affiliate of the Depositor, has agreed to purchase the classes of Certificates
offered by this Prospectus Supplement. The Underwriter is obligated to purchase
all classes of Certificates offered by this Prospectus Supplement if it
purchases any.
Distribution of the 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 Certificates,
before deducting expenses payable by the Depositor, will be % of the
aggregate initial Certificate Principal Balance of the Certificates, plus
accrued interest thereon at the initial Variable Pass-Through Rate from the
Cut-off Date. In connection with the purchase and sale of the Certificates, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended, or will contribute to payments the
Underwriter may be required to make in respect thereof.
S-21
<PAGE>
There can be no assurance that a secondary market for the Certificates will
develop or, if it does develop, that it will continue. The primary source of
information available to investors concerning the Certificates will be the
monthly statements discussed in the Prospectus under "Description of the
Certificates--Reports to Certificateholders", which will include information as
to the outstanding principal balance of the Certificates and the status of the
applicable form of credit enhancement. There can be no assurance that any
additional information regarding the Certificates will be available through any
other source. In addition, the Depositor is not aware of any source through
which price information about the Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Certificates
may adversely affect the liquidity of the Certificates, even if a secondary
market for the Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon for
the Depositor and the Underwriter by Thacher Proffitt & Wood, New York, New
York.
RATING
It is a condition to the issuance of the Certificates that the Certificates
be rated not lower than by .
The ratings of on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions on the
underlying mortgage loans to which they are entitled. rating opinions
address the structural, legal and issuer-related aspects associated with the
certificates, including the nature of the underlying mortgage loans.
ratings on pass-through certificates do not represent any assessment of the
likelihood or the rate of principal prepayments. The rating does not address the
possibility that Certificateholders might suffer a lower than anticipated yield.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
LEGAL INVESTMENT
The Certificates will constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") for so long
as they are rated as described herein and, as such, will be legal investments
for certain entities to the extent provided in SMMEA. SMMEA, however, provides
for state limitation on the authority of such entities to invest in "mortgage
related securities" provided that such restrictive legislation was enacted prior
to October 3, 1992. Certain states have enacted legislation which overrides the
preemption provisions of SMMEA. Institutions whose investment activities are
subject to legal investment laws and regulations or to review by certain
regulatory authorities may be subject to restrictions on investment in the
Certificates. The Federal Financial Institutions Examination Council, which
includes the Board of Governors of the Federal Reserve System (the "FRB"), the
Federal Deposit Insurance Corporation (the "FDIC"), the National Credit Union
Administration (the "NCUA"), the Comptroller of the Currency (the "OCC") and the
Office of Thrift Supervision (the "OTS"), has issued a supervisory policy
statement (the "Policy Statement") that is applicable to all depository
institutions (to the extent adopted by their respective federal regulators),
setting forth guidelines for and imposing significant restrictions on
investments in "high-risk mortgage securities". The Policy Statement generally
indicates that a mortgage derivative product will be deemed to be high-risk if
S-22
<PAGE>
it exhibits greater price volatility than a benchmark fixed-rate thirty-year
mortgage backed pass-through security. According to the Policy Statement, prior
to purchase, a depository institution would be required to determine whether a
mortgage derivative product that it is considering acquiring is high-risk, and
if so that the proposed acquisition would reduce the institution's overall
interest rate risk. Reliance on analysis and documentation obtained from a
securities dealer or other outside party without internal analysis by the
institution would be unacceptable, and a failure to adhere to the monitoring,
reporting and diligence requirements would be considered an unsafe and unsound
practice. There can be no assurance as to whether the Certificates would be
treated as high-risk under the Policy Statement. The Policy Statement has been
adopted by the FRB, the FDIC, the OCC and the OTS with an effective date of
February 10, 1993, and may be considered by the NCUA at a later date.
A predecessor to the OTS, the Office of Regulatory Activities of the
Federal Home Loan Bank System, 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. In addition, the NCUA has issued regulations governing federal
credit union investments which prohibit investment in certain specified types of
securities. In the event the NCUA adopts the Policy Statement, it is likely that
the regulations issued by the NCUA will take precedence in the event of a
conflict with the Policy Statement. Similar policy statements and regulations
have been issued by other regulators having jurisdiction over other types of
depository institutions. Any such institution should consult its own legal
advisors in determining whether and to what extent there may be restrictions on
its ability to invest in the Certificates. See "Legal Investment" in the
Prospectus.
S-23
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus Supplement or the Prospectus in connection with the offer made by
this Prospectus Supplement and the Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by any of the Underwriters. Neither the delivery of this Prospectus nor any sale
made hereunder shall under any circumstances create any implication that there
has been no change since the date hereof. This Prospectus Supplement and the
Prospectus do not constitute an offer or solicitation by anyone in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so or to
anyone to whom it is unlawful to make such solicitation.
----------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Summary of Prospectus Supplement.........................................S-
The Mortgage Pool........................................................S-
Yield on the Certificates................................................S-
Description of the Certificates..........................................S-
Pooling and Servicing Agreement..........................................S-
Certain Federal Income Tax Consequences..................................S-
Method of Distribution...................................................S-
Legal Opinions...........................................................S-
Rating...................................................................S-
Legal Investment.........................................................S-
PROSPECTUS
Summary of Prospectus....................................................
The Mortgage Pools.......................................................
Use of Proceeds..........................................................
Yield Considerations.....................................................
Maturity and Prepayment Considerations...................................
The Depositor............................................................
Mortgage Loan Program....................................................
Description of the Certificates..........................................
Description of Credit Support............................................
Description of Primary Insurance Policies................................
Certain Legal Aspects of Mortgage Loans..................................
Certain Federal Income Tax Consequences..................................
ERISA Considerations.....................................................
Legal Investment.........................................................
Methods of Distribution..................................................
Legal Matters............................................................
Financial Information....................................................
Index of Principal Definitions...........................................
----------
Until _________________, 199_, all dealers effecting transactions in the
Certificates, whether or not participating in this distribution, may be required
to deliver a Prospectus Supplement and the Prospectus to which it relates. This
delivery requirement is in addition to the obligation of dealers to deliver a
Prospectus Supplement and Prospectus when acting as Underwriters and with
respect to their unsold allotments or subscriptions.
$ (APPROXIMATE)
MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 199_-
SALOMON BROTHERS MORTGAGE
SECURITIES VII, INC.
DEPOSITOR
MASTER SERVICER
------------------------------------
SALOMON SMITH BARNEY
--------------------------------------------------
Prospectus Supplement
Dated , 199_.
================================================================================
<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 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 SEPTEMBER 2, 1998
[Version 3]
PROSPECTUS SUPPLEMENT
(To Prospectus dated ______, 199_)
$____________ (Approximate)
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
(Depositor)
[MASTER SERVICER]
Master Servicer
Mortgage Pass-Through Certificates
Series 199_-_, Class A
Variable Pass-Through Rate
The Series 199_-_ Mortgage Pass-Through Certificates (the
"Certificates") will represent beneficial ownership interests in a trust fund
(the "Trust Fund") to be created by Salomon Brothers Mortgage Securities VII,
Inc. (the "Depositor"). The Trust Fund will consist primarily of a pool (the
"Mortgage Pool") of conventional, [adjustable-rate] mortgage loans, with terms
to maturity of not more than ___ years (the "Mortgage Loans"), secured by
[first] [first and junior] liens on [multifamily][commercial] properties. The
Mortgage Loans were originated or acquired by ________________ (the "Mortgage
Asset Seller") and will be sold to the Depositor on or prior to the date of
initial issuance of the Certificates.
The Certificates will consist of four classes of Certificates,
designated as the Class A Certificates, Class B Certificates, Class C
Certificates and Class R Certificates (the Class B, Class C and Class R
Certificates, collectively, the "Subordinate Certificates"). The Class A
Certificates will evidence approximately an initial __% undivided interest in
the Trust Fund and the Subordinate Certificates, in the aggregate, will evidence
approximately an initial __% undivided interest in the Trust Fund. Only the
Class A Certificates are being offered hereby.
[As more fully described herein, each Mortgage Loan provides for
periodic adjustments (which may occur monthly, quarterly, semi-annually or
annually) of the mortgage interest rate (the "Mortgage Rate") thereon and the
monthly payment due thereon, in each case subject to the limitations described
herein. Accordingly, a significant increase in the Mortgage Rate and the amount
of the scheduled monthly payment due thereafter may result, which may increase
the likelihood of default on and prepayment of such Mortgage Loan. In most
cases, because the Mortgage Rate on a Mortgage Loan will be subject to
adjustment monthly, while the monthly payment due thereon will be subject to
adjustment annually, in each case subject to the limitations described herein,
and because the application of payment caps limits adjustments to the monthly
payments on certain Mortgage Loans, the Mortgage Loans (and consequently the
Class A Certificates) may be subject to accelerated, reduced or negative
amortization. Certain of the Mortgage Loans continue to be in an initial fixed
interest rate period and have not experienced the first adjustment to their
respective Mortgage Rates.] The characteristics of the Mortgage Loans are more
fully described herein under "Description of the Mortgage Pool".
Distributions on the Class A Certificates will be made, to the extent
of available funds, on the 25th day of each month or, if any such day is not a
business day, on the next succeeding business day, beginning in __________
(each, a "Distribution Date"). As more fully described herein, distributions
allocable to interest on the Class A Certificates on each Distribution Date will
be based on the then-applicable variable pass-through rate (the "Pass-Through
Rate") and the aggregate principal balance (the "Certificate Balance") of such
class outstanding immediately prior to such Distribution Date. The Pass-Through
Rate applicable to the Class A Certificates from
<PAGE>
time to time will equal the weighted average of the Class A Remittance Rates (as
defined herein) on the Mortgage Loans. The Pass-Through Rate for the Class A
Certificates on the first Distribution Date will be ____% per annum and is
expected to change thereafter because the weighted average of the Class A
Remittance Rates is expected to change for succeeding Distribution Dates.
Distributions in respect of principal of the Class A Certificates will be made
as described herein under "Description of the
Certificates-Distributions-Priority" and "-Calculations of Principal".
______________ will act as master servicer of the Mortgage Loans (the
"Master Servicer"). The obligations of the Master Servicer with respect to the
Certificates will be limited to its contractual servicing obligations and the
obligation under certain circumstances to make Advances to the
Certificateholders. If the Master Servicer fails to make any such Advance or
otherwise fails to perform its servicing obligations, the Trustee will be
obligated to assume such servicing obligations and to make such Advance to the
extent described herein. See "Description of the Certificates-Advances" herein.
The only obligation of the Depositor with respect to the Certificates will be to
obtain from the Mortgage Asset Seller certain representations and warranties
with respect to the Mortgage Loans and to assign to the Trustee the obligation
of the Mortgage Asset Seller to repurchase or substitute for any Mortgage Loan
as to which there exists an uncured material breach of any such representation
or warranty.
------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
CLASS A CERTIFICATES. THE CLASS A CERTIFICATES DO NOT REPRESENT AN INTEREST IN
OR OBLIGATION OF THE DEPOSITOR, THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE CLASS A CERTIFICATES NOR THE MORTGAGE LOANS
ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY
THE DEPOSITOR, THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR AFFILIATES.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.]
------------------
It is a condition of the issuance of the Class A Certificates that they
be rated [not lower than] "____________" by _______________.
An election will be made to treat the Trust Fund as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. The
Class A Certificates will constitute "regular interests" in the REMIC. See
"Certain Federal Income Tax Consequences" herein and in the Prospectus.
The yield to maturity on the Class A Certificates will depend on the
rate and timing of principal payments (including prepayments, defaults and
liquidations) on the Mortgage Loans. See "Special Considerations" herein and
"Special Considerations-Average Life of Certificates; Prepayments; Yields" and
"Yield Considerations" in the Prospectus. As further described herein, losses on
the Mortgage Loans will be allocated to the Subordinate Certificates prior to
allocation to the Class A Certificates. See "Description of the
Certificates-Distributions-Priority" herein.
-ii-
<PAGE>
There is currently no secondary market for the Class A Certificates.
Salomon Smith Barney Inc. (the "Underwriter"), through one or more of its
affiliates, currently expects to make a secondary market in the Class A
Certificates, but has no obligation to do so. There can be no assurance that
such a market will develop or, if it does develop, that it will continue. See
"Secondary Market" herein.
<TABLE>
<CAPTION>
=============================================================================================================================
INITIAL CERTIFICATE PRICE TO UNDERWRITING PROCEEDS TO
PRINCIPAL PUBLIC(2) DISCOUNT DEPOSITOR(2)(3)
AMOUNT(1)
<S> <C> <C> <C> <C>
Class A......................... $__________ $__________ $__________ $__________
=============================================================================================================================
</TABLE>
(1) Subject to a permitted variance of plus or minus ___%.
(2) Plus accrued interest from ________ 1, 199__.
(3) Before deducting expenses payable by the Depositor estimated at
$____________. --------------------
The Class A Certificates will be purchased by the Underwriter from the
Depositor. The Class A Certificates are offered subject to receipt and
acceptance by the Underwriter, to prior sale and to the Underwriter's right to
reject any order in whole or in part, and to withdraw, cancel or modify the
offer without notice. It is expected that delivery of the Class A Certificates
will be made at the offices of Salomon Smith Barney Inc., Seven World Trade
Center, New York, New York 10048 on or about _________________, 199_.
THE CLASS A CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT
CONSTITUTE PART OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR AND
ARE BEING OFFERED PURSUANT TO ITS PROSPECTUS DATED _________, 199_, OF WHICH
THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS
SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS
OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO
READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE CLASS A
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL _________, 199__, ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS
A CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT
RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ---------------------------
SALOMON SMITH BARNEY
--------------------------------------------------------------------------
The date of this Prospectus Supplement is
________________, 199__
-iii-
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY ARE
DEFINED ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT OR IN THE
PROSPECTUS.
Title of Certificates.................Salomon Brothers Mortgage Securities VII,
Inc., Mortgage Pass-Through Certificates,
Series 199_-_, Variable Pass- Through Rate
(the "Certificates").
Depositor.............................Salomon Brothers Mortgage Securities VII,
Inc., a Delaware corporation and an
indirect wholly-owned subsidiary of
Salomon Smith Barney Holdings Inc. and an
affiliate of Salomon Smith Barney Inc.
(the "Underwriter"). See "The Depositor"
in the Prospectus.
Master Servicer.......................________________________, a
____________________. See "Pooling and
Servicing Agreement-The Master Servicer"
herein.
Trustee...............................____________, a
____________________________.
Cut-off Date..........................____________ 1, 199_.
Delivery Date.........................____________ 1, 199_.
Denominations.........................The Class A Certificates will be issuable
in registered form, in denominations of
$_________ and integral multiples of
$_____ in excess thereof[, with one
Certificate of such class evidencing an
additional amount equal to the remainder
of the Certificate Balance thereof].
The Mortgage Pool.....................The Mortgage Pool will consist of __
conventional, adjustable rate Mortgage
Loans secured by [first] [first and
junior] liens on [multifamily][commercial]
properties (the "Mortgaged Properties")
located in __ different states. The
Mortgage Loans will have an aggregate
principal balance as of the Cut- off Date
of $___________ and individual principal
balances at origination of at least
$__________ but not more than $__________,
with an average principal balance at
origination of approximately $_______.
[___ of the Mortgage Loans, representing
___% of the Mortgage Loans by aggregate
principal balance as of the Cut-off Date,
are secured by a junior mortgage lien.]
The Mortgage Loans will have terms to
maturity from the date of origination or
modification of not more than ___ years,
and a weighted average remaining term to
maturity of approximately ___ months as of
the Cut-off Date. As of the Cut-off Date,
the Mortgage Loans will bear interest at
Mortgage Rates ranging from ___% per annum
to ___% per annum, with a weighted average
Mortgage Rate of approximately ___% per
annum.
___ of the Mortgage Loans, representing
_____% of the Mortgage Loans by aggregate
principal balance as of the Cutoff Date,
provide for scheduled payments of
principal and/or interest ("Monthly
Payments") to be due on the first day of
each month; the remainder of the Mortgage
Loans
S-1
<PAGE>
provide for Monthly Payments to be due on
the 5th, 10th or 15th day of each month
(the date in any month on which a Monthly
Payment on a Mortgage Loan is first due,
the "Due Date"). [The rate per annum at
which interest accrues on each Mortgage
Loan is subject to adjustment on specified
Due Dates (each such date, an "Interest
Rate Adjustment Date") by adding a fixed
percentage amount (a "Gross Margin") to
the value of the then-applicable Index (as
described below) subject, in the case of
substantially all of the Mortgage Loans,
to maximum and minimum lifetime Mortgage
Rates as described herein. __ of the
Mortgage Loans, representing _____% of the
Mortgage Loans by aggregate principal
balance as of the Cut-off Date, provide
for Interest Rate Adjustment Dates to
occur monthly; the remainder of the
Mortgage Loans provide for adjustments to
the Mortgage Rate to occur quarterly,
semi-annually or annually. Each of the
Mortgage Loans provides for an initial
fixed interest rate period; _____ of the
Mortgage Loans, representing _____% of the
Mortgage Loans by aggregate principal
balance as of the Cut-off Date, have not
yet experienced their first Interest Rate
Adjustment Date. The latest initial
Interest Rate Adjustment Date for any
Mortgage Loan is scheduled to occur on
_________________.]
[The amount of the Monthly Payment on each
Mortgage Loan is also subject to
adjustment on specified Due Dates (each
such date, a "Payment Adjustment Date") to
an amount that would amortize the
outstanding principal balance of the
Mortgage Loan over its then remaining
amortization schedule and pay interest at
the applicable Mortgage Rate, subject, in
the case of several Mortgage Loans, to
payment caps, which limit the amount by
which the Monthly Payment may adjust on
any Payment Adjustment Date as described
herein. __ of the Mortgage Loans,
representing _____% of the Mortgage Loans
(by aggregate principal balance as of the
Cut-off Date, provide for Payment
Adjustment Dates to occur annually, while
the remainder of the Mortgage Loans
provide for adjustments of the Monthly
Payment to occur monthly, quarterly or
semi-annually.]
[__ Mortgage Loans, representing _____% of
the Mortgage Loans by aggregate principal
balance as of the Cut-off Date, permit
negative amortization. Substantially all
of the Mortgage Loans that permit negative
amortization contain provisions that limit
the extent to which the amount of their
respective original principal balances may
be exceeded as a result thereof. For a
further description of yield
considerations in connection with an
investment in negative amortizing mortgage
loans, see "Effect of Prepayments [and
Negative Amortization] on Investment
Expectations" in the Summary, "Special
Considerations-Adjustable Rate Mortgage
Loans; Negative Amortization" and "Certain
Yield, Prepayment and
S-2
<PAGE>
Maturity Considerations" herein and "Yield
Considerations" in the Prospectus.]
[All of the Mortgage Loans provide for
monthly payments of principal based on
amortization schedules significantly
longer than the remaining term of such
Mortgage Loans, thereby leaving
substantial outstanding principal amounts
due and payable (each such payment, a
"Balloon Payment") on their respective
maturity dates, unless prepaid prior
thereto. See "Special
Considerations-Balloon Payments" herein.]
For a further description of the Mortgage
Loans, see "Description of the Mortgage
Pool" herein.
[The Index............................As of any Interest Rate Adjustment Date,
the Index used to determine the Mortgage
Rate on each Mortgage Loan will be the
__________________________________. See
"Description of the Mortgage Pool-The
Index" herein.]
The Class A Certificates..............The Certificates will be issued pursuant
to a Pooling and Servicing Agreement, to
be dated as of the Cut-off Date, among the
Depositor, the Master Servicer and the
Trustee (the "Pooling and Servicing
Agreement"). The Certificates will consist
of Class A Certificates, Class B
Certificates, Class C Certificates and
Class R Certificates. The Class A
Certificates represent a type of interest
referred to in the Prospectus as "Senior
Certificates"; and the Class B, Class C
and Class R Certificates represent a type
of interest referred to in the Prospectus
as "Subordinated Certificates". As these
designations suggest, the Class A
Certificates are entitled to a certain
priority, relative to the Class B, Class C
and Class R Certificates, in right of
distributions on the Mortgage Loans. Only
the Class A Certificates are offered
hereby. The Class A Certificates have an
initial Certificate Balance of $__________
(the initial "Class A Balance"),
representing an initial interest of
approximately __% in a trust fund (the
"Trust Fund"), which will consist
primarily of the Mortgage Pool.
Distributions on the Certificates will be
made on the 25th day of each month or, if
such day is not a business day, on the
succeeding business day, beginning on
__________ 25, 199_ (each, a "Distribution
Date"). Distributions on each Distribution
Date will be made by check or wire
transfer of immediately available funds,
as provided in the Pooling and Servicing
Agreement, to the Certificateholders of
record as of the last business day of the
month preceding the month of such
Distribution Date (each, a "Record Date"),
except that the final distribution on the
Certificates will be made only upon
presentation and surrender of the
Certificates at the office or agency
specified in the Pooling and Servicing
Agreement. The relative interests in the
aggregate outstanding principal balance of
the Mortgage Loans represented by the
Class A, Class B and Class C Certificates
are subject to change over time because of
the
S-3
<PAGE>
disproportionate allocation of principal
payments to the Class A Certificates, the
allocation of negative amortization and
the allocation of certain losses and
certain shortfalls first to the
Subordinate Certificates, prior to the
allocation of such losses and shortfalls
to the Class A Certificates, as discussed
herein.
Pass-Through Rate on the
Class A Certificates................The Pass-Through Rate on the Class A
Certificates for any Distribution Date is
equal to the weighted average of the Class
A Remittance Rates in effect for the
Mortgage Loans as of the commencement of
the related Due Period. The Class A
Remittance Rate in effect for any Mortgage
Loan as of any date of determination (i)
prior to its first Interest Rate
Adjustment Date is equal to the related
Mortgage Rate then in effect minus __
basis points (the "Net Mortgage Rate") and
(ii) from and after its first Interest
Rate Adjustment Date is equal to the
related Mortgage Rate then in effect minus
the excess of the related Gross Margin
over ___ basis points.
Interest Distributions
on the Class A Certificates.........Holders of the Class A Certificates will
be entitled to receive on each
Distribution Date, to the extent of the
Available Distribution Amount for such
Distribution Date, distributions allocable
to interest in an aggregate amount (the
"Class A Interest Distribution Amount")
equal to thirty days' interest accrued on
the Class A Balance outstanding
immediately prior to such Distribution
Date at the then applicable Pass-Through
Rate, less the Class A Certificates'
allocable share (calculated as described
herein) of (i) the aggregate amount of
negative amortization in respect of the
Mortgage Loans for their respective Due
Dates occurring during the related Due
Period and (ii) the aggregate portion of
Prepayment Interest Shortfalls incurred
during the related Due Period that was not
covered by the application of the Master
Servicer's servicing compensation for the
related Due Period. The amount, if any, by
which the Class A Interest Distribution
Amount for any Distribution Date is
reduced as a result of negative
amortization on the Mortgage Loans shall
constitute the "Class Negative
Amortization" for such Distribution Date
in respect of the Class A Certificates and
shall be added to the Class A Balance on
such Distribution Date. If the Available
Distribution Amount for any Distribution
Date is less than the Class A Interest
Distribution Amount for such Distribution
Date, the shortfall will be part of the
Class A Interest Distribution Amount
distributable to holders of Class A
Certificates on subsequent Distribution
Dates, to the extent of available funds.
The Available Distribution Amount for any
Distribution Date generally includes: (i)
scheduled payments on the Mortgage Loans
due during or prior to the related Due
Period and collected as of the related
Determination Date (to the extent not
distributed on previous Distribution
Dates) and certain unscheduled payments
and other collections on the Mortgage
S-4
<PAGE>
Loans collected during the related Due
Period, net of amounts payable or
reimbursable to the Master Servicer
therefrom; (ii) any Advances made by the
Master Servicer for the related
Distribution Date; and (iii) that portion
of the Master Servicer's servicing
compensation for the related Due Period
applied to cover Prepayment Interest
Shortfalls incurred during the related Due
Period. See "Description of the
Certificates-Distributions-Calculations of
Interest" herein.
Principal Distributions
on the Class A
Certificates........................Holders of the Class A Certificates will
be entitled to receive on each
Distribution Date, to the extent of the
balance of the Available Distribution
Amount remaining after the payment of the
Class A Interest Distribution Amount for
such Distribution Date, distributions in
respect of principal in an amount (the
"Class A Principal Distribution Amount")
generally equal to the aggregate of (i)
the then Class A Scheduled Principal
Distribution Percentage (calculated as
described herein) of all scheduled
payments of principal (including the
principal portion of any Balloon Payments)
due on the Mortgage Loans during or, if
and to the extent not previously received
or advanced and distributed on prior
Distribution Dates, prior to the related
Due Period that were paid by the
mortgagors as of the related Determination
Date or advanced by the Master Servicer in
respect of such Distribution Date and (ii)
all principal prepayments and, to the
extent not previously advanced, any other
unscheduled principal recoveries received
during the related Due Period in respect
of the Mortgage Loans, whether in the form
of liquidation proceeds, insurance
proceeds, condemnation proceeds or amounts
received as a result of the purchase of
any Mortgage Loan out of the Trust Fund.
Distributions in respect of principal of
the Class A Certificates on any
Distribution Date shall be limited to the
sum of (i) the Class A Balance outstanding
immediately prior to such Distribution
Date and (ii) the Class Negative
Amortization, if any, for such
Distribution Date in respect of the Class
A Certificates. See "Description of the
Certificates-Distributions-Calculations of
Principal" herein.
Advances..............................The Master Servicer is required to make
advances ("Advances") in respect of
delinquent Monthly Payments on the
Mortgage Loans, subject to the limitations
described herein. The Trustee will be
obligated to make any such Advance if the
Master Servicer fails in its obligation to
do so, to the extent provided in the
Pooling and Servicing Agreement. See
"Description of the Certificates-Advances"
herein and "Description of the
Certificates-Advances in Respect of
Delinquencies" in the Prospectus.
Subordination.........................The rights of holders of the Subordinate
Certificates to receive distributions of
amounts collected on the Mortgage Loans
will be subordinated, to the extent
described herein, to the rights of holders
of the Class A Certificates. This
S-5
<PAGE>
subordination is intended to enhance the
likelihood of receipt by the holders of
the Class A Certificates of the full
amount of the Class A Interest
Distribution Amount and the [ultimate
receipt of principal equal to the initial
Class A Balance]. The protection afforded
to the holders of the Class A Certificates
by means of the subordination, to the
extent provided herein, will be
accomplished by the application of the
Available Distribution Amount to the Class
A Certificates prior to the application
thereof to the Subordinate Certificates.
See "Description of the
Certificates-Subordination" herein.
The Subordinate
Certificates........................The Class B Certificates have an initial
Certificate Balance of $__________ (the
initial "Class B Balance") and the Class C
Certificates have an initial Certificate
Balance of $_______ (the initial "Class C
Balance"), representing ___% and ----%,
respectively, of the Mortgage Loans by
aggregate principal balance as of the
Cut-off Date. Interest shall accrue on the
Class B Balance and Class C Balance at a
Pass-Through Rate equal to the weighted
average of the Net Mortgage Rates in
effect from time to time on the Mortgage
Loans.
The Class R Certificates, which have no
Pass-Through Rate and initially have a
Certificate Balance of $______ (the
initial "Class R Balance"), represent the
right to receive on any Distribution Date
the balance, if any, of the Available
Distribution Amount remaining after the
payment of all interest and principal due
on the other Classes of Certificates.
Subsequent to the first Distribution Date,
the Class R Balance will equal the excess,
if any, of the aggregate Stated Principal
Balance of the Mortgage Loans over the sum
of the Class A Balance, Class B Balance
and Class C Balance.
The Subordinate Certificates are not
offered hereby.
Optional Termination..................At its option, the Master Servicer may
purchase all of the Mortgage Loans, and
thereby effect termination of the Trust
Fund and early retirement of the then
outstanding Certificates, on any
Distribution Date on which the aggregate
Stated Principal Balance of the Mortgage
Loans remaining in the Trust Fund is less
than ___% of the aggregate principal
balance of such Mortgage Loans as of the
Cut-off Date. See "Pooling and Servicing
Agreement-Termination" herein and
"Description of the
Certificates-Termination" in the
Prospectus.
Effects of Prepayments [and
Negative Amortization] on
Investment Expectations.............The actual rate of prepayment of principal
on the Mortgage Loans cannot be predicted.
The investment performance of the Class A
Certificates may vary materially and
adversely from the investment expectations
of investors due to prepayments on the
Mortgage Loans being higher or lower than
anticipated by investors. The actual yield
to the holder
S-6
<PAGE>
of an Offered Certificate may not be equal
to the yield anticipated at the time of
purchase of the Certificate or,
notwithstanding that the actual yield is
equal to the yield anticipated at that
time, the total return on investment
expected by the investor or the expected
weighted average life of the Certificate
may not be realized. These effects are
summarized below. For a detailed
discussion of certain factors affecting
prepayment of the Mortgage Loans,
including the effect of Lock-out Periods
and Prepayment Premiums, see "Special
Considerations" and "Certain Yield,
Prepayment and Maturity Considerations"
herein and "Yield Considerations" in the
Prospectus. IN DECIDING WHETHER TO
PURCHASE ANY CLASS A CERTIFICATES, AN
INVESTOR SHOULD MAKE AN INDEPENDENT
DECISION AS TO THE APPROPRIATE PREPAYMENT
ASSUMPTIONS TO BE USED.
YIELD. If an investor purchases an Offered
Certificate at an amount equal to its
unpaid principal balance (that is, at
"par"), the effective yield to that
investor (assuming that there are no
interest shortfalls and assuming the full
return of the purchaser's invested
principal) will approximate the
pass-through rate on that Certificate. If
an investor pays less or more than the
unpaid principal balance of the
Certificate (that is, buys the Certificate
at a "discount" or "premium,"
respectively), then, based on the
assumptions set forth in the preceding
sentence, the effective yield to the
investor will be higher or lower,
respectively, than the pass-through rate
on that Certificate, because such discount
or premium will be amortized over the life
of the Certificate. Any deviation in the
actual rate of prepayments on the Mortgage
Loans from the rate assumed by the
investor will affect the period of time
over which, or the rate at which, the
discount or premium will be amortized and,
consequently, will change the investor's
actual yield from that anticipated. [With
respect to any Mortgage Loan that permits
negative amortization, the amount of a
Monthly Payment may be more or less than
the amount necessary to amortize the
remaining principal balance of the
Mortgage Loan over its then remaining
amortization schedule and pay interest at
the then-applicable Mortgage Rate.
Accordingly, such Mortgage Loans may be
subject to slower amortization (if the
Monthly Payment due on a Due Date is
sufficient to pay interest accrued to such
Due Date at the then-applicable Mortgage
Rate but is not sufficient to reduce
principal in accordance with the
applicable amortization schedule), to
negative amortization (if interest accrued
to a Due Date at the applicable Mortgage
Rate is greater than the entire Monthly
Payment due on such Due Date) or to
accelerated amortization (if the Monthly
Payment due on a Due Date is greater than
the amount necessary to pay interest
accrued to such Due Date at the
then-applicable Mortgage Rate and to
reduce principal in accordance with the
applicable amortization schedule).] An
investor that
S-7
<PAGE>
purchases a Class A Certificate at a
discount should carefully consider the
risk that a slower than anticipated rate
of principal payments on the Mortgage
Loans will result in an actual yield that
is lower than such investor's expected
yield. An investor that purchases any
Class A Certificate at a premium should
consider the risk that a faster than
anticipated rate of principal payments on
the Mortgage Loans will result in an
actual yield that is lower than such
investor's expected yield.
REINVESTMENT RISK. As stated above, if a
Certificate is purchased at par,
fluctuations in the rate of distributions
of principal will generally not affect the
yield to maturity of that Certificate.
However, the total return on any
purchaser's investment, including an
investor who purchases at par, will be
reduced to the extent that principal
distributions received on its Certificate
can not be reinvested at a rate as high as
the pass-through rate of the Certificate.
Investors in the Class A Certificates
should consider the risk that rapid rates
of prepayments on the Mortgage Loans may
coincide with periods of low prevailing
market interest rates may be relatively
large. Conversely, slow rates of
prepayments on the Mortgage Loans may
coincide with periods of high prevailing
market interest rates. During periods of
low prevailing market interest rates,
mortgagors may be expected to prepay or
refinance Mortgage Loans that carry
interest rates significantly higher than
then-current interest rates for mortgage
loans. Consequently, the amount of
principal distributions available to an
investor for reinvestment at such low
prevailing interest rates. During such
periods, it is less likely that mortgagors
will elect to prepay or refinance Mortgage
Loans and, therefore, the amount of
principal distributions available to an
investor for reinvestment at such high
prevailing interest rates may be
relatively small.
WEIGHTED AVERAGE LIFE VOLATILITY. One
indication of the impact of varying
prepayment rates on a security is the
change in its weighted average life. The
"weighted average life" of Class A
Certificate is the average amount of time
that will elapse between the date of
issuance of the Certificate and the date
on which each dollar in reduction of the
principal balance of the Certificate is
distributed to the investor. Low rates of
prepayment may result in the extension of
the weighted average life of a
Certificate; high rates, in the shortening
of such weighted average life. In general,
if the weighted average life of a
Certificate purchased at par is extended
beyond that initially anticipated, such
Certificate's market value may be
adversely affected even though the yield
to maturity on the Certificate is
unaffected. The weighted average lives of
the Class A Certificates, under various
prepayment scenarios, are displayed in the
tables appearing under the heading
"Certain Yield, Prepayment and Maturity
Considerations" herein.
S-8
<PAGE>
Certain Federal Income Tax
Consequences........................An election will be made to treat the
Trust Fund as a real estate mortgage
investment conduit ("REMIC") for federal
income tax purposes. Upon the issuance of
the Class A Certificates, _____________,
counsel to the Depositor, will deliver its
opinion generally to the effect that
assuming compliance with all provisions of
the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust
Fund will qualify as a REMIC under
Sections 860A through 860G of the Internal
Revenue Code of 1986 (the "Code").
For federal income tax purposes, the Class
R Certificates will be the sole class of
"residual interests" in the REMIC and the
Class A, Class B and Class C Certificates
will be the "regular interests" in the
REMIC and will be treated as debt
instruments of the REMIC.
The Class A Certificates [may][will not]
be treated as having been issued with
original issue discount for federal income
tax purposes. The prepayment assumption
that will be used for purposes of
computing the accrual of original issue
discount, market discount and premium, if
any, for federal income tax purposes will
be equal to a [constant prepayment
rate][standard prepayment assumption] of
___%. However, no representation is made
that the Mortgage Loans will prepay at
that rate or at any other rate.
For further information regarding the
federal income tax consequences of
investing in the Class A Certificates, see
"Certain Federal Income Tax Consequences"
herein and in the Prospectus.
ERISA Considerations..................[A fiduciary of any employee benefit plan
or other retirement arrangement subject to
the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code should review
carefully with its legal advisors whether
the purchase or holding of Class A
Certificates could give rise to a
transaction that is prohibited or is not
otherwise permitted either under ERISA or
Section 4975 of the Code.] [The U.S.
Department of Labor has issued an
individual exemption, Prohibited
Transaction Exemption 89-89, to the
Underwriter that generally exempts from
the application of certain of the
prohibited transaction provisions of
Section 406 of the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), and the excise taxes imposed on
such prohibited transactions by Section
4975(a) and (b) of the Code and Section
502(i) of ERISA, transactions relating to
the purchase, sale and holding of
pass-through certificates underwritten by
the Underwriter such as the Class A
Certificates and the servicing and
operation of asset pools such as the
Mortgage Pool, provided that certain
conditions are satisfied. A fiduciary of
any employee benefit plan subject to ERISA
or the Code should consult with its legal
advisors
S-9
<PAGE>
regarding the requirements of ERISA and
the Code.] See "ERISA Considerations"
herein and in the Prospectus.
Rating................................It is a condition to the issuance of the
Class A Certificates that they be rated
[not lower than] "__" by
______________________. A security rating
is not a recommendation to buy, sell or
hold securities and may be subject to
revision or withdrawal at any time by the
assigning rating organization. A security
rating does not address the
frequency of prepayments of Mortgage
Loans, or the corresponding effect on
yield to investors. See "Special
Considerations" and "Rating" herein and
"Yield Considerations" in the Prospectus.
Legal Investment......................The appropriate characterization of the
Class A Certificates under various legal
investment restrictions, and thus the
ability of investors subject to these
restrictions to purchase the Class A
Certificates, may be subject to
significant interpretative uncertainties.
The Class A Certificates will [not] be
"mortgage related securities" within the
meaning of the Secondary Mortgage Market
Enhancement Act of 1984 [so long as they
are rated in at least the second highest
rating category by the Rating Agency, and,
as such, are legal investments for certain
entities to the extent provided in SMMEA].
Accordingly, investors should consult
their own legal advisors to determine
whether and to what extent the Class A
Certificates constitute legal investments
for them. See "Legal Investment" herein
and in the Prospectus.
S-10
<PAGE>
SPECIAL CONSIDERATIONS
[Description will depend on the particulars of the Mortgage Pool]
SPECIAL PREPAYMENT CONSIDERATIONS. The rate and timing of principal
payments on the Class A Certificates will depend, among other things, on the
rate and timing of principal payments (including prepayments, defaults,
liquidations and purchases of Mortgage Loans due to a breach of representation
and warranty) on the Mortgage Loans. 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, 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. [The rate of principal payments on the Class A Certificates will
correspond to the rate of principal payments on the Mortgage Loans and is likely
to be affected by the Lock-out Periods and Prepayment Premium provisions
applicable to the Mortgage Loans, and by the extent to which the Master Servicer
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.] [As is the case with mortgage-backed
securities generally, the Class A Certificates are subject to substantial
inherent cash-flow uncertainties because the Mortgage Loans may be prepaid at
any time.]
As described herein, prior to reduction of the Class A Balance to zero, all
principal prepayments on and other unscheduled recoveries of principal of the
Mortgage Loans will be allocated to the Class A Certificates. To the extent that
no prepayments or other unscheduled recoveries of principal are distributed on
the Subordinate Certificates, the subordination afforded the Class A
Certificates by the Subordinate Certificates, in the absence of offsetting
losses on the Mortgage Loans allocated thereto, will be increased.
See "Description of the Certificates-Distributions-Priority" and "Certain
Yield, Prepayment and Maturity Considerations" herein and "Yield Considerations"
in the Prospectus.
SPECIAL YIELD CONSIDERATIONS. The yield to maturity on the Class A
Certificates will depend, among other things, on the rate and timing of
principal payments (including prepayments, defaults, liquidations and purchases
of Mortgage Loans due to a breach of representation and warranty) on the
Mortgage Loans and the allocation thereof to reduce the Certificate Balance of
such class. The yield to maturity on the Class A Certificates will also depend
on changes in the Index and the effect of any maximum lifetime Mortgage Rate,
minimum lifetime Mortgage Rate, Payment Cap and Periodic Rate Cap applicable to
each Mortgage Loan. The yield to investors on the Class A Certificates will be
adversely affected by any allocation thereto of Prepayment Interest Shortfalls
on the Mortgage Loans, which are expected to result from the distribution of
interest only to the date of prepayment (rather than a full month's interest) in
connection with prepayments in full, and the lack of any distribution of
interest on the amount of any partial prepayments. Neither the Certificates not
the Mortgage Loans are guaranteed by any governmental entity or private insurer.
In general, if a Certificate is 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 a Certificate is purchased at a
discount and principal distributions thereon occur at a rate slower than that
assumed at the time of purchase, the investor's actual yield to maturity will be
lower than assumed at the time or purchase.
See "Certain Federal Income Tax Consequences" herein and in the Prospectus
and "Yield Considerations" in the Prospectus.
S-11
<PAGE>
RISKS ASSOCIATED WITH CERTAIN OF THE MORTGAGE LOANS AND MORTGAGED
PROPERTIES. [Description of type of property, lease provisions, nature of
tenants and operating income.]
LIMITED RECOURSE. The Mortgage Loans are not insured or guaranteed by any
governmental entity or private mortgage insurer. The Depositor has not
undertaken any evaluation of the significance of the recourse provisions of any
of a number of the Mortgage Loans that provide for recourse against the related
borrower or another person in the event of a default. Accordingly, investors
should consider all of the Mortgage Loans to be non-recourse loans as to which
recourse in the case of default will be limited to the specific property and
such other assets, if any, as were pledged to secure a Mortgage Loan.
ENVIRONMENTAL LAW CONSIDERATIONS. The Depositor has found no evidence that
environmental assessments have ever been conducted with respect to any of the
Mortgaged Properties. However, the Depositor will agree in the Pooling and
Servicing Agreement that if it is shown that a materially adverse environmental
situation or condition (each, as more particularly described herein, a
"Disqualifying Condition") existed on any Mortgaged Property as of the Delivery
Date, the Depositor will cure the Disqualifying Condition or repurchase the
affected Mortgage Loan, subject to the satisfaction of certain conditions
described under "Description of the Mortgage Pool-Representations and
Warranties; Repurchases" herein, including the condition that the affected
Mortgage Loan be at least 60 days delinquent.
The Pooling and Servicing Agreement requires that the Master Servicer
obtain an environmental site assessment of a Mortgaged Property prior to
acquiring title thereto or assuming its operation. Such prohibition effectively
precludes enforcement of the security for the related Mortgage Note until a
satisfactory environmental site assessment is obtained (or until any required
remedial action is thereafter taken), but will decrease the likelihood that the
Trust Fund will become liable for any such Disqualifying Condition. However,
there can be no assurance that the requirements of the Pooling and Servicing
Agreement will effectively insulate the Trust Fund from potential liability for
Disqualifying Conditions. See "Servicing of the Mortgage Loans-Realization Upon
Defaulted Mortgage Loans" herein and "Description of the Agreements-Realization
Upon Defaulted Whole Loans", "Special Considerations-Environmental Risks" and
"Certain Legal Aspects of Mortgage Loans-Environmental Legislation" in the
Prospectus.
GEOGRAPHIC CONCENTRATION. ____ Mortgage Loans, which represent ___% of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date are
secured by liens on Mortgaged Properties located in ____________. In general,
that concentration increases the exposure of the Mortgage Pool to any adverse
economic, regulatory or other developments that may occur in ___________. In
recent periods, ______________ (along with other regions of the United States)
has experienced a significant downturn in the market value of real estate.
CONCENTRATION OF MORTGAGE LOANS, BORROWERS AND OPERATORS. [Description of
concentrations, if applicable]
In general, concentrations in a mortgage pool of loans with
larger-than-average balances can result in losses that are more severe, relative
to the size of the pool, than would be the case if the aggregate balance of the
pool were more evenly distributed. Concentration of borrowers and operators also
poses increased risks. For instance, if a borrower that owns several Mortgaged
Properties experiences financial difficulty at one Mortgaged Property, or at
another income-producing property that it owns, it could attempt to avert
foreclosure by filing a bankruptcy petition that might have the effect of
interrupting Monthly Payments for an indefinite period on all of the related
Mortgage Loans. Similarly, if an operator of more than one Mortgaged Property
were to experience financial difficulties, any adverse effects of that
difficulty, such as a reduction in the level of operating performance or, if the
operator were to become a debtor in a bankruptcy proceeding, an interruption in
payments to the borrower needed for debt service, could adversely affect the
Mortgage Pool to a greater degree than if the operator operated fewer Mortgaged
Properties.
BALLOON PAYMENTS. None of the Mortgage Loans is fully amortizing over its
term to maturity. Thus, each Mortgage Loan will have a substantial payment (that
is, a Balloon Payment) due at its stated
S-12
<PAGE>
maturity unless prepaid prior thereto. In addition, Mortgage Loans that permit
negative amortization could require balloon payments substantially larger than
expected under certain interest rate scenarios. Loans with balloon payments
involve a greater risk to the lender than self-amortizing loans because the
ability of a borrower to make a balloon payment typically will depend upon its
ability either to refinance the loan or to sell the related mortgaged property.
See "Special Considerations-Balloon Payments" in the Prospectus.
In order to maximize recoveries on defaulted Mortgage Loans, the Pooling
and Servicing Agreement enables the Master Servicer to extend and modify
Mortgage Loans that are in material default or as to which a payment default
(including the failure to make a Balloon Payment) is imminent; subject, however,
to the limitations described under "Servicing of the Mortgage
Loans-Modifications, Waivers and Amendments" herein. There can be no assurance,
however, that any such extension or modification will increase the present value
of recoveries in a given case. Any delay in collection of a Balloon Payment that
would otherwise be distributable in respect of a Class of Certificates, whether
such delay is due to borrower default or to modification of the related Mortgage
Loan by the Master Servicer, will extend the weighted average life of such Class
of Certificates. See "Certain Yield, Prepayment and Maturity Considerations"
herein and "Yield Considerations" in the Prospectus.
ADJUSTABLE RATE MORTGAGE LOANS; NEGATIVE AMORTIZATION. All of the Mortgage
Loans are adjustable rate Mortgage Loans. In addition, ____ of the Mortgage
Loans, which represent _____% of the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date, allow negative amortization to occur. Increases in
the required Monthly Payments on Mortgage Loans in excess of those assumed in
the original underwriting of those loans may result in a default rate higher
than that on mortgage loans with fixed mortgage rates. Moreover, increases in
the principal balances of Mortgage Loans due to the deferral and capitalization
of interest payments may result in a default rate that is higher than that of
adjustable rate mortgage loans that do not provide for negative amortization. In
addition, in the case of the Mortgage Loans that permit negative amortization,
the amount of a Monthly Payment may be more or less than the amount necessary to
amortize the Mortgage Loan principal balance over the then remaining
amortization schedule at the applicable Mortgage Rate. Accordingly, such
Mortgage Loans may be subject to (i) slower amortization (if the Monthly Payment
due on a Due Date is sufficient to pay interest accrued to such Due Date at the
applicable Mortgage Rate but is not sufficient to reduce principal in accordance
with the applicable amortization schedule), (ii) negative amortization (if
interest accrued to a Due Date at the applicable Mortgage Rate is greater than
the entire Monthly Payment due on such Due Date) or (iii) accelerated
amortization (if the Monthly Payment due on a Due Date is greater than the
amount necessary to pay interest accrued to such Due Date at the applicable
Mortgage Rate and to reduce principal in accordance with the applicable
amortization schedule).
EFFECT OF MORTGAGOR DEFAULTS. The aggregate amount of distributions on the
Class A Certificates, the yield to maturity of the Class A Certificates, the
rate of principal payments on the Class A Certificates and the weighted average
life of the Class A Certificates will be affected by the rate and the timing of
delinquencies and defaults on the Mortgage Loans. If a purchaser of a Class A
Certificate calculates its anticipated yield based on an assumed rate of default
and amount of losses on the Mortgage Loans that is lower than the default rate
and amount of losses actually experienced and such additional losses are
allocable to such class of Certificates, such purchaser's actual yield to
maturity will be lower than that so calculated and could, under certain extreme
scenarios, be negative. The timing of any loss on a liquidated Mortgage Loan
will also affect the actual yield to maturity of the Class A Certificates to
which a portion of such loss is allocable, even if the rate of defaults and
severity of losses are consistent with an investor's expectations. In general,
the earlier a loss borne by an investor occurs, the greater is the effect on
such investor's yield to maturity.
As and to the extent described herein, the Master Servicer will be entitled
to receive interest on unreimbursed Advances and unreimbursed servicing expenses
that (i) are recovered out of amounts received on the Mortgage Loan as to which
such Advances were made or such servicing expenses were incurred, which amounts
are in the form of liquidation proceeds, insurance proceeds, condemnation
proceeds or amounts paid in connection with the purchase of such mortgage Loan
out of the Trust Fund or (ii) are determined to be nonrecoverable Advances. The
Master Servicer's right
S-13
<PAGE>
to receive such payments of interest are prior to the rights of
Certificateholders to receive distributions on the Certificates and,
consequently, may result in losses being allocated to the Class A Certificates
that would not otherwise have resulted absent the accrual of such interest.
Even if losses on the Mortgage Loans are not borne by an investor in the
Class A Certificates, such losses may affect the weighted average life and yield
to maturity of such investor's Certificates. Losses on the Mortgage Loans, to
the extent not allocated to the Class A Certificates, may result in a higher
percentage ownership interest evidenced by such Certificates than would
otherwise have resulted absent such loss. The consequent effect on the weighted
average life and yield to maturity of the Class A Certificates will depend upon
the characteristics of the remaining Mortgage Loans.
Regardless of whether losses ultimately result, delinquencies and defaults
on the Mortgage Loans may significantly delay the receipt of payments by the
holder of a Class A Certificate, to the extent that Advances or the
subordination of another class of Certificates does not fully offset the effects
of any such delinquency or default. The Scheduled Principal Distribution Amount
and the Unscheduled Principal Distribution Amount generally consist of, as more
fully described herein, principal of the Mortgage Loans actually collected or
advanced. The Master Servicer has the ability to extend and modify Mortgage
Loans that are in default or as to which a payment default is imminent,
including the ability to extend the date on which a Balloon Payment is due by up
to ____ months, subject to certain conditions described in the Pooling and
Servicing Agreement. The Master Servicer's obligation to make Advances in
respect of a Mortgage Loan that is delinquent as to its Balloon Payment is
limited, however, to the extent described under "Description of the
Certificates-Advances". Until such time as any Mortgage Loan delinquent in
respect of its Balloon Payment is liquidated, the entitlement of the holders of
Class A Certificates on each Distribution Date in respect of principal of such
Mortgage Loan will be limited to the Class A Scheduled Principal Distribution
Percentage of that portion of the Available Distribution Amount that represents
the principal portion of (i) any payment made by the related mortgagor under a
forbearance arrangement or (ii) any related Advance made by the Master Servicer.
Consequently, any delay in the receipt of a Balloon Payment that is payable, in
whole or in part, to holders of Class A Certificates will extend the weighted
average life of the Class A Certificates.
As described under "Description of the Certificates-Distributions" herein,
if the portion of Available Distribution Amount distributable in respect of
interest on the Class A Certificates on any Distribution Date is less than the
Distributable Certificate Interest then payable for such class, the shortfall
will be distributable to holders of such class of Certificates on subsequent
Distribution Dates, to the extent of available funds. Any such shortfall will
not bear interest and will therefore negatively affect the yield to maturity of
such class of Certificates for so long as it is outstanding.
[The following paragraphs may be included in the event any of the Mortgage Loans
are acquired from the Resolution Trust Corporation:
ABSENCE OF PERFECTED SECURITY INTERESTS IN PERSONAL PROPERTY. In order to
perfect a security interest in borrower-owned personal property pledged as
security for repayment of a mortgage loan, a lender must file one or more UCC-1
financing statements with appropriate offices of official records. Unless a
financing statement is continued by another filing every five years, perfection
lapses and subsequent lienors may obtain priority over the lien granted to the
lender. At the time the Mortgage Loans were transferred by the RTC to ____,
there were many cases where UCC-1 financing statements in favor of the mortgage
holder had not been filed or had lapsed, and several cases where lien searches
disclosed prior liens on the pledged personal property. In addition, the RTC did
not at that time complete any UCC financing statements necessary to effect a
record transfer of the RTC's liens to ____. The Depositor has agreed in the
Pooling and Servicing Agreement to use its best reasonable efforts to cause
UCC-1 financing statements to be executed and filed if not previously executed
and filed, to cause the lapsed UCC-1 financing statements to be continued, and
to cause the Trustee to become the record assignee of all existing, continued or
newly executed UCC financing statements. In cases where this is not accomplished
(for example, where required borrower cooperation is not obtained) or, even if
accomplished, in cases where there exist third party liens on personal property
pledged to secure a Mortgage Loan that were perfected prior to such filing or
continuation, it may be impossible for the Trustee in the case of a Mortgage
Loan default to acquire or transfer title to pledged
S-14
<PAGE>
personal property, which may include beds, furniture, kitchen equipment, medical
equipment or other property used in Mortgaged Property operations.
TROUBLED ORIGINATORS. The Mortgage Loans were originated or
purchased by the [Originating Institutions], each of which is subject to an RTC
receivership. It is possible that the financial difficulties experienced by the
[Originating Institutions] may have adversely affected either or both of (i) the
standards and procedures pursuant to which the Mortgage Loans were originated or
purchased by such [Originating Institutions] and (ii) the manner in which such
Mortgage Loans have been serviced prior to assumption of servicing
responsibilities by the Master Servicer. The Mortgage Loans will be acquired by
the Depositor on or before the _____________ from the Mortgage Asset Seller,
which acquired the Mortgage Loans from the RTC in its capacity as receiver of
each of the [Originating Institutions] pursuant to a certain mortgage loan sale
agreement, dated _______, 199__ (as amended, the "Loan Sale Agreement").
Pursuant to the Loan Sale Agreement, the RTC, as receiver of the [Originating
Institutions], has made certain representations and warranties regarding the
Mortgage Loans and is obligated to cure such breaches or repurchase those
Mortgage Loans as to which there is a breach of such representations and
warranties. The RTC repurchase price for the Mortgage Loans is par plus accrued
interest at the related Mortgage Rate[, except in the case of ___ Mortgage Loans
as to which a repurchase for a breach of the representation and warranty
relating to certain environmental matters would be accomplished at a price that
initially is discounted but increases to par over approximately __ years]. See
"Description of the Mortgage Pool-Representations and Warranties of the
Originating Institutions" herein. The RTC, acting in its corporate capacity, has
guaranteed such obligations of the RTC, acting in its capacity as receiver. The
agreement pursuant to which such guarantee was made by the RTC is hereinafter
referred to as the "Guarantee Agreement".
LIMITED INFORMATION. The information set forth in this Prospectus
Supplement with respect to the Mortgage Loans is derived from books and records
of the [Originating Institutions], as well as a limited review of the credit and
legal files relating to the Mortgage Loans. Accordingly, available information
does not permit the Depositor to determine fully the origination, credit
appraisal and underwriting practices of the originators of the Mortgage Loans.
Furthermore, it is possible that this Prospectus Supplement does not contain
material information regarding the Mortgage Loans that would have been disclosed
if the structure and personnel of the [Originating Institutions] had not been
affected by such institutions having been placed in receivership. While the
Depositor has undertaken a limited review of the records and files related to
the Mortgage Loans in connection with the issuance of the Class A Certificates,
the Mortgage Loans have not been "re-underwritten" or subjected to the type of
review that would typically be made in respect of a newly originated mortgage
loan.]
S-15
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Trust Fund will consist primarily of __ conventional, adjustable
interest rate Mortgage Loans with an aggregate principal balance as of the
Cut-off Date, after deducting payments of principal due on such date, of
$___________. Each Mortgage Loan is evidenced by a promissory note (a "Mortgage
Note") and secured by a mortgage, deed of trust or other similar security
instrument (a "Mortgage") creating a [first] [first or junior] fee lien on a
[multifamily][commercial] property (a "Mortgaged Property"). The Mortgaged
Properties consist of [description commercial or multifamily properties].
[Because no evaluation of any mortgagor's financial condition has been
conducted, investors should consider all of the Mortgage Loans to be
non-recourse loans so that, in the event of mortgagor default, recourse may be
had only against the specific property and such limited other assets as have
been pledged to secure a Mortgage Loan, and not against the mortgagor's other
assets.] ALL PERCENTAGES OF THE MORTGAGE LOANS DESCRIBED HEREIN ARE APPROXIMATE
PERCENTAGES (EXCEPT AS OTHERWISE INDICATED) BY AGGREGATE PRINCIPAL BALANCE AS OF
THE CUT-OFF DATE.
The Mortgage Loans to be included in the Trust Fund will have been
originated or acquired by __________ (the "Mortgage Asset Seller") and will
comply with the underwriting criteria described herein. The Depositor will
purchase the Mortgage Loans to be included in the Mortgage Pool on or before the
_____________ from the Mortgage Asset Seller pursuant to a seller's agreement
(the "Seller's Agreement"), to be dated as of _______________, 199_ between the
Mortgage Asset Seller and the Depositor. The Depositor will cause the Mortgage
Loans in the Mortgage Pool to be assigned to ____________, as Trustee, pursuant
to the Pooling and Servicing Agreement. ___________, in its capacity as Master
Servicer, will service the Mortgage Loans pursuant to the Pooling and Servicing
Agreement.
Under the Seller's Agreement, the Mortgage Asset Seller will make
certain representations, warranties and covenants to the Depositor relating to,
among other things, the due execution and enforceability of the Seller's
Agreement and certain characteristics of the Mortgage Loans, and will be
obligated to repurchase or substitute for any Mortgage Loans as to which there
exists deficient documentation or an uncured material breach of any such
representation, warranty or covenant. Under the Pooling and Servicing Agreement
the Depositor will assign all its right, title and interest in such
representations, warranties and covenants (including the Mortgage Asset Seller's
repurchase or substitution obligation) to the Trustee for the Trust Fund. The
Depositor will make no representations or warranties with respect to the
Mortgage Loans and will have no obligation to repurchase or substitute for
Mortgage Loans with deficient documentation or which are otherwise defective.
The Mortgage Asset Seller is selling such Mortgage Loans without recourse and,
accordingly, in such capacity, will have no obligations with respect to the
Certificates other than pursuant to such representations, warranties, covenants
and repurchase obligations. See "Description of the Agreements-Representations
and Warranties; Repurchases" in the Prospectus.
The Mortgage Rate on each Mortgage Loan is subject to adjustment on
each Interest Rate Adjustment Date by adding the related Gross Margin to the
value of the Index (described below) as most recently announced a specified
number of days prior to such Interest Rate Adjustment Date, subject, in the case
of substantially all of the Mortgage Loans, to minimum and maximum lifetime
Mortgage Rates, with ranges specified below. The Mortgage Rates on the Mortgage
Loans generally are adjusted monthly; however, certain of the Mortgage Loans
provide for Interest Rate Adjustment Dates to occur quarterly (____% of the
Mortgage Loans), semi-annually (_____% of the Mortgage Loans) or annually (____%
of the Mortgage Loans). Each of the Mortgage Loans provided for an initial fixed
interest rate period; _____ Mortgage Loans, representing _____% of the Mortgage
Loans, have not experienced their first Interest Rate Adjustment Dates. The
latest initial Interest Rate Adjustment Date for any Mortgage Loan is to occur
in _______________.
Subject to the Payment Caps described below, the amount of the Monthly
Payment on each Mortgage Loan adjusts periodically on each Payment Adjustment
Date to an amount that would fully amortize the principal balance of the
Mortgage Loan over its then remaining amortization schedule and
S-16
<PAGE>
pay interest at the Mortgage Rate in effect during the one month period
preceding such Payment Adjustment Date. Approximately _____% of the Mortgage
Loans provide that an adjustment of the amount of the Monthly Payment on a
Payment Adjustment Date may not result in a Monthly Payment that increases by
more than ___% (nor, in some cases, decreases by more than ___%) of the amount
of the Monthly Payment in effect immediately prior to such Payment Adjustment
Date (each such provision, a "Payment Cap"); however, certain of those Mortgage
Loans also provide that the Payment Cap will not apply on certain Payment
Adjustment Dates or if the application thereof would result in the principal
balance of the Mortgage Loan exceeding (through negative amortization) by a
specified percentage the original principal balance thereof. Generally, the
related Mortgage Note provides that if, as a result of negative amortization,
the respective principal balance of the Mortgage Loan reaches an amount
specified therein (which as to most Mortgage Loans is not greater than ___% of
the Mortgage Loan principal balance as of the origination date thereof), the
amount of the Monthly Payments due thereunder will be increased as necessary to
prevent further negative amortization.
[THE INDEX
As of any Payment Adjustment Date, the Index applicable to the
determination of the related Mortgage Rate will be a per annum rate equal to
________________, as most recently available as of the date ___ days prior to
the Payment Adjustment Date (the "Index"). Such average yields reflect the
yields for the week prior to that week in which the information is reported. In
the event that the Index is no longer available, an index reasonably acceptable
to the Trustee that is based on comparable information will be selected by the
Master Servicer.
The Index is currently calculated based on information reported in
_____________. Listed below are the weekly average yields on actively traded
________________ as reported in _________________ on the date that would have
been applicable to mortgage loans having the following adjustment dates for the
indicated years. Such average yields may fluctuate significantly from week to
week as well as over longer periods and may not increase or decrease in a
constant pattern from period to period. The following does not purport to be
representative of future average yields. No assurance can be given as to the
average yields on such _______________ on any Payment Adjustment Date or during
the life of any Mortgage Loan.
[NAME OF INDEX]
MONTH 1990 1991 1992 1993
- ----- ------ ------ ------ -----
1994
----
January ..............
February .............
March ................
April ................
May ..................
June .................
July .................
August ...............
September ............
October ..............
November .............
December .............
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
Approximately _____% of the Mortgage Loans have Due Dates that occur on
the first day of each month; approximately _____% of the Mortgage Loans have Due
Dates that occur on the fifth day of each month; approximately _____% of the
Mortgage Loans have Due Dates that occur on the tenth day of each month; and the
remainder of the Mortgage Loans have Due Dates that occur on the fifteenth day
of each month.
As of the Cut-off Date, the Mortgage Loans had the following
characteristics: (i) Mortgage Rates ranging from _____% per annum to ______% per
annum; (ii) a weighted average Mortgage Rate of -----% per annum; (iii) Gross
Margins ranging from ___ basis points to ___ basis points; (iv) a weighted
average Gross Margin of _____ basis points; (v) principal balances ranging from
$_______ to $_________ and with
S-17
<PAGE>
____ Mortgage Loans having a principal balance as of the Cut-off Date that
exceeds its original principal balance; (vi) an average principal balance of
$_________; (vii) original terms to maturity ranging from __ months to ___
months; (viii) a weighted average original term to maturity of ___ months; (ix)
remaining terms to maturity ranging from _ months to ___ months; (x) a weighted
average remaining term to maturity of __ months; (xi) Loan-to-Value ("LTV")
Ratios ranging from ____% to ____%; (xii) a weighted average LTV Ratio of ____%;
(xiii) as to the _____% of the Mortgage Loans to which such characteristic
applies, (A) minimum lifetime Mortgage Rates ranging from ___% per annum to
____% per annum and (B) a weighted average minimum lifetime Mortgage Rate of
____% per annum; (xiv) as to the _____% of Mortgage Loans to which such
characteristic applies and for which it may be currently calculated, (A) maximum
lifetime Mortgage Rate ranging from ____% per annum to _____% per annum and (B)
a weighted average maximum lifetime Mortgage Rate of _____% per annum, (xv) Debt
Service Coverage Ratios ranging from ___% to ___% and (xvi) a weighted average
Debt Service Coverage Ratio of ___%.
___% of the Mortgage Loans are secured by first liens; ___% by second
liens; ___% by third liens and ___% by fourth liens. Loans secured by junior
liens involve a greater degree of risk than loans secured by first liens, and
the more junior a lien is, the greater the risk will be. See "Special
Considerations-Junior Mortgage Loans" in the Prospectus.
___% of the Mortgage Loans provide for Balloon Payments on their
respective maturity dates. Loans providing for Balloon Payments involve a
greater degree of risk than self-amortizing loans. See "Special
Considerations-Balloon Payments" herein.
No Mortgage Loan currently prohibits principal prepayments; however,
certain of the Mortgage Loans impose fees or penalties ("Prepayment Premiums")
in connection with full or partial prepayments. Although Prepayment Premiums are
payable to the Master Servicer as additional servicing compensation, the Master
Servicer may waive the payment of any Prepayment Premium only in connection with
a principal prepayment that is proposed to be made during the three month period
prior to the scheduled maturity of the related Mortgage Loan, or under certain
other limited circumstances.
The Mortgage Loans are expected to have the following additional
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
<TABLE>
<CAPTION>
MORTGAGE RATES AS OF THE CUT-OFF DATE
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Mortgage Rates Loans as of the Cut-off Date as of the Cut-off Date
-------------- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate was ___% per
annum.
S-18
<PAGE>
PROPERTY TYPE
<TABLE>
<CAPTION>
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Type Loans as of the Cut-off Date as of the Cut-off Date
---- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
GROSS MARGINS
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Gross Margins Loans as of the Cut-off Date as of the Cut-off Date
------------- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
As of the Cut-off Date, the weighted average Gross Margin was ___% per
annum.
FREQUENCY OF ADJUSTMENTS TO MORTGAGE RATES
<TABLE>
<CAPTION>
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Frequency Loans as of the Cut-off Date as of the Cut-off Date
--------- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
As of the Cut-off Date, the weighted average frequency of adjustments
to Mortgage Rates was months. ___% of Mortgage Loans, with an aggregate
principal balance of $ as of the Cut-off Date, have not experienced their
first Interest Rate Adjustment Date.
S-19
<PAGE>
FREQUENCY OF ADJUSTMENTS TO MONTHLY PAYMENTS
<TABLE>
<CAPTION>
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Frequency Loans as of the Cut-off Date as of the Cut-off Date
--------- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
As of the Cut-off Date, the weighted average frequency of Payment
Adjustment Dates was __ months. ________ of the Mortgage Loans, with an
aggregate principal balance of $_________ as of the Cut-off Date, have not
experienced their first Payment Adjustment Date.
MAXIMUM LIFETIME MORTGAGE RATES
<TABLE>
<CAPTION>
Maximum Aggregate Principal % by Aggregate Principal
Lifetime Number of Balance Outstanding Balance Outstanding
Mortgage Rates(%) Loans as of the Cut-off Date as of the Cut-off Date
----------------- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
As of the Cut-off Date, the weighted average Maximum Lifetime Mortgage
Rate was _____% per annum.
[(A) Represents Mortgage Loans without a lifetime rate cap.
(B) The lifetime rate caps for these Mortgage Loans are based upon the
Index as determined at a future point in time plus a fixed percentage.
Therefore, the rate is not determinable as of the Cut-off
Date.
(C) This calculation does not include the ___ Mortgage Loans without a
lifetime rate cap or the ____ Mortgage Loans with lifetime rate caps
which are currently not determinable.]
MINIMUM LIFETIME MORTGAGE RATES
<TABLE>
<CAPTION>
Maximum Aggregate Principal % by Aggregate Principal
Lifetime Number of Balance Outstanding Balance Outstanding
Mortgage Rates(%) Loans as of the Cut-off Date as of the Cut-off Date
----------------- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
As of the Cut-off Date, the weighted average Minimum Lifetime Mortgage
Rate was _____% per annum.
[(A) Represents Mortgage Loans without interest rate floors.
(B) This calculation does not include the _____ Mortgage Loans without interest
rate floors.]
S-20
<PAGE>
PRINCIPAL BALANCES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Principal Balances ($) Loans as of the Cut-off Date as of the Cut-off Date
---------------------- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
The average principal balance of the Mortgage Loans at origination was
$______________. No Mortgage Loan had a principal balance at origination of
greater than $______________ or less than
$--------------.
PRINCIPAL BALANCES AT ORIGINATION
<TABLE>
<CAPTION>
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Principal Balances ($) Loans as of the Cut-off Date as of the Cut-off Date
---------------------- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
Average Principal Balance
at Origination:
The average principal balance of the Mortgage Loans as of the Cut-off
Date was $______________. No Mortgage Loan had a principal balance as of the
Cut-off Date of greater than $______________ or less than $______________.
ORIGINAL TERM TO MATURITY
<TABLE>
<CAPTION>
Aggregate Principal % by Aggregate Principal
Original Number of Balance Outstanding Balance Outstanding
Term (Months) Loans as of the Cut-off Date as of the Cut-off Date
------------- ----- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
The weighted average original term to maturity was ___ months.
S-21
<PAGE>
REMAINING TERM TO MATURITY AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Aggregate Principal % by Aggregate Principal
Original Number of Balance Outstanding Balance Outstanding
Term (Months) Loans as of the Cut-off Date as of the Cut-off Date
------------- ----- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
As of the Cut-off Date, the weighted average term to maturity was ___
months.
<TABLE>
<CAPTION>
MORTGAGE LOAN YEAR OF ORIGINATION
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Year Loans as of the Cut-off Date as of the Cut-off Date
------------- ----- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
The following table sets forth the respective years in which the
Mortgage Loans are scheduled to mature. The table provides an indication (which
does not account for any scheduled amortization, prepayments or negative
amortization) of the concentration of Balloon Payments that will be due in those
years. See "Special Considerations-Balloon Payments" herein.
MORTGAGE LOAN YEAR OF SCHEDULED MATURITY
<TABLE>
<CAPTION>
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Year Loans as of the Cut-off Date as of the Cut-off Date
------------- ----- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
The following table[s] set[s] forth the range of Cut-off Date LTV
Ratios of the Mortgage Loans. A "Cut-off Date LTV Ratio" is a fraction,
expressed as a percentage, the numerator of which is the Cut-off Date Balance of
a Mortgage Loan, and the denominator of which is the appraised value of the
related Mortgaged Property as determined by an appraisal thereof obtained in
connection with the origination of such Mortgage Loan. A Cut-off Date LTV Ratio,
since it is most often based on the value of a Mortgaged Property determined as
of loan origination, is not necessarily a reliable measure of the borrower's
current equity in that Mortgaged Property. In a declining real estate market,
the fair market value of the Mortgaged Property could have decreased from the
value determined at origination, and the actual loan-to-value ratio of a
Mortgage Loan may be higher than its Cut-off Date LTV Ratio.
<TABLE>
<CAPTION>
CUT-OFF DATE LTV RATIOS
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
LTV Ratio(%) Loans as of the Cut-off Date as of the Cut-off Date
------------- ----- ---------------------- ----------------------
S-22
<PAGE>
<S> <C> <C> <C>
Total 100.00% $
=== =========== =======
</TABLE>
As of the Cut-off Date, the weighted average Cut-off Date LTV Ratio was
___% per annum.
<TABLE>
<CAPTION>
CUT-OFF DATE LTV RATIOS - [FIRST] [SECOND] [THIRD] [FOURTH] LIEN
MORTGAGE LOANS
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
LTV Ratio(%) Loans as of the Cut-off Date as of the Cut-off Date
------------- ----- ---------------------- ----------------------
<S> <C> <C> <C>
Total 100.00% $
=== =========== =======
</TABLE>
As of the Cut-off Date, the weighted average Cut-off Date LTV Ratio for
the [first] [second] [third] [fourth] lien Mortgage Loans was ___% per annum.
S-23
<PAGE>
The following table sets forth the range of Debt Service Coverage
Ratios for the Mortgage Loans. The "Debt Service Coverage Ratio" for any
Mortgage Loan is the ratio of Net Operating Income produced by the related
Mortgaged Property for the period (annualized if the period was less than one
year) covered by the operating statement to the amount of the Monthly Payment in
effect as of the Cut-off Date multiplied by 12. "Net Operating Income" is the
revenue derived from the use and operation of a Mortgaged Property less
operating expenses (such as utilities, administrative expenses, repairs and
maintenance and less fixed expenses (such as insurance, real estate and other
taxes to be paid by mortgagor). Net Operating Income generally does not reflect
capital expenditures. The following table was prepared using operating
statements obtained from the respective mortgagors. The information contained
therein was unaudited, and the Depositor has made no attempt to verify its
accuracy. [In the case of _________ Mortgage Loans, operating statements could
not be obtained. Accordingly, Debt Service Coverage Ratios for those Mortgage
Loans were not calculated. As a result, no conclusions should be drawn as to
those ____ Mortgage Loans on the basis of the information set forth below.] The
last day of the period (which may not correspond to the end of the calendar year
most recent to the Cut-off Date) covered by each operating statement or cost
report from which a Debt Service Coverage Ratio was calculated is set forth in
Annex A with respect to the related Mortgage Loan. Certain of the Mortgaged
Properties have relatively short operating histories, and such performance may
be less indicative of future performance than in the case of a property with a
stable operating history over an extended period of time. However, even with
respect to Mortgaged Properties with longer operating histories, operating
income produced by Mortgaged Properties in the past should not be construed as
indicative of the future performance of any Mortgaged Property.
DEBT SERVICE COVERAGE RATIOS
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Aggregate Principal % by Aggregate Principal
Debt Service Number of Balance Outstanding Balance Outstanding
Coverage Ratio Loans as of the Cut-off Date as of the Cut-off Date
-------------- ----- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
As of the Cut-off Date, the weighted average Debt Service Coverage
Ratio was ___x.
[(A) The debt service coverage ratios for these loans were not calculated due to
a lack of operating statements with respect to years after 198_.
(B) This calculation does not include the ___ Mortgage Loans where debt service
coverage ratios were not calculated.]
S-24
<PAGE>
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
State Loans as of the Cut-off Date as of the Cut-off Date
------------- ----- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
[regional breakdown to be provided as appropriate]
___% of the Mortgage Loans prohibit the prepayment thereof until a date
specified in the related Mortgage Note (such period, the "Lock-out Period" and
the date of expiration thereof, the "Lock-out Date"). The following table sets
forth the Lock-out Dates for such Mortgage Loans.
MORTGAGE LOAN LOCK-OUT DATES
<TABLE>
<CAPTION>
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Lock-out Date Loans as of the Cut-off Date as of the Cut-off Date
------------- ----- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
___% of the Mortgage Loans provide that upon any principal prepayment
of a Mortgage Loan, whether made voluntarily or involuntarily, the related
Mortgagor will be required to pay a prepayment premium or yield maintenance
penalty (a "Prepayment Premium") in the amount set forth in the following table.
MORTGAGE LOAN PREPAYMENT PREMIUMS
<TABLE>
<CAPTION>
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Prepayment Premiums Loans as of the Cut-off Date as of the Cut-off Date
------------------- ----- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
[Set forth in Annex A to this Prospectus Supplement are certain
individual characteristics of the Mortgage Loans.]
UNDERWRITING STANDARDS
All of the Mortgage Loans were originated or acquired by ________,
generally in accordance with the underwriting criteria described herein.
[Description of underwriting standards.]
The Mortgage Loans selected for inclusion in the Mortgage Pool from
loans in the [Mortgage Asset Seller's] portfolio were not so selected on any
basis which would have a material adverse effect on the
Certificateholders.
S-25
<PAGE>
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the close of business on the Cut-off Date, as adjusted for the
scheduled principal payments due on or before such date. Prior to the issuance
of the Class A Certificates, a Mortgage Loan may be removed from the Mortgage
Pool as a result of incomplete documentation or otherwise, if the Depositor
deems such removal necessary or appropriate 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 Class A 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 Class A Certificates are issued, although the range
of Mortgage Rates and maturities and certain other characteristics of the
Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Class A Certificates and will be filed, together with the
Pooling and Servicing Agreement, with the Securities and Exchange Commission
within fifteen days after the initial issuance of the Class A Certificates. In
the event Mortgage Loans are removed from or added to the Mortgage Pool as set
forth in the preceding paragraph, such removal or addition will be noted in the
Form 8-K.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will consist of four classes to be designated as the Class A
Certificates, the Class B Certificates, the Class C Certificates and the Class R
Certificates. The Class B, Class C and Class R Certificates (the "Subordinate
Certificates") will be subordinate to the Class A Certificates, as described
herein. The Certificates represent in the aggregate the entire beneficial
ownership interest in a Trust Fund consisting of: (i) the Mortgage Loans and all
payments under and proceeds of the Mortgage Loans received after the Cut-off
Date (exclusive of payments of principal and interest due on or before the
Cut-off Date); (ii) any Mortgaged Property acquired on behalf of the Trust Fund
through foreclosure or deed in lieu of foreclosure (upon acquisition, an "REO
Property"); (iii) such funds or assets as from time to time are deposited in the
Certificate Account and any account established in connection with REO
Properties (the "REO Account"); and (iv) the rights of the mortgagee under all
insurance policies with respect to the Mortgage Loans. Only the Class A
Certificates are offered hereby.
The Class A Certificates will have an initial Certificate Balance of
$__________, representing __% of the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date. The Class B Certificates will have an initial
Certificate Balance of $__________, representing __% of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date. The Class C Certificates
will have an initial Certificate Balance of $_______, representing ___% of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date. The
initial Certificate Balance of the Class R Certificates will be [zero]. The
Certificate Balance of any class of Certificates outstanding at any time
represents the maximum amount which the holders thereof are 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 respective Certificate Balances of
the Class A, Class B and Class C Certificates (respectively, the "Class A
Balance", "Class B Balance" and "Class C Balance") will in each case be (i)
reduced by amounts actually distributed on such class of Certificates that are
allocable to principal and (ii) increased by amounts allocated to such class of
Certificates in respect of negative amortization on the Mortgage Loans. The
Certificate Balance of the Class R Certificates (the "Class R Balance") will at
any time equal the aggregate Stated Principal Balance of the Mortgage Loans
minus the sum of the Class A Balance, Class B Balance and Class C Balance. The
Stated Principal Balance of any Mortgage Loan at any date of determination will
equal (a) the Cut-off Date Balance of such Mortgage Loan, plus (b) any negative
amortization added to the principal balance of such Mortgage Loan on any Due
Date after the Cut-off Date to and including the Due Date in the Due Period for
the most recently preceding Distribution Date, minus (c) the sum of (i) the
principal portion of each Monthly Payment due on such Mortgage Loan after the
Cut-off Date, to the extent received from the mortgagor or advanced by the
Master Servicer and distributed to
S-26
<PAGE>
holders of the Certificates before such date of determination, (ii) all
principal prepayments and other unscheduled collections of principal received
with respect to such Mortgage Loan, to the extent distributed to holders of the
Certificates before such date of determination, and (iii) any reduction in the
outstanding principal balance of such Mortgage Loan resulting out of a
bankruptcy proceeding for the related mortgagor.
None of the Subordinate Certificates are offered hereby.
DISTRIBUTIONS
METHOD, TIMING AND AMOUNT. Distributions on the Certificates will be
made on the 25th day of each month or, if such 25th day is not a business day,
then on the next succeeding business day, commencing in _____ 199_ (each, a
"Distribution Date"). All distributions (other than the final distribution on
any Certificate) will be made by the Master Servicer to the persons in whose
names the Certificates are registered at the close of business on each Record
Date, which will be the last business day of the month preceding the month in
which the related Distribution Date occurs. Such distributions will be made by
wire transfer in immediately available funds to the account specified by the
Certificateholder at a bank or other entity having appropriate facilities
therefor, if such Certificateholder will have provided the Master Servicer with
wiring instructions no less than five business days prior to the related Record
Date and is the registered owner of Certificates the aggregate initial principal
amount of which is at least $_________, or otherwise by check mailed to such
Certificateholder. The final distribution on any Certificate will be made in
like manner, but only upon presentment or surrender of such Certificate at the
location specified in the notice to the holder thereof of such final
distribution. All distributions made with respect to a class of Certificates on
each Distribution Date will be allocated pro rata among the outstanding
Certificates of such class based on their respective Percentage Interests. The
Percentage Interest evidenced by any Class A Certificate is equal to the initial
denomination thereof as of the _____________, divided by the initial Certificate
Balance for such class. The aggregate distribution to be made on the
Certificates on any Distribution Date shall equal the Available Distribution
Amount.
The "Available Distribution Amount" for any Distribution Date is an
amount equal to (a) the sum of (i) the amount on deposit in the Certificate
Account as of the close of business on the related Determination Date, (ii) the
aggregate amount of any Advances made by the Master Servicer in respect of such
Distribution Date and (iii) the aggregate amount deposited by the Master
Servicer in the Certificate Account in respect of such Distribution Date in
connection with Prepayment Interest Shortfalls incurred during the related Due
Period, net of (b) the portion of the amount described in clause (a)(i) hereof
that represents (i) Monthly Payments due on a Due Date subsequent to the end of
the related Due Period, (ii) any voluntary principal prepayments and other
unscheduled recoveries on the Mortgage Loans received after the end of the
related Due Period or (iii) any amounts payable or reimbursable therefrom to any
person.
PRIORITY. On each Distribution Date, the Master Servicer shall apply
amounts on deposit in the Certificate Account, to the extent of the Available
Distribution Amount, first, to distributions of interest to holders of the Class
A Certificates, in the amount equal to all Distributable Certificate Interest in
respect of the Class A Certificates for such Distribution Date and, to the
extent not previously distributed, for all preceding Distribution Dates and
second, to distributions of principal to holders of the Class A Certificates, in
an amount, not to exceed the sum of the Class A Balance outstanding immediately
prior to such Distribution Date and any Class Negative Amortization in respect
of the Class A Certificates for such Distribution Date, equal to the sum of (A)
the then Class A Scheduled Principal Distribution Percentage of the Scheduled
Principal Distribution Amount for such Distribution Date and (B) the Unscheduled
Principal Distribution Amount for such Distribution Date.
On or after the reduction of the Class A Balance to zero, the Available
Distribution Amount will be paid solely to the holders of the Subordinate
Certificates.
CALCULATIONS OF INTEREST. The "Distributable Certificate Interest" in
respect of the Class A Certificates for any Distribution Date represents that
portion of the Accrued Certificate Interest in respect of such class of
Certificates for such Distribution Date that is net of such class's allocable
share of (i) the aggregate portion of any Prepayment Interest Shortfalls
resulting from voluntary principal prepayments on the Mortgage Loans during the
related Due Period that are not covered by the application of servicing
compensation of the Master Servicer for the related Due Period (such uncovered
aggregate portion, as to such Distribution Date,
S-27
<PAGE>
the "Net Aggregate Prepayment Interest Shortfall"); and (ii) the aggregate of
any negative amortization in respect of the Mortgage Loans for their respective
Due Dates during the related Due Period (the aggregate of such negative
amortization, as to such Distribution Date, the "Aggregate Mortgage Loan
Negative Amortization").
The "Accrued Certificate Interest" in respect of the Class A
Certificates for any Distribution Date is equal to thirty days' interest accrued
during the related Interest Accrual Period at the Pass-Through Rate applicable
to such class of Certificates for such Distribution Date accrued on the related
Certificate Balance outstanding immediately prior to such Distribution Date. The
Pass-Through Rate applicable to the Class A Certificates for any Distribution
Date is equal to the weighted average of the Class A Remittance Rates in effect
for the Mortgage Loans as of the commencement of the related Due Period (as to
such Distribution Date, the "Weighted Average Class A Remittance Rate"). The
"Class A Remittance Rate" in effect for any Mortgage Loan as of any date of
determination (a) prior to its first Interest Rate Adjustment Date, is equal to
the related Mortgage Rate then in effect minus ___ basis points and (b) from and
after its first Interest Rate Adjustment Date, is equal to the related Mortgage
Rate then in effect minus the excess of the related Gross Margin over ___ basis
points. The "Interest Accrual Period" for the Certificates is the calendar month
preceding the month in which the Distribution Date occurs.
The portion of Net Aggregate Prepayment Interest Shortfall and the
Aggregate Mortgage Loan Negative Amortization for any Distribution Date that
will be allocated to the Class A Certificates on such Distribution Date will be
equal to the then applicable Class A Interest Allocation Percentage. The "Class
A Interest Allocation Percentage" for any Distribution Date will equal a
fraction, expressed as a percentage, the numerator of which is equal to the
product of (a) the Class A Balance (net of any Uncovered Portion thereof)
outstanding immediately prior to such Distribution Date, multiplied by (b) the
Weighted Average Class A Remittance Rate for such Distribution Date, and the
denominator of which is the product of (x) the aggregate Stated Principal
Balance of the Mortgage Loans outstanding immediately prior to such Distribution
Date, multiplied by (y) the Weighted Average Net Mortgage Rate for such
Distribution Date. The "Net Mortgage Rate" in effect for any Mortgage Loan as of
any date of determination is equal to the related Mortgage Rate then in effect
minus ___ basis points. The "Uncovered Portion" of the Class A Balance, as of
any date of determination, is the portion thereof representing the excess, if
any, of (a) the Class A Balance then outstanding, over (b) the aggregate Stated
Principal Balance of the Mortgage Loans then outstanding.
CALCULATIONS OF PRINCIPAL. The "Scheduled Principal Distribution
Amount" for any Distribution Date is equal to the aggregate of the principal
portions of all Monthly Payments, including Balloon Payments, due during or, if
and to the extent not previously received or advanced and distributed to
Certificateholders on a preceding Distribution Date, prior to the related Due
Period, in each case to the extent paid by the related mortgagor or advanced by
the Master Servicer and included in the Available Distribution Amount for such
Distribution Date. The principal portion of any Advances in respect of a
Mortgage Loan delinquent as to its Balloon Payment will constitute advances in
respect of the principal portion of such Balloon Payment.
The Class A Scheduled Principal Distribution Percentage for any
Distribution Date represents the portion of the Scheduled Principal Distribution
Amount for such Distribution Date payable (subject to the payment priorities
described herein) on the Class A Certificates. The "Class A Scheduled Principal
Distribution Percentage" for any Distribution Date will equal the lesser of (a)
100% and (b) a fraction, expressed as a percentage, the numerator of which is
the Class A Balance outstanding immediately prior to such Distribution Date, and
the denominator of which is the lesser of (i) the sum of the Class A Balance,
the Class B Balance and the Class C Balance and (ii) the aggregate Stated
Principal Balance of the Mortgage Loans, in either case outstanding immediately
prior to such Distribution Date.
The "Unscheduled Principal Distribution Amount" for any Distribution
Date is equal to the sum of: (a) all voluntary principal prepayments received on
the Mortgage Loans during the related Due Period; and (b) the excess, if any, of
(i) all unscheduled recoveries received on the Mortgage Loans during the related
Due Period, whether in the form of liquidation proceeds, condemnation proceeds,
insurance proceeds or amounts paid in connection with the purchase of a Mortgage
Loan out of the Trust Fund, exclusive in each case of any portion thereof
payable or reimbursable to the Master Servicer in connection with the related
Mortgage Loan, over (ii) the respective portions of the net amounts described in
the immediately preceding clause (i) needed to cover interest (at the applicable
Net Mortgage Rate in effect from time to time) on the
S-28
<PAGE>
related Mortgage Loan from the date to which interest was previously paid or
advanced through the Due Date for such Mortgage Loan in the related Due Period
(exclusive of any portion of such interest added to the principal balance of
such Mortgage Loan as negative amortization).
The "Class Negative Amortization" in respect of any class of
Certificates for any Distribution Date is equal to such class' allocable share
of the Aggregate Mortgage Loan Negative Amortization for such Distribution Date.
SUBORDINATION
In order to maximize the likelihood of distribution in full of the
Class A Interest Distribution Amount and the Class A Scheduled Principal
Distribution Amount, on each Distribution date, holders of the Class A
Certificates have a right to distributions of the Available Distribution Amount
that is prior to the rights of the holders of the Subordinate Certificates, to
the extent necessary to satisfy the Class Interest Distribution Amount and the
Class A Scheduled Principal Distribution Amount.
The entitlement to the Class A Certificates of the entire Unscheduled
Principal Distribution Amount will accelerate the amortization of the Class A
Certificates relative to the actual amortization of the Mortgage
Loans.
To the extent that the Class A Certificates are amortized faster than
the Mortgage Loans, without taking into account losses on the Mortgage Loans,
the percentage interest evidenced by the Class A Certificates in the Trust Fund
will be decreased (with a corresponding increase in the interest in the Trust
Fund evidenced by the Subordinate Certificates), thereby increasing, relative to
their respective Certificate Balances, the Subordinate afforded the Class A
Certificates by the Subordinate Certificates.
ADVANCES
On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated to make advances (each, an "Advance") out of
its own funds, or funds held in the Certificate Account that are not required to
be part of the Available Distribution Amount for such Distribution Date, in an
amount equal to the aggregate of (i) all Monthly Payments (net of the Servicing
Fee), other than Balloon Payments, which were due on the Mortgage Loans during
the related Due Period and delinquent as of the related Determination Date and
(ii) in the case of each Mortgage Loan delinquent in respect of its Balloon
Payment as of the related Determination Date, an amount sufficient to amortize
fully the principal portion of such Balloon Payment over the remaining
amortization term of such Mortgage Loan and to pay interest at the Net Mortgage
Rate in effect for such Mortgage Loan for the one month period preceding its Due
Date in the related Due Period (but only to the extent that the related
mortgagor has not made a payment sufficient to cover such amount under any
forbearance arrangement that has been included in the Available Distribution
Amount for such Distribution Date). The Master Servicer's obligations to make
Advances in respect of any Mortgage Loan will continue through liquidation of
such Mortgage Loan and out of its own funds from any amounts collected in
respect of the Mortgage Loan as to which such Advance was made, whether in the
form of late payments, insurance proceeds, liquidation proceeds, condemnation
proceeds or amounts paid in connection with the purchase of such Mortgage Loan.
Notwithstanding the foregoing, the Master Servicer will be obligated to make any
Advance only to the extent that it determines in its reasonable good faith
judgment that, if made, would be recoverable out of general funds on deposit in
the Certificate Account. Any failure by the Master Servicer to make an Advance
as required under the Pooling and Servicing Agreement will constitute an event
of default thereunder, in which case the trustee will be obligated to make any
such Advance, in accordance with the terms of the Pooling and Servicing
Agreement.
CERTAIN YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity on the Class A Certificates will be affected by
the rate of principal payments on the Mortgage Loans including, for this
purpose, prepayments, which may include amounts received by virtue of
repurchase, condemnation, insurance or foreclosure. The yield to maturity on the
Class A Certificates will also be affected by the level of the Index. The rate
of principal payments on the Class A Certificates will correspond to the rate of
principal payments (including prepayments) on the related Mortgage Loans.
S-29
<PAGE>
[Description of factors affecting yield, prepayment and maturity of the
Mortgage Loans and Class A Certificates depending upon characteristics of the
Mortgage Loans.]
WEIGHTED AVERAGE LIFE OF THE CLASS A CERTIFICATES
Weighted average life refers to the average amount of time 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 Class A
Certificates will be influenced by the rate at which principal payments
(including scheduled payments, principal prepayments and payments made pursuant
to any applicable policies of insurance) on the Mortgage Loans are made.
Principal payments on the Mortgage Loans may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
prepayments and liquidations due to a default or other dispositions of the
Mortgage Loans).
The table of Percent of Initial Certificate Balance Outstanding for the
Class A Certificates at the respective percentages of [CPR][SPA] set forth below
indicates the weighted average life of such Certificates and sets forth the
percentage of the initial principal amount of such Certificates that would be
outstanding after each of the dates shown at the indicated percentages of
[CPR][SPA]. The table has been prepared on the basis of the following
assumptions regarding the characteristics of the Mortgage Loans: (i) an
outstanding principal balance of $____________, a remaining amortization term of
___ months and a term to balloon of ___ months; (ii) an interest rate equal to
___% per annum until the _______ Due Date and thereafter an interest rate equal
to ___% per annum (at an assumed Index of ___%) and Monthly Payments that would
fully amortize the remaining balance of the Mortgage Loan over its remaining
amortization term; (iii) the Mortgage Loans prepay at the indicated percentage
of [CPR][SPA]; (iv) the maturity date of each of the Balloon Mortgage Loans is
not extended; (v) distributions on the Class A Certificates are received, in
cash, on the 25th day of each month, commencing in __________; (vi) no defaults
or delinquencies in, or modifications, waivers or amendments respecting, the
payment by the mortgagors of principal and interest on the Mortgage Loans occur;
(vii) the initial Certificate Balance of the Class A Certificates is
$______________; (viii) prepayments represent payment in full of individual
Mortgage Loans and are received on the respective Due Dates and include 30 days'
interest thereon; (ix) there are no repurchases of Mortgage Loans due to
breaches of any representation and warranty or otherwise; (x) the Class A
Certificates are purchased on ___________; (xi) the Servicing Fee is ____% per
annum; and (xii) the Index on each Interest Rate Adjustment Date is _____% per
annum.
Based on the foregoing assumptions, the table indicates the weighted
average life of the Class A Certificates and sets forth the percentages of the
initial Certificate Balance of the Class A Certificates that would be
outstanding after the Distribution Date in ____________ of each of the years
indicated, at various percentages of [CPR][SPA]. Neither [CPR][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 mortgage loans, including the Mortgage Loans included in the
Mortgage Pool. Variations in the actual prepayment experience and the balance of
the Mortgage Loans that prepay may increase or decrease the percentage of
initial Certificate Balance (and weighted average life) shown in the following
table. Such variations may occur even if the average prepayment experience of
all such Mortgage Loans is the same as any of the specified assumptions.
PERCENT OF INITIAL CLASS A CERTIFICATE BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF [CPR][SPA]
DISTRIBUTION DATE
Initial Percent......... ____% ____% ____% ____% ____% ____%
_________ 25, 1994......
_________ 25, 1995......
_________ 25, 1996......
_________ 25, 1997......
_________ 25, 1998......
_________ 25, 1999......
_________ 25, 2000......
_________ 25, 2001......
_________ 25, 2002......
_________ 25, 2003......
S-30
<PAGE>
_________ 25, 2004......
Weighted Average Life
(Years) (+)...........
- ----------
+ The weighted average life of the Class A Certificates is determined by (i)
multiplying the amount of each distribution of principal by the number of
years from the date of issuance to the related Distribution
Date, (ii) adding the results and (iii) dividing the sum by the total
principal distributions on such class of Certificates.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of ____________ 1, 199__ (the "Pooling and Servicing
Agreement"), by and among the Depositor, the Master
Servicer and the Trustee.
Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Class A Certificates. The Depositor will
provide to a prospective or actual Class A Certificateholder without charge,
upon written request, a copy (without exhibits) of the Pooling and Servicing
Agreement. Requests should be addressed to Salomon Brothers Mortgage Securities
VII, Inc., Seven World Trade Center, New York, New York 10048.
[The Master Servicer will be required to service and administer the
Mortgage Loans, either directly or through sub-servicers, on behalf of the
Trustee and in the best interests of and for the benefit of the
Certificateholders (as determined by the Master Servicer in its good faith and
reasonable judgment) in accordance with applicable law, the terms of the Pooling
and Servicing Agreement, the terms of the respective Mortgage Loans and, to the
extent consistent with the foregoing, in the same manner as would prudent
institutional mortgage lenders and loan servicers servicing mortgage loans
comparable to the Mortgage Loans in the jurisdictions where the Mortgaged
Properties are located, and with a view to the maximization of timely recovery
of principal and interest, but without regard to: (i) any relationship that the
Master Servicer or any affiliate of the Master Servicer or any affiliate of the
Master Servicer may have with the related mortgagor; (ii) the ownership of any
Certificate by the Master Servicer or any affiliate of the Master Servicer;
(iii) the Master Servicer's obligation to make Advances and advances to cover
certain servicing expenses; and (iv) the Master Servicer's right to receive
compensation for services under the Pooling and Servicing Agreement or with
respect to any particular transaction.]
ASSIGNMENT OF THE MORTGAGE LOANS
On or prior to the _____________, the Depositor will assign or cause to
be assigned the Mortgage Loans, without recourse, to the Trustee for the benefit
of the Certificateholders. Prior to the _____________, the Depositor will, as to
each Mortgage Loan, deliver to the Trustee (or the custodian hereinafter
referred to), among other things, the following documents (collectively, as to
such Mortgage Loan, the "Mortgage File"): (i) the original or, if accompanied by
a "lost note" affidavit, a copy of the Mortgage Note, endorsed by
_______________________________ which transferred such Mortgage Loan, without
recourse, in blank or to the order of Trustee; (ii) the original Mortgage or a
certified copy thereof, and any intervening assignments thereof, or certified
copies of such intervening assignments, in each case with evidence of recording
thereon; (iii) originals or certified copies of any related assignment of
leases, rents and profits and any related security agreement (if, in either
case, such item is a document separate from the Mortgage) and any intervening
assignments of each such document or instrument; (iv) an assignment of the
Mortgage, executed by the __________________________________ which transferred
such Mortgage Loan, in blank or to the order of the Trustee, in recordable form;
(v) assignments of any related assignment of leases, rents and profits and any
related security agreement (if, in either case, such item is a document separate
from the Mortgage), executed by ______________________________________ which
transferred such Mortgage Loan, in blank or to the order of the Trustee; (vi)
originals or certified copies of all assumption, modification and substitution
agreements in those instances where the terms or provisions of the Mortgage or
Mortgage Note have been modified or the Mortgage or Mortgage Note has been
assumed; and (vii) the originals or certificates of a lender's title insurance
policy issued on the date of the origination of such Mortgage Loan
S-31
<PAGE>
or, with respect to each Mortgage Loan not covered by a lender's title insurance
policy, an attorney's opinion of title given by an attorney licensed to practice
law in the jurisdiction where the Mortgaged Property is located. The Pooling and
Servicing Agreement will require the Depositor promptly (and in any event within
___ days of the _____________) to cause each assignment of the Mortgage
described in clauses (iv) and (v) above to be submitted for recording in the
real property records of the jurisdiction in which the related Mortgaged
Property is located. Any such assignment delivered in blank will be completed to
the order of the Trustee prior to recording. The Pooling and Servicing Agreement
will also require the Depositor to cause the endorsements on the Mortgage Notes
delivered in blank to be completed to the order of the Trustee.
THE MASTER SERVICER
GENERAL. ______________________, a ______________ corporation, will act
as Master Servicer (in such capacity, the "Master Servicer") for the
Certificates pursuant to the Pooling and Servicing Agreement. The Master
Servicer[, a wholly-owned subsidiary of ______________,] [is engaged in the
mortgage banking business and, as such, originates, purchases, sells and
services mortgage loans. _____________ primarily originates mortgage loans
through a branch system consisting of _________ offices in ________ states, and
through mortgage loan brokers.]
The executive offices of the Master Servicer are located at
________________, telephone number (___) _____________.
The information set forth herein concerning the Master Servicer has
been provided by the Master Servicer, and neither the Depositor nor the
Underwriter makes any representation or warranty as to the accuracy or
completeness of such information.
DELINQUENCY AND FORECLOSURE EXPERIENCE. The following tables set forth
certain information concerning the delinquency experience (including pending
foreclosures) on [multifamily][commercial] mortgage loans included in the Master
Servicer's servicing portfolio (which includes mortgage loans that are
subserviced by others). 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 31 days past due on a contractual basis.
S-32
<PAGE>
<TABLE>
<CAPTION>
as of December 31, 19 as of December 31, 19 as of , 19
---------------------- ---------------------- ----------
By Dollar By Dollar By Dollar
By No. of Amount By No. of Amount By No. Amount of
Loans of Loans of of Loans
Loans Loans Loans
--------- ------ --------- ------ ------ ---------
(Dollar Amount in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio __________ $______ __________ $______ ______ $_______
-- -- ---- -
Period of
Delinquency
31 to 59 days
60 to 89 days
90 days or more __________ _______ __________ _______ ______ ________
--- --- ---- -
Total Delinquent __________ $______ __________ $______ ______ $_______
Loans __ __ ____ _
Percent of % % % % % %
Portfolio
Foreclosures
pending (1)
Percent of % % % % % %
Portfolio
Foreclosures
Percent of
Portfolio % % % % % %
- -------------
</TABLE>
- ----------
(1) Includes bankruptcies which preclude foreclosure.
There can be no assurance that the delinquency and foreclosure
experience of the Mortgage Loans comprising the Mortgage Pool will correspond to
the delinquency and foreclosure experience of the Master Servicer's mortgage
portfolio set forth in the foregoing tables. The aggregate delinquency and
foreclosure experience on the Mortgage Loans comprising the Mortgage Pool will
depend on the results obtained over
the life of the Mortgage Pool.
[A discussion re: trends, changes and anomalies and matters expected to
have a material impact on future conditions].
[SPECIAL SERVICERS
The Master Servicer is permitted, at its own expense, to utilize agents
or attorneys in performing any of its obligations under the Pooling and
Servicing Agreement, but will not thereby be relieved of any such obligation,
and will be responsible for the acts and omissions of any such agents or
attorneys.
The Master Servicer currently intends to engage [____________]
("______"), a ______ corporation, as its agent to perform certain servicing
functions primarily related to property inspections, foreclosure and the
operation and sale of REO Property. See "Description of the
Agreements-Realization Upon Defaulted
S-33
<PAGE>
Whole Loans" in the Prospectus. ____________ is [describe organization] of
[multifamily] [commercial] properties and has extensive experience in the
[describe relevant experience] of [multifamily] [commercial] properties.]
CERTIFICATE ACCOUNT
The Master Servicer is required to deposit on a daily basis all amounts
received with respect of the Mortgage Loans, net of its servicing compensation,
into a separate Certificate Account maintained with _____________. Interest or
other income earned on funds in the Certificate Account will be paid to the
Master Servicer as additional servicing compensation. See "Description of the
Trust Funds- General" and "-Certificate Accounts" in the Prospectus.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect
of its master servicing activities will be the Servicing Fee. The Servicing Fee
will be payable monthly only from amounts received in respect of interest on
each Mortgage Loan, will accrue at the Servicing Fee Rate and will be computed
on the basis of the same principal amount and for the same period respecting
which any related interest payment on such Mortgage Loan is computed. The
Servicing Fee Rate with respect to each Mortgage Loan equals ____% per annum.
[The principal compensation to be paid to the Special Servicer in respect of its
special servicing activities will be the Special Servicing Fee. The Special
Servicing Fee will be payable monthly only from amounts received in respect of
interest on each Mortgage Loan serviced by the Special Servicer (each such
Mortgage Loan, a Specially Serviced Mortgage Loan"), will accrue at the Special
Servicing Fee Rate and will be computed on the basis of the same principal
amount for the same period respecting which any related interest payment on such
Mortgage Loan is computed. The Special Servicing Fee Rate with respect to each
Specially Serviced Mortgage Loan equals __% per annum. As further compensation
for its servicing activities, the Special Servicer shall also be entitled to
receive (i) the Liquidation Fee for the procurement (directly or through an
agent thereof) of a purchaser in connection with the liquidation of a Mortgaged
Property securing any defaulted Mortgage Loan, out of related liquidation
proceeds, provided that the payment of such Liquidation Fee would not be a
violation of, and would not subject the Trustee or the Trust Fund to liability
under, any state or local statute, regulation or other requirement (including
without limitation, those governing the licensing of real estate brokers or
salesmen), and (ii) the Management Fee in connection with the operation and
management of any REO Property, out of related revenues. Any "Liquidation Fee"
payable to the Special Servicer will be equal to ___% (if the relevant sale
occurs at a foreclosure sale, trustee's sale or other similar proceeding) or
___% (if the relevant sale occurs subsequent to such Mortgaged Property's having
become an REO Property), as applicable, of the gross liquidation proceeds. The
"Management Fee" in respect of any REO Property is payable to the Special
Servicer monthly and is equal to ___% of the gross revenues derived from such
REO Property.]
As additional servicing compensation, the Master Servicer is entitled
to retain all assumption fees, prepayment penalties and late payment charges, to
the extent collected from mortgagors, together with any interest or other income
earned on funds held in the Certificate Account and any escrow accounts.
Although the Master Servicer is required to service and administer the Mortgage
Pool in accordance with the general servicing standard described above and,
accordingly, without regard to its right to receive compensation under the
Pooling and Servicing Agreement, additional servicing compensation in the nature
of assumption fees, prepayment penalties and late payment charges may under
certain circumstances provide the Master Servicer with an economic disincentive
to comply with such standard. The Master Servicer is obligated to pay certain
ongoing expenses associated with the Mortgage Pool and incurred by the Master
Servicer in connection with its responsibilities under the Agreement. See
"Description of the Agreements-Retained Interest; Servicing Compensation and
Payment of Expenses" in the Prospectus for information regarding other possible
compensation payable to the Master Servicer and for information regarding
expenses payable by the Master Servicer [and "Certain Federal Income Tax
Consequences" herein regarding certain taxes payable by the Master Servicer].
S-34
<PAGE>
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date the Master Servicer shall furnish to each
Certificateholder, to the Depositor, to the Trustee and to the Rating Agency a
statement setting forth certain information with respect to the Mortgage Loans
and the Certificates required pursuant to the Pooling and Servicing Agreement.
In addition, within a reasonable period of time after each calendar year, the
Master Servicer shall furnish to each person who at any time during such
calendar year was the holder of a Certificate a statement containing certain
information with respect to the Certificates required pursuant to the Pooling
and Servicing Agreement, aggregated for such calendar year or portion thereof
during which such person was a Certificateholder. See "Description of the
Certificates-Reports to Certificateholders" in the Prospectus.
VOTING RIGHTS
At all times during the term of this Agreement, the Voting Rights shall
be allocated among the Classes of Certificateholders in proportion to the
respective Certificate Balances of their Certificates (net, in the case of the
Class A, Class B and Class C Certificates, of any Uncovered Portion of the
related Certificate Balance). Voting Rights allocated to a class of
Certificateholders shall be allocated among such Certificateholders in
proportion to the Percentage Interests evidenced by their respective
Certificates.
TERMINATION
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment or other liquidation
of the last Mortgage Loan or REO Property subject thereto, and (ii) the purchase
of all of the assets of the Trust Fund by the Master Servicer. Written notice of
termination of the Pooling and Servicing Agreement will be given to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at the office of the Certificate Registrar
specified in such notice of termination. In no event, however, will the trust
created by the Pooling and Servicing Agreement continue beyond the expiration of
21 years from the death of the survivor of certain persons named in such Pooling
and Servicing Agreement.
Any such purchase by the Master Servicer of all the Mortgage Loans and
other assets in the Trust Fund is required to be made at a price equal to the
greater of (1) the aggregate fair market value of all the Mortgage Loans and REO
Properties then included in the Trust Fund, as mutually determined by the Master
Servicer and the Trustee, and (2) the excess of (a) the sum of (i) the aggregate
Purchase Price of all the Mortgage Loans then included in the Trust Fund and
(ii) the fair market value of all REO Properties then included in the Trust
Fund, as determined by an appraiser mutually agreed upon by the Master Servicer
and the Trustee, over (b) the aggregate of amounts payable or reimbursable to
the Master Servicer under the Pooling and Servicing Agreement. Such purchase
will effect early retirement of the then outstanding Class A Certificates, but
the right of the Master Servicer to effect such termination is subject to the
requirement that the aggregate Stated Principal Balance of the Mortgage Loans
then in the Trust Fund is less than ___% of the aggregate principal balance of
the Mortgage Loans as of the Cut-off Date.
USE OF PROCEEDS
The net proceeds from the sale of Class A Certificates will be used by
the Depositor to pay the purchase price of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class A Certificates, _______________________,
counsel to the Depositor, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Pooling and Servicing Agreement,
for federal income tax purposes, the Trust Fund will qualify as a REMIC under
the Code.
For federal income tax purposes, the Class R Certificates will be the
sole class of "residual interests" in the REMIC and the Class A, Class B and
Class C Certificates will be the "regular interests" in the REMIC and will be
treated as debt instruments of the REMIC.
See "Certain Federal Income Tax Consequences-REMICs" in the Prospectus.
S-35
<PAGE>
[The Class A Certificates [may][will not] be treated as having been
issued with original issue discount for federal income tax reporting purposes.
The prepayment assumption that will be used in determining the rate of accrual
of original issue discount, market discount and premium, if any, for federal
income tax purposes will be based on the assumption that subsequent to the date
of any determination the Mortgage Loans will prepay at a rate equal to ___%
[CPR][SPA]. No representation is made that the Mortgage Loans will prepay at
that rate or at any other rate. See "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates" and
"-Original Issue Discount" in the Prospectus.]
The Class A Certificates may be treated for federal income tax purposes
as having been issued at a premium. Whether any holder of such a class of
Certificates 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 such class of Certificates
should consult their own tax advisors regarding the possibility of making an
election to amortize such premium. See "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates" and
"-Premium" in the Prospectus.
The Class A Certificates will be treated as "qualifying real property
loans" within the meaning of Section 593(d) of the Code[, assets described in
Section 7701(a)(19)(C) of the Code] and "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code generally in the same proportion that the
assets of the REMIC underlying such Certificates would be so treated. [In
addition, interest (including original issue discount) on the Class A
Certificates will be interests described in Section 856(c)(3)(B) of the Code to
the extent that such Class A Certificates are treated as "real estate assets"
under Section 856(c)(5)(A) of the Code.] [Moreover, the Class A 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.] [The Class A Certificates will not be considered to represent an interest
in "loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code.] See "Certain Federal Income Tax
Consequences-REMICs-Characterization of Investments in REMIC Certificates" in
the Prospectus.
For further information regarding the federal income tax consequences
of investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences-REMICs" in the Prospectus.
ERISA CONSIDERATIONS
[A fiduciary of any employee benefit plan or other retirement plans and
arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested, that is subject to the Employee
Retirement arrangements are invested, that is subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code
should carefully review with its legal advisors whether the purchase or holding
of Class A Certificates could give rise to a transaction that is prohibited or
is not otherwise permitted either under ERISA or Section 4975 of the Code.
[The U.S. Department of Labor issued an individual exemption,
Prohibited Transaction Exemption 91-23 (the "Exemption"), on April 18, 1991 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 Sections 4975(a) and (b) of the Code and Section 501(i) of ERISA,
certain transactions, among others, relating to the servicing and operation of
mortgage pools and the purchase, sale and holding of mortgage pass-through
certificates underwritten by an Underwriter (as hereinafter defined), provided
that certain conditions set forth in the Exemption are satisfied. For purposes
of this Section "ERISA Considerations", the term "Underwriter" shall include (a)
Salomon 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 the Class A Certificates.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Class A
Certificates to be eligible for exemptive relief thereunder.
S-36
<PAGE>
First, the acquisition of the Class A Certificates by certain employee benefit
plans subject to Section 4975 of the Code (each, a "Plan"), must be on terms
that are at least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party. Second, the rights and interests evidenced
by the Class A Certificates must not be subordinated to the rights and interests
evidenced by the other certificates of the same trust. Third, the Class A
Certificates at the time of acquisition by the Plan must be rated in one of the
three highest generic rating categories by Standard & Poor's Corporation,
Moody's Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch
Investors Service, Inc. Fourth, the Trustee cannot be an affiliate of any member
of the "Restricted Group", which consists of any Underwriter, the Depositor, the
Master Servicer, each sub-servicer and any mortgagor with respect to Mortgage
Loans constituting more than 5% of the aggregate unamortized principal balance
of the Mortgage Loans as of the date of initial issuance of the Class A
Certificates. Fifth, the sum of all payments made to and retained by the
Underwriter must represent not more than reasonable compensation for
underwriting the Class A Certificates; the sum of all payments made to and
retained by the Underwriter must represent not more than reasonable compensation
for underwriting the Class A Certificates; the sum of all payments made to and
retained by the Depositor pursuant to the assignment of the Mortgage Loans to
the Trust Fund must represent not more than the fair market value of such
obligations; and the sum of all payments made to and retained by the Master
Servicer and any sub-servicer must represent not more than reasonable
compensation for such person's services under the Agreement and reimbursement of
such person's reasonable expenses in connection therewith. Sixth, the investing
Plan must be an accredited investor as defined in Rule 501(a)(1) of Regulation D
of the Securities and Exchange Commission under the Securities Act of 1933, as
amended.
Because the Class A Certificates are not subordinated to any other
class of Certificates, the second general condition set forth above is satisfied
with respect to such Certificates. It is a condition of the issuance of the
Class A Certificates that they be rated [not lower than] "___________" by
_______________. A fiduciary of a Plan contemplating purchasing a Class A
Certificate in the secondary market must make its own determination that at the
time of such acquisition, the Class A Certificates continue to satisfy the third
general condition set forth above. The Depositor expects that the fourth general
condition set forth above will be satisfied with respect to the Class A
Certificates. A fiduciary of a Plan contemplating purchasing a Class A
Certificate must make its own determination that the first, third, fifth and
sixth general conditions set forth above will be satisfied with respect to such
Class A Certificate.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm (a) that such Certificates constitute "certificates" for purposes
of the Exemption and (b) that the specific and general conditions of the
Exemption and the other requirements set forth in the Exemption would be
satisfied. In addition to making its own determination as to the availability of
the exemptive relief provided in the Exemption, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions, in
particular, Prohibited Transaction Class Exemption 83-1.] See "ERISA
Considerations" in the Prospectus.
Any Plan fiduciary considering whether to purchase a Class A
Certificate on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment.
LEGAL INVESTMENT
The Class A Certificates will [not] constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") [so long as they are rated in at least the second highest rating
category by the Rating Agency, and, as such, are legal investments for certain
entities to the extent provided in SMMEA]. SMMEA provided that states could
override its provisions on legal investment and restrict or condition investment
in mortgage related securities by taking statutory action on or prior to October
3, 1991. Certain states have enacted legislation which overrides the preemption
provisions of SMMEA.
The Depositor makes no representations as to the proper
characterization of the Class Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase the Class A
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of the Class A Certificates. Accordingly, all
institutions whose investment activities are subject to legal investment laws
and regulations, regulatory capital requirements or review by regulatory
authorities
S-37
<PAGE>
should consult with their own legal advisors in determining whether and to what
extent the Class A Certificates constitute a legal investment under SMMEA or is
subject to investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter, the Class A Certificates
will be purchased from the Depositor by the Underwriter, an affiliate of the
Depositor, upon issuance. Distribution of the Class A Certificates will be made
by the Underwriter from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. Proceeds to the Depositor
from the sale of the Class A Certificates will be _____% of the initial
aggregate principal balance thereof as of the Cut-off Date, plus accrued
interest from the Cut-off Date at a rate of ___% per annum, before deducting
expenses payable by the Depositor. In connection with the purchase and sale of
the Class A Certificates, the Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting discounts.
The Depositor also has been advised by the Underwriter that it, through
one or more of its affiliates currently expects to make a market in the Class A
Certificates offered hereby; however, it has not obligation to do so, any market
making may be discontinued at any time, and there can be no assurance that an
active public market for the Class A Certificates will develop.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933.
SECONDARY MARKET
There can be no assurance that a secondary market for the Class A
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Class A
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates-Reports to Certificateholders", which will
include information as to the outstanding principal balance of the Class A
Certificates and the status of the applicable forms of credit enhancement. There
can be no assurance that any additional information regarding the Class A
Certificates will be available through any other source. In addition, the
Depositor is not aware of any source through which price information about the
Class A Certificates will be generally available on an ongoing basis. The
limited nature of such information regarding the Class A Certificates may
adversely affect the liquidity of the Class A Certificates, even if a secondary
market for the Class A Certificates becomes available.
LEGAL MATTERS
Certain legal matters relating to the Class A Certificates will be
passed upon for the Depositor and the Underwriter by Thacher Proffitt & Wood,
New York, New York.
RATING
It is a condition to issuance that the Class A Certificates be rated
[not lower than] "___" by __________________. However, no person is obligated to
maintain the rating on the Class A Certificates, and ____________________ is not
obligated to monitor its rating following the _____________.
_______________'s ratings on mortgage pass-through certificates address
the likelihood of the receipt by holders thereof of payments to which they are
entitled. _______________'s ratings take into consideration the credit quality
of the mortgage pool, structural and legal aspects associated with the
certificates, and the extent to which the payment stream in the mortgage pool is
adequate to make payments required under the certificates. _______________'s
rating on the Class A Certificates does not, however, constitute a statement
regarding frequency of prepayments on the Mortgage Loans. See "Special
Considerations" herein.
S-38
<PAGE>
There can be no assurance as to whether any rating agency not requested
to rate the Class A Certificates will nonetheless issue a rating and, if so,
what such rating would be. A rating assigned to the Class A Certificates by a
rating agency that has not been requested by the Depositor to do so may be lower
than the rating assigned by _______________'s pursuant to the Depositor's
request.
The rating of the Class A Certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating agency.
S-39
<PAGE>
[ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
Attach Mortgage Loan Schedule that details relevant and available
information regarding the Mortgage Loans, such as the information included under
the following headings:
1. Loan ID number
2. Original balance
3. Current balance
4. Current rate
5. Current payment
6. Note date
7. Original term
8. Remaining term
9. Maturity date
10. Amortization
11. Origination appraisal
12. Borrowing entity
13. Property name
14. Street
15. City
16. State
17. Zip code
18. Rate index
19. First rate change
20. Next rate change
21. First payment change
22. Next payment change
23. Rate adjustment frequency
24. Payment adjustment frequency
25. Period payment cap
26. Life rate cap
27. Life rate floor
28. Negative amortization cap percent
29. Negative amortization cap amount
30. Annualized recent net operating income
31. Most recent net operating income year
32. Most recent debt service coverage ratio
33. LTV and current balances based upon the
Appraised Value]
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Depositor or by the Underwriter. This Prospectus Supplement and the Prospectus
do not constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement
or the Prospectus.
---------------
TABLE OF CONTENTS
Page
----
Prospectus Supplement
Summary.............................................. S-
Special Considerations............................... S-
Description of the Mortgage Pool..................... S-
Description of the Certificates...................... S-
Pooling and Servicing Agreement...................... S-
Use of Proceeds...................................... S-
Certain Federal Income Tax
Consequences.................................... S-
ERISA Considerations................................. S-
Legal Investment..................................... S-
Method of Distribution............................... S-
Legal Matters........................................ S-
Rating............................................... S-
Prospectus
Available Information................................ 2
Incorporation of Certain Information
by Reference....................................... 3
Summary of Prospectus................................ 8
Special Considerations............................... 17
Description of the Trust Funds....................... 22
Use of Proceeds...................................... 27
Yield Considerations................................. 27
The Depositor........................................ 31
Description of the Certificates...................... 31
Description of the Agreements........................
39
Description of Credit Support........................ 51
Certain Legal Aspects of Mortgage Loans.............. 53
Certain Federal Income Tax Consequences.............. 64
State Tax Considerations............................. 90
ERISA Considerations................................. 90
Legal Investment.....................................
93
Method of Distribution............................... 94
Legal Matters........................................ 95
Financial Information................................ 95
Rating............................................... 95
Index of Principal Definitions....................... 96
================================================================================
================================================================================
SALOMON BROTHERS
MORTGAGE SECURITIES
VII, INC.
$----------------
(APPROXIMATE)
CLASS A
MORTGAGE
PASS-THROUGH
CERTIFICATES
SERIES 199_-___
VARIABLE PASS-THROUGH RATE
PROSPECTUS SUPPLEMENT
____________ __, 199_
SALOMON SMITH BARNEY
<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 supplement 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 September 2, 1998
[Version 4]
PROSPECTUS SUPPLEMENT
(To Prospectus Dated ____________, 19__)
$----------------
Salomon Brothers Mortgage Securities VII, Inc.
Company
Salomon MBN Trust 19__-___
[Name of Master Servicer]
Master Servicer
Collateralized Mortgage Notes, Series 19__-___
The Salomon MBN Trust 19__ (the "Issuer") will be formed pursuant to a
Trust Agreement to be dated as of _________________, 19__ between Salomon
Brothers Mortgage Securities VII, Inc. (the "Company") and
__________________________, the Owner Trustee. The Issuer will issue $__________
aggregate principal amount of Collateralized Mortgage Notes, Series 19__-____
(the "Notes"). The Notes will be issued pursuant to an Indenture to be dated as
of _________________, 19__, between the Issuer and ___________________, the
Indenture Trustee. The Issuer will also issue $___________ aggregate principal
amount of the Issuer's Trust Certificates, Series 19__- ____ (the
"Certificates"). The Notes and the Certificates are collectively referred to
herein as the "Securities". Only the Notes are offered hereby.
The Notes will represent indebtedness of the related trust fund (the
"Trust Fund") created by the Trust Agreement. The Trust Fund consists of
adjustable-rate, conventional, residential, one- to four-family first lien
mortgage loans (the "Mortgage Loans"). In addition, the Notes will have the
benefit of an irrevocable and unconditional financial guaranty insurance policy
(the "Policy") issued by _______________ (the "Insurer") as described under "The
Policy" herein.
The interest rates on the Mortgage Loans (each, a "Mortgage Rate") will
change semi-annually based on the Index (as defined herein) and the respective
Note Margins described herein, subject to certain periodic and lifetime
limitations as described more fully herein.
Payments of principal and interest on the Notes will be made on the
_______ day of each month or, if such day is not a business day, then on the
next business day, commencing on ____________, 19__ (each, a "Payment Date"). As
described herein, interest will accrue on the Notes at a floating rate (the
"Bond Rate") equal to [LIBOR (as defined herein)] plus _____% per annum subject
to certain limitations as described herein. See "Description of the
Securities--Interest on the Notes" herein.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" BEGINNING ON PAGE S-__ HEREIN AND ON PAGE ___ IN THE ACCOMPANYING
PROSPECTUS.
<PAGE>
It is a condition of the issuance of the Notes that they be rated "___"
by ___________________ and "____" by ___________________.
THE YIELD TO MATURITY ON THE NOTES WILL DEPEND ON THE RATE AND TIMING
OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, LIQUIDATIONS AND REPURCHASES) ON
THE MORTGAGE LOANS. SEE "CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN AND
"YIELD AND PREPAYMENT CONSIDERATIONS" IN THE PROSPECTUS.
There is currently no secondary market for the Notes.
____________________ (the "Underwriter") intends to make a secondary market in
the Notes, but is not obligated to do so. There can be no assurance that a
secondary market for the Notes will develop or, if it does develop, that it will
continue. The Notes will not be listed on any securities exchange.
THE NOTES REPRESENT OBLIGATIONS OF THE ISSUER ONLY AND DO NOT REPRESENT
AN INTEREST IN OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER, OR ANY OF
THEIR AFFILIATES. NONE OF THE NOTES OR THE UNDERLYING MORTGAGE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE COMPANY,
THE MASTER SERVICER OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Notes will be purchased from the Company by the Underwriter and
will be offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The proceeds to the Company from the sale of the Notes are expected to be
approximately $___________, before the deduction of expenses payable by the
Company estimated to be approximately $_______.
The Notes are offered by the Underwriter subject to prior sale, when,
as and if delivered to and accepted by the Underwriter and subject to certain
other conditions. The Underwriter reserves the right to withdraw, cancel or
modify such offer and to reject any order in whole or in part. It is expected
that delivery of the Notes will be made on or about ____________, 19__ [in
book-entry form through the Same Day Funds Settlement System of The Depository
Trust Company as discussed herein,] [at the office of __________________,
_______________, _________________] against payment therefor in immediately
available funds.
[Name of Underwriter]
[Date of Prospectus Supplement]
S-2
<PAGE>
THE SECURITIES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF
A SEPARATE SERIES OF SECURITIES BEING OFFERED PURSUANT TO THE COMPANY'S
PROSPECTUS DATED ____________, 19__, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A
PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE SECURITIES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER- ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET, SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus.
Issuer......................... The Notes will be issued by Salomon MBN Trust
19__-___, a Delaware business trust established
pursuant to the Trust Agreement, dated as of
________ 1, 19__ between the Company and the
Owner Trustee.
The Notes...................... $____________ Collateralized Mortgage Notes,
Series 19__-__. Only the Notes are offered
hereby. The Notes will be issued pursuant to an
Indenture, dated as of ________ 1, 19__ between
the Issuer and ___________________, as
Indenture Trustee.
Company........................ Salomon Brothers Mortgage Securities VII, Inc.
(the "Company"). See "The Company" in the
Prospectus.
Master Servicer................ [Name of Master Servicer] (the "Master
Servicer"). See "[Name of Master Servicer]" in
the Prospectus.
Owner Trustee.................. _________________, ____________.
Indenture Trustee.............. __________________, ____________.
Delivery Date.................. On or about ____________, 19__.
Payment Date................... The [______] day of each month (or, if such day
is not a business day, the next business day),
beginning on ___________________, 19__, (each,
a "Payment Date").
[Denominations and
Registration................... The Notes (the "Book-Entry Notes") will be
issued, maintained and transferred on the
book-entry records of DTC and its Participants
(as defined in the Prospectus). The Notes will
be offered in registered form, in minimum
denominations of $______ and integral multiples
of $_____ in excess thereof. The Book-Entry
Notes will be represented by one or more Bond
certificates registered in the name of Cede &
Co., as nominee of DTC. No Beneficial Owner
will be entitled to receive a Bond in fully
registered, certificated form (a "Definitive
Bond"), except
S-4
<PAGE>
under the limited circumstances described
herein. See "Description of the Notes--Book
Entry Notes" herein.]
The Mortgage Pool.............. The Mortgage Loans are secured by first liens
on one- to four-family residential real
properties (each, a "Mortgaged Property"). The
Mortgage Loans have individual principal
balances at origination of at least $______ but
not more than $_________ with an average
principal balance at origination of
approximately $_________. The Mortgage Loans
have terms to maturity of __ years from the
date of origination and a weighted average
remaining term to stated maturity of
approximately ____ years and __ months as of
the Cut-off Date. The Mortgage Rate on each
Mortgage Loan will adjust semi-annually on its
Adjustment Date (as defined herein), with
corresponding adjustments in the amount of
monthly payments, to equal the sum (rounded as
described herein) of the Index described below
and a fixed percentage set forth in the related
Mortgage Note (the "Note Margin"). However, (i)
on any Adjustment Date such Mortgage Rate may
not increase or decrease by more than 2% (the
"Periodic Rate Cap"), (ii) over the life of
such Mortgage Loan, such Mortgage Rate may not
exceed the related maximum Mortgage Rate (such
maximum Mortgage Rate is equal to the Mortgage
Rate at origination plus a lifetime rate cap
(the "Lifetime Rate Cap")), which maximum
Mortgage Rates will range from ______% to
______% and (iii) with respect to approximately
____% of the Mortgage Loans, by aggregate
principal balance as of the Cut-off Date, over
the life of such Mortgage Loan, such Mortgage
Rate may not be lower than the minimum Mortgage
Rate. The difference between the Mortgage Rate
on each Mortgage Loan at origination and the
minimum Mortgage Rate on such Mortgage Loan
will equal the lifetime rate floor (the
"Lifetime Rate Floor"). The minimum Mortgage
Rates will range from _____% to ______% per
annum. The Mortgage Loans will bear interest at
Mortgage Rates of at least _____% per annum but
not more than ______% per annum, as of the
Cut-off Date. For a further description of the
Mortgage Loans, see "Description of the
Mortgage Pool" herein.
The Index...................... As of any Adjustment Date with respect to any
Mortgage Loan, the Index applicable to the
determination of the related Mortgage Rate will
be a rate equal to the monthly weighted average
cost of funds for members of the
S-5
<PAGE>
Federal Home Loan Bank of San Francisco as most
recently available 45 days prior to the
Adjustment Date (the "Cost of Funds Index" or
"Index").
Interest Payments ............. Interest on the Notes will be paid monthly on
each Payment Date, commencing in ___ 19__, at
the Bond Interest Rate for the related Interest
Period (as defined below). The Bond Interest
Rate for an Interest Period will be equal to
LIBOR plus ___% as described herein under
"Description of the Notes--Interest on the
Notes." Interest on the Notes in respect of any
Payment Date will accrue from the preceding
Payment Date (or in the case of the first
Payment Date, from the date of initial issuance
of the Notes (the "Closing Date") through the
day preceding such Payment Date (each such
period, an "Interest Period")) on the basis of
the actual number of days in the Interest
Period and a 360-day year.
Principal Payments ............ On any Payment Date, to the extent of funds
available therefor, Bondholders will be
entitled to receive principal payments
generally equal to the amount, if any,
necessary to bring the Outstanding Reserve
Amount up to the Reserve Amount Target. In no
event will principal payments on the Notes on
any Payment Date exceed the Bond Principal
Balance thereof on such date. On the Payment
Date in __________, principal will be due and
payable on the Notes in an amount equal to the
Bond Principal Balance for such Payment Date.
The "Bond Principal Balance" of the Notes on
any day is the initial balance thereof as of
the Closing Date reduced by all payments of
principal thereon as of such day.
P&I Collections................ All collections on the Mortgage Loans will be
allocated by the Master Servicer in accordance
with the terms of the Mortgage Loans between
amounts collected in respect of interest and
amounts collected in respect of principal. See
"Description of the Servicing Agreement--P&I
Collections" herein, which describes the
calculation of the Interest Collections and the
Principal Collections on the Mortgage Loans for
the Collection Period related to each Payment
Date.
With respect to any Payment Date, the portion
of Principal Collections and Interest
Collections that are distributable pursuant to
the Servicing Agreement
S-6
<PAGE>
(together, the "P&I Collections") will equal
(a) Interest Collections for such Payment Date
and (b) Principal Collections for such Payment
Date.
Outstanding Reserve
Amount......................... The distribution of the Additional Principal
Distribution Amount, if any, on the Mortgage
Loans will create the Outstanding Reserve
Amount. The Outstanding Reserve Amount, if any,
will be available to absorb any Liquidation
Loss Amounts that are allocated to the Mortgage
Loans and not covered by Principal Collections
and Interest Collections. Any Liquidation Loss
Amounts allocable to the Bondholders and not
covered by such overcollateralization will be
covered by draws on the Policy to the extent
provided herein. The "Outstanding Reserve
Amount" on any Payment Date is the amount, if
any, by which the Pool Balance as of the end of
the related Collection Period exceeds the Bond
Principal Balance on such day (after giving
effect to all distributions on such Payment
Date).
As of the Closing Date, the Reserve Amount
Target is equal to ___% of the Cut-Off Date
Pool Balance. The Reserve Amount Target may be
increased or reduced from time to time pursuant
to the terms of the Pooling and Servicing
Agreement, with the consent of the Rating
Agencies and the Indenture Trustee. To the
extent the Reserve Amount Target is reduced on
any Payment Date, the amount of the Principal
Collections distributed on such Payment Date
will be reduced and on each subsequent Payment
Date to the extent the remaining Outstanding
Reserve Amount is in excess of the reduced
Reserve Amount Target until the Outstanding
Reserve Amount equals the Reserve Amount
Target.
Insurer........................ ______________. See "The Insurer" herein.
Policy......................... On the Closing Date, the Insurer will issue a
Policy in favor of the [Indenture Trustee on
behalf of the Issuer]. The Policy will
unconditionally and irrevocably guarantee
principal payments on the Notes plus accrued
and unpaid interest due on the Notes. The
Policy will not guarantee payments on the
Certificates. On each Payment Date, a draw will
be made on the Policy to cover (a) any
shortfall in amounts available to make payments
of interest on the
S-7
<PAGE>
outstanding Bond Principal Balance of the Notes
and (b) the amount, if any, [by which the Bond
Principal Balance of the Notes exceeds the Pool
Balance at the end of the related Collection
Period]. In addition, the Policy will guarantee
the payment of the outstanding Bond Principal
Balance of each Bond on the Payment Date in
_______ (after giving effect to all other
amounts distributable and allocable to
principal on such Payment Date). See "The
Policy" herein and "Description of Credit
Enhancement" in the Prospectus.
The Certificates............... $________ Trust Certificates, Series 19__-__.
The Certificates will be issued pursuant to the
Trust Agreement and will represent the
beneficial ownership interest in the Issuer.
The Certificates are not offered hereby.
Final Payment of Principal on
the Notes..................... The Notes will be payable in full on ________.
In addition, the Issuer will pay the Notes in
full upon the exercise by the [Master Servicer]
of its option to purchase all Mortgage Loans
and all property acquired in respect of such
Mortgage Loans. See "The
Agreements--Termination; Redemption of Notes"
in the Prospectus.
Federal Income Tax
Consequences.................. In the opinion of Tax Counsel (as defined in
the Prospectus), for federal income tax
purposes, the Notes will be characterized as
indebtedness of the Issuer and the Issuer, as
created pursuant to the terms and conditions of
the Trust Agreement, will not be characterized
as an association (or publicly traded
partnership) taxable as a corporation or as a
taxable mortgage pool within the meaning of
section 7701(i) of the Code.
For further information regarding certain
federal income tax consequences of an
investment in the Notes see "Federal Income Tax
Consequences" herein and "Federal Income Tax
Consequences" and "State and Other Tax
Consequences" in the Prospectus.
Legal Investment............... So long as the Notes are rated in the top two
rating agencies, the Notes will constitute
"mortgage related securities" for purposes of
SMMEA. See "Legal Investment Considerations"
herein.
S-8
<PAGE>
Rating......................... It is a condition to the issuance of the Notes
that they be rated "____" by ____________ and
"____" by___________ (each a "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 by the
assigning rating organization. A security
rating does not address the frequency of
prepayments of Mortgage Loans, or the
corresponding effect on yield to investors. See
"Certain Yield and Prepayment Considerations"
and "Ratings" herein.
S-9
<PAGE>
[RISK FACTORS]
[Prospective Bondholders should consider, among other things, the items
discussed under "Risk Factors" in the Prospectus and the following factors in
connection with the purchase of the Notes:]
[Appropriate Risk Factors as necessary. Possible Risk Factors based on present
disclosure include the following:
DELINQUENCIES AND POTENTIAL DELINQUENCIES
Approximately _____% of the Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) were thirty days or more but less than sixty
days delinquent in their Monthly Payments (such Mortgage Loans, "Delinquent
Mortgage Loans") as of the Cut-off Date. Prospective investors in the Notes
should be aware, however, that only approximately _____% of the Mortgage Loans
(by aggregate principal balance as of the Cut-off Date), had a first Monthly
Payment due on or before ______ _, 19__, and therefore, the remaining Mortgage
Loans could not have been Delinquent Mortgage Loans as of the Cut-off Date.
Approximately _____% of the Mortgage Loans (by aggregate outstanding
principal balance as of the Cut-off Date), are secured by Mortgaged Properties
located in the State of California. Property values of residential real estate
in California have declined in recent years. If the California residential real
estate market should continue to experience an overall decline in property
values after the dates of origination of the Mortgage Loans, the rates of
delinquency, foreclosure, bankruptcy and loss on the Mortgage Loans may be
expected to increase, and may increase substantially, as compared to such rates
in a stable or improving real estate market.
In addition, ___% of the Mortgage Loans are secured by Mortgaged
Properties located in Orange County, California. On December 6, 1994, Orange
County filed for protection under Chapter 9 of the United States Bankruptcy
Code. If public services are curtailed as a result of Orange County's financial
difficulties, property values in the related market area may be adversely
affected.]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date of $____________. The
Mortgage Loans will consist of conventional, adjustable-rate, fully-amortizing,
first lien Mortgage Loans with terms to maturity of not more than ___ years from
the due date of the first monthly payment. On or before the Delivery Date, the
Company will acquire the Mortgage Loans
S-10
<PAGE>
to be included in the Mortgage Pool from _______________ and ________________
(the "Sellers"). The Sellers will make certain representations and warranties
with respect to the Mortgage Loans and, as more particularly described in the
Prospectus, will have certain repurchase or substitution obligations in
connection with a breach of any such representation and warranty, as well as in
connection with an omission or defect in respect of certain constituent
documents required to be delivered with respect to the Mortgage Loans, in any
event if such breach, omission or defect cannot be cured and it materially and
adversely affects the interests of Bondholders. Neither the Company nor any
other entity or person will have any responsibility to purchase or replace any
Mortgage Loan if a Seller is obligated but fails to do so. See "Description of
the Mortgage Pool--Representations by Sellers" and "Description of the
Notes--Assignment of Trust Fund Assets" in the Prospectus and "--The Seller"
below. The Mortgage Loans will have been originated or acquired by the [Sellers]
in accordance with the underwriting criteria described herein. See
"--Underwriting" below. All percentages of the Mortgage Loans described herein
are approximate percentages (except as otherwise indicated) by aggregate
principal balance as of the Cut-off Date.
The Mortgage Rate on each Mortgage Loan will adjust semi-annually on a
date specified in the related Mortgage Note (the "Adjustment Date"). For
approximately ____% of the Mortgage Loans, by aggregate principal balance as of
the Cut-off Date, the first Adjustment Date occurred prior to the Cut-off Date.
On each Adjustment Date, the Mortgage Rate on a Mortgage Loan will be
adjusted to equal the sum (rounded to either the nearest or next highest
multiple of _____%) of (a) a rate per annum equal to the monthly weighted
average cost of funds for members of the Federal Home Loan Bank of San Francisco
(the "FHLB of San Francisco") as published by the FHLB of San Francisco (the
"Cost of Funds Index" or "Index") and as most recently available as of the day
45 days prior to such Adjustment Date or, in the event that such Index is no
longer available, an index selected by the Master Servicer and reasonably
acceptable to the Trustee that is based on comparable information, and (b) the
related Note Margin, subject to the following limitations. The Mortgage Rate on
the Mortgage Loan on any Adjustment Date may not increase or decrease by more
than the Periodic Rate Cap applicable to such Mortgage Loan and, over the life
of such Mortgage Loan, generally may not exceed the Mortgage Rate at origination
plus the Lifetime Rate Cap, or be less than the Mortgage Rate at origination
minus any Lifetime Rate Floor, applicable to such Mortgage Loan. No Mortgage
Loan provides for payment caps on any Adjustment Date which would result in
deferred interest or negative amortization. Effective with the first payment due
date on a Mortgage Loan after an Adjustment Date therefor, the monthly principal
and interest payment will be adjusted to an amount that will fully amortize the
then outstanding principal balance of such Mortgage Loan at its stated maturity
and pay interest at the adjusted Mortgage Rate. Because the amortization
schedule of each Mortgage Loan will be recalculated semi-annually, any partial
prepayments thereof will not reduce the term to maturity of such Mortgage Loan.
An increase in the Mortgage Rate on a Mortgage Loan will result in a larger
monthly payment and in a larger percentage of such monthly payment being
allocated to interest and a smaller percentage being allocated to principal, and
conversely, a decrease in the Mortgage Rate on the Mortgage Loan will
S-11
<PAGE>
result in a lower monthly payment and in a larger percentage of each monthly
payment being allocated to principal and a smaller percentage being allocated to
interest.
The Cost of Funds Index reflects the monthly weighted average cost of
funds of savings and loan associations and savings banks, the home offices of
which are located in Arizona, California and Nevada, that are member
institutions of the FHLB of San Francisco, as computed from statistics tabulated
and published by the FHLB of San Francisco. The FHLB of San Francisco normally
announces the Cost of Funds Index on or near the last working day of the month
following the month in which the cost of funds was incurred. The Index is
available through a variety of sources, including, without limitation, Telerate,
THE WALL STREET JOURNAL and USA TODAY.
Listed below are the historical values of the Cost of Funds Index since
19___. Such values may fluctuate significantly over time and may not increase or
decrease in a constant pattern from period to period. The following does not
purport to be representative of future values of the Index. No assurance can be
given as to the Index value to be applied on any future Adjustment Date.
<TABLE>
<CAPTION>
COST OF FUNDS INDEX
Month 19__ 19__ 19__ 19__ 19__ 19__ 19__ 19__
===== ===== ===== ====== ====== ====== ====== ===== =====
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January.............
February............
March...............
April...............
May.................
June................
July................
August..............
September...........
October.............
November............
December............
</TABLE>
The initial Mortgage Rate in effect on a Mortgage Loan generally will
be lower than the sum of the Index that would have been applicable at
origination and the Note Margin. Absent a decline in the Index subsequent to
origination of a Mortgage Loan, the related Mortgage Rate will generally
increase on the first Adjustment Date following origination of such Mortgage
Loan. The repayment of such Mortgage Loans will be dependent on the ability of
the Mortgagor to make larger Monthly Payments following adjustments of the
Mortgage Rate. Moreover, because the maximum Mortgage Rate on any Mortgage Loan
is determined by adding the Lifetime Rate Cap to the Mortgage Rate at
origination, irrespective of the Index that would have been applicable at
origination, the maximum Mortgage Rate on a Mortgage Loan will generally be less
than the sum of the Index and the Note Margin that would have been applicable at
origination plus the Lifetime Rate Cap.
S-12
<PAGE>
Mortgage Loans that have the same initial Mortgage Rate may not always bear
interest at the same Mortgage Rate because the Mortgage Loans may have different
Adjustment Dates (and the Mortgage Rate therefore may reflect different Index
values), different Note Margins, different Lifetime Rate Caps and different
Lifetime Rate Floors, if any.
The Mortgage Loans will have approximately the following
characteristics as of the Cut-off Date:
Number of Mortgage Loans.........................
Mortgage Rates:
Weighted Average.............................
Range........................................
Range of Net Mortgage Rates.......................
Note Margins:
Weighted Average.............................
Range........................................
Maximum Mortgage Rates:
Weighted Average.............................
Range........................................
Maximum Net Mortgage Rates (1):
Weighted Average.............................
Range........................................
Weighted Average Months to Next
Adjustment Date after ____________, 19__(2)......
- ----------
(1) The difference between the maximum Net Mortgage Rate and the Net
Mortgage Rate as of the Cut-off Date may be less than the Lifetime Rate
Cap.
(2) The Weighted Average Months to the next Adjustment Date is equal to the
weighted average of the number of months until the Adjustment Date next
following _____________, 19__.
The Mortgage Loans in the Mortgage Pool will have the following
characteristics as of the Cut-off Date (expressed as a percentage of the
aggregate principal balance of the Mortgage Loans having such characteristics
relative to the aggregate principal balance of all Mortgage Loans in the
Mortgage Pool):
The Mortgage Loans will have had individual principal balances
at origination of at least $__________ but not more than $__________.
None of the Mortgage Loans in the Mortgage Pool will have been
originated prior to _____________, 19__ or will have a scheduled
maturity later than ____________, ____. No Mortgage Loan in the
Mortgage Pool will have an unexpired term to stated maturity as of the
Cut-off Date of less than __ years and __ months. The weighted average
remaining term to stated maturity of the Mortgage Loans in the Mortgage
Pool as of the Cut-off Date will be approximately
S-13
<PAGE>
____ years and __ months. The weighted average Adjustment Date of the
Mortgage Loans in the Mortgage Pool next following the Cut-off Date is
____________, 19__.
Approximately _____% of the Mortgage Loans will have
Loan-to-Value Ratios at origination exceeding 80% but less than or
equal to 90%, and approximately ____% of the Mortgage Loans will have
Loan-to-Value Ratios exceeding 90%. The weighted average Loan-to-Value
Ratio at origination, as of the
Cut-off Date, is approximately _____%.
At least _____% of such Mortgage Loans will be secured by fee
simple interests in detached one- to four-family dwelling units with
the remaining units being secured by fee simple interests in attached
planned unit developments, condominiums or townhouses.
Approximately _____% of the Mortgage Loans in the Mortgage
Pool will be secured by Mortgaged Properties located in California.
No more than _____% of the Mortgage Loans in the Mortgage Pool
will be secured by Mortgaged Properties located in any one zip code
area in California, and no more than ____% will be secured by Mortgaged
Properties located in any one zip code area outside California.
No more than _____% of the Mortgage Loans were equity
refinance mortgage loans made to mortgagors who used less than the
entire amount of the proceeds to refinance an existing mortgage loan.
The weighted average Loan-to- Value Ratio at origination of such
Mortgage Loans, as of the Cut-off Date, is approximately ______%.
Approximately ____% of the Mortgage Loans were made to Mortgagors who
used the entire proceeds to refinance an existing Mortgage Loan.
No Mortgage Loan provides for deferred interest or negative
amortization.
Approximately ____% of the Mortgage Loans in the Mortgage Pool
will have been underwritten under a reduced loan documentation program.
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans in the Mortgage Pool which were underwritten under such reduced
loan documentation program will be approximately ____% and no more than
approximately ____% of such Mortgage Loans will be secured by Mortgaged
Properties located in California. See "Servicing Agreement--The Master
Servicer" herein.
No more than ____% of the Mortgage Loans will be secured by
vacation or second homes. No more than ____% of the Mortgage Loans will
be secured by one- to four-story condominium units. No Mortgage Loans
will be secured by condominium units in buildings of five or more
stories.
S-14
<PAGE>
None of the Mortgage Loans in the Mortgage Pool will be
Buydown Mortgage Loans.
The following table sets forth the number and aggregate principal
balance as of the Cut-off Date of Mortgage Loans having their next Adjustment
Dates in the month described therein. The table also indicates the approximate
percentage of Mortgage Loans in the Mortgage Pool with an Adjustment Date in
each such month.
<TABLE>
<CAPTION>
MONTH OF NUMBER OF AGGREGATE PERCENTAGE OF
ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
--------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Total..................
</TABLE>
The following table sets forth the number and aggregate principal
balance of Mortgage Loans having unpaid principal balances in the ranges
described therein as of the Cut-off Date. The table also indicates the
approximate weighted average Mortgage Rate and the approximate weighted average
Loan-to-Value Ratio at origination of the Mortgage Loans in each given range, as
of the Cut-off Date.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER WEIGHTED ORIGINAL
OF AGGREGATE AVERAGE LOAN-TO-
MORTGAGE PRINCIPAL MORTGAGE VALUE
PRINCIPAL BALANCE LOANS BALANCE RATE RATIO
- ----------------- -------- --------- -------- ---------
<S> <C> <C> <C> <C>
Total, Average or Weighted Average...... _______ $____________ ________% _______%
</TABLE>
[Specific information with respect to the Mortgage Loans will be
available to purchasers of the Notes on or before the time of issuance of such
Notes. If not included in the Prospectus Supplement, such information will be
included in the Form 8-K.]
UNDERWRITING
S-15
<PAGE>
[Underwriting standards as appropriate.]
DELINQUENCY AND FORECLOSURE EXPERIENCE
Based solely upon information provided by the Master Servicer, the
following tables summarize, for the respective dates indicated, the delinquency,
forbearance, foreclosure, bankruptcy and REO property status with respect to all
mortgage loans originated or acquired by the Sellers that were originated as of
the date three months prior to the date indicated. The indicated periods of
delinquency are based on the number of days past due on a contractual basis. The
monthly payments under all of such mortgage loans are due on the first day of
each calendar month.
S-16
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 19__ AT DECEMBER 31, 19__
-------------------- --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total Loans Outstanding.......................... $ $
DELINQUENCY(1)
Period of Delinquency:
31-60 Days.............................. $ $
61-90 Days..............................
91-120 Days or More.....................
-- ----- -- -
Total Delinquencies........................... $ $
=== = ===== == = ===
Delinquencies as a Percentage of
Total Loans Outstanding.......................... % % % %
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 19__ AT DECEMBER 31, 19__
-------------------- --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FORBEARANCE LOANS(2)................. $ $
Forbearance Loans as a
Percentage of Total Loans
Outstanding.......................... % %
FORECLOSURES PENDING(3).............. $ $
Foreclosures Pending as a
Percentage of Total Loans
Outstanding.......................... % % % %
BANKRUPTCIES PENDING(4).............. $ $
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding.......................... % % % %
Total Delinquencies plus
Forbearance Loans, Foreclosures
Pending and Bankruptcies
Pending.............................. $ $
Total Delinquencies plus
Forbearance Loans, Foreclosures
Pending and Bankruptcies
Pending as a Percentage of Total
Loans Outstanding.................... % % % %
REO PROPERTIES(5).................... $ $
REO Properties as a
Percentage of Total Loans
Outstanding.......................... % % % %
</TABLE>
S-17
<PAGE>
(1) The delinquency balances, percentages and numbers set forth under this
heading exclude (a) delinquent mortgage loans that were subject to
forbearance agreements with the related mortgagors at the respective
dates indicated ("Forbearance Loans"), (b) delinquent mortgage loans
that were in foreclosure at the respective dates indicated
("Foreclosure Loans"), (c) delinquent mortgage loans as to which the
related mortgagor was in bankruptcy proceedings at the respective dates
indicated ("Bankruptcy Loans") and (d) REO properties that have been
purchased upon foreclosure of the related mortgage loans. All
Forbearance Loans, Foreclosure Loans, Bankruptcy Loans and REO
properties have been segregated into the sections of the table entitled
"Forbearance Loans," "Foreclosures Pending," "Bankruptcies Pending" and
"REO Properties," respectively, and are not included in the "31-60
Days," "61-90 Days," "91-120 Days or More" and "Total Delinquencies"
sections of the table. See the section of the table entitled "Total
Delinquencies plus Forbearance Loans, Foreclosures Pending and
Bankruptcies Pending" for total delinquency balances, percentages and
numbers which include Forbearance Loans, Foreclosure Loans and
Bankruptcy Loans, and see the section of the table entitled "REO
Properties" for delinquency balances, percentages and numbers related
to REO properties that have been purchased upon foreclosure of the
related mortgage loans.
(2) For each of the Forbearance Loans, the Master Servicer has entered into
a written forbearance agreement with the related mortgagor, based on
the Master Servicer's determination that the mortgagor is temporarily
unable to make the scheduled monthly payment on such mortgage loan.
Prior to entering into each forbearance agreement, the Master Servicer
confirmed the continued employment status of the mortgagor and found
the payment history of such mortgagor to be satisfactory. There can be
no assurance that the mortgagor will be able to make the payments as
required by the forbearance agreement, and any failure to make such
payments will constitute a delinquency. None of the Mortgage Loans
included in the Mortgage Pool are Forbearance Loans.
(3) Mortgage loans that are in foreclosure but as to which the mortgaged
property has not been liquidated at the respective dates indicated. It
is generally the Master Servicer's policy, with respect to mortgage
loans originated by the Seller, to commence foreclosure proceedings
when a mortgage loan is between 31 and 60 days delinquent.
(4) Mortgage loans as to which the related mortgagor is in bankruptcy
proceedings at the respective dates indicated.
(5) REO properties that have been purchased upon foreclosure of the related
mortgage loans, including mortgaged properties that were purchased by
the Seller after the respective dates
indicated.
The above data on delinquency, forbearance, foreclosure, bankruptcy and
REO property status are calculated on the basis of the total mortgage loans
originated or acquired by the Seller's that were originated as of the date three
months prior to the date indicated. However, the total amount of mortgage loans
on which the above data are based includes many mortgage loans which were not,
as of the respective dates indicated, outstanding long enough to give rise to
some of the indicated periods of delinquency or to foreclosure or bankruptcy
proceedings or REO property status. In the absence of such mortgage loans, the
delinquency, forbearance, foreclosure, bankruptcy and REO property
S-18
<PAGE>
percentages indicated above would be higher and could be substantially higher.
Because the Mortgage Pool will consist of a fixed group of Mortgage Loans, the
actual delinquency, forbearance, foreclosure, bankruptcy and REO property
percentages with respect to the Mortgage Pool may therefore be expected to be
higher, and may be substantially higher, than the percentages indicated above.
The information set forth in the preceding paragraphs concerning ____
and _____ has been provided by [Names of Sellers].
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Notes,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise, if the Company deems such removal necessary or
appropriate. The Company believes that the information set forth herein will be
substantially representative of the characteristics of the Mortgage Pool as it
will be constituted at the time the Notes are issued although the range of
Mortgage Rates and maturities and certain other characteristics of the Mortgage
Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the
Notes and will be filed, together with the Servicing Agreement, the Trust
Agreement and the Indenture, with the Securities and Exchange Commission within
fifteen days after the initial issuance of the Notes. In the event Mortgage
Loans are removed from or added to the Mortgage Pool as set forth in the
preceding paragraph, such removal or addition will be noted in the Current
Report on Form 8-K.
See "The Mortgage Pools" and "Certain Legal Aspects of Mortgage Loans"
in the Prospectus.
THE ISSUER
GENERAL
The Salomon MBN Trust 19_-_, is a business trust formed under the laws
of the State of [Delaware] pursuant to the Trust Agreement dated as of _____ 1,
19__ between the Company and ________________, as the Owner Trustee for the
transactions described in this Prospectus Supplement. The Trust Agreement
constitutes the "governing instrument" under the laws of the State of [Delaware]
relating to business trusts. After its formation, the Issuer will not engage in
any activity other than (i) acquiring the Mortgage Loans and the other assets of
the Issuer and proceeds therefrom and pledging them to the Indenture Trustee,
(ii) issuing the Notes and the Certificates, (iii) making payments on the
S-19
<PAGE>
Notes and the Certificates and (iv) engaging in other activities that are
necessary, suitable or convenient to accomplish the foregoing or are incidental
thereto or connected therewith.
The assets of the Issuer will consist of the Mortgage Loans and certain
related assets.
The Issuer's principal offices are in ___________, Delaware, in care of
________________, as Owner Trustee, at the address listed below.
THE OWNER TRUSTEE
_______________ is the Owner Trustee under the Trust Agreement.
__________________ is a [Delaware] banking corporation and its principal offices
are located at ____________________.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Bondholders for
any action taken or for refraining from the taking of any action in good faith
pursuant to the Trust Agreement or for errors in judgment; provided, however,
that none of the Owner Trustee and any director, officer or employee thereof
will be protected against any liability which would otherwise be imposed by
reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
Trust Agreement. All persons into which the Owner Trustee may be merged or with
which it may be consolidated or any person resulting from such merger or
consolidation shall be the successor of the Owner Trustee under the Trust
Agreement.
THE INSURER
[Insert Description of Insurer as Appropriate.]
DESCRIPTION OF THE SECURITIES
GENERAL
The Notes will be issued pursuant to the Indenture dated as of
________, between the Issuer and _________, as Indenture Trustee. The
Certificates will be issued pursuant to the Trust Agreement dated as of
____________, between the Company and _____________, as Owner Trustee. The
following summaries describe certain provisions of the Securities, the Indenture
and the Trust Agreement. The summaries do not purport to be complete and are
subject to, and qualified in their entirety by reference to, the provisions of
the applicable agreement. Only the Notes are offered hereby.
The Notes will be secured by the Trust Fund pledged by the Issuer to
the Indenture Trustee pursuant to the Indenture which will consist of: (i) the
Mortgage Loans; (ii) collections in respect of principal of the Mortgage Loans
received after the applicable Cut-
S-20
<PAGE>
Off Date and collections in respect of interest on the Mortgage Loans from the
Cut-Off Date relating to the Mortgage Loan; (iii) the amounts on deposit in the
Custodial Account allocated to the Mortgage Loans and the Payment Account
(excluding net earnings thereon); (iv) the Policy; (v) certain hazard insurance
policies maintained by the Mortgagors or by or on behalf of the Master Servicer
or related subservicer in respect of the Mortgage Loans and (vi) an assignment
of the Company's rights under the Purchase Agreement and the Servicing
Agreement.
The Notes will be issued in denominations of $1,000 and integral
multiples in excess thereof. See "--Book-Entry Securities" below.
BOOK-ENTRY SECURITIES
General. Beneficial Owners (as defined in the Prospectus) that are not
Participants or Intermediaries (as defined in the Prospectus) but desire to
purchase, sell or otherwise transfer ownership of, or other interests in, the
related Book-Entry Securities may do so only through Participants and
Intermediaries. In addition, Beneficial Owners will receive all payments of
principal of and interest on the related Book-Entry Securities from the Paying
Agent (as defined in the Prospectus) through DTC and Participants. Accordingly,
Beneficial Owners may experience delays in their receipt of payments. Unless and
until Definitive Securities are issued for the related Book-Entry Securities, it
is anticipated that the only registered Bondholder of such Book-Entry Securities
will be Cede, as nominee of DTC. Beneficial Owners will not be recognized by the
Indenture Trustee or the Master Servicer as Bondholders, as such term is used in
the Indenture, and Beneficial Owners will be permitted to receive information
furnished to Bondholders and to exercise the rights of Bondholders only
indirectly through DTC, its Participants and Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Book-Entry Securities among Participants and to receive and transmit payments
of principal of, and interest on, such Book-Entry Securities. Participants and
Intermediaries with which Beneficial Owners have accounts with respect to such
Book-Entry Securities similarly are required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not possess physical
certificates evidencing their interests in the Book-Entry Securities, the Rules
provide a mechanism by which Beneficial Owners, through their Participants and
Intermediaries, will receive payments and will be able to transfer their
interests in the Book- Entry Securities.
None of the Company, the Master Servicer, the Insurer or the Indenture
Trustee will have any 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 Book-Entry
Securities held by Cede, as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
S-21
<PAGE>
Definitive Securities. Definitive Securities will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
"Description of the Securities--Form of Securities."
Upon the occurrence of an event described in the Prospectus in the
third paragraph under "Description of the Securities--Form of Securities," the
Indenture Trustee is required to notify, through DTC, Participants who have
ownership of Book-Entry Securities as indicated on the records of DTC of the
availability of Definitive Securities for their Book- Entry Securities. Upon
surrender by DTC of the definitive certificates representing the Book-Entry
Securities and upon receipt of instructions from DTC for re-registration, the
Indenture Trustee will reissue the Book-Entry Securities as Definitive
Securities issued in the respective principal amounts owned by individual
Beneficial Owners, and thereafter the Indenture Trustee will recognize the
holders of such Definitive Securities as Bondholders under the Indenture.
For additional information regarding DTC and the Book-Entry Securities,
see "Description of the Notes--Form of Notes" in the Prospectus.]
PAYMENTS
Payments on the Notes will be made by the Indenture Trustee or the
Paying Agent on the _____ day of each month or, if such day is not a Business
Day, then the next succeeding Business Day, commencing in __________. Payments
on the Notes will be made to the persons in whose names such Notes are
registered at the close of business on the day prior to each Payment Date or, if
the Notes are no longer Book-Entry Securities, on the Record Date. See
"Description of the Notes--Payments" in the Prospectus. Payments will be made by
check or money order mailed (or upon the request of a Holder owning Notes having
denominations aggregating at least $_________, by wire transfer or otherwise) to
the address of the person entitled thereto (which, in the case of Book-Entry
Securities, will be DTC or its nominee) as it appears on the Security Register
in amounts calculated as described herein on the Determination Date. However,
the final payment in respect of the Notes will be made only upon presentation
and surrender thereof at the office or the agency of the Indenture Trustee
specified in the notice to Holders of such final payment. A "Business Day" is
any day other than (i) a Saturday or Sunday or (ii) a day on which banking
institutions in the State of ___________ are required or authorized by law to be
closed.
INTEREST ON THE NOTES
Interest payments will be made on the Notes on each Payment Date at the
Bond Rate for the related Interest Period. The "Bond Rate" for an Interest
Period will generally equal the sum of [(a) LIBOR determined as specified
herein, as of the second LIBOR Business Day prior to the first day of such
Interest Period (or as of two LIBOR Business Days prior to the Closing Date, in
the case of the first Interest Period)] plus (b) ___% per
S-22
<PAGE>
annum. Notwithstanding the foregoing, in no event will the Bond Rate on any
Payment Date exceed a rate equal to the weighted average of the Loan Rates (net
of the applicable Servicing Fee Rate) (adjusted to an effective rate reflecting
accrued interest calculated on the basis of the actual number of days in the
Collection Period commencing in the month in which such Interest Period
commences and a year assumed to consist of 360 days).
Interest on the Notes in respect of any Payment Date will accrue on the
applicable Bond Principal Balance from the preceding Payment Date (or in the
case of the first Payment Date, from the Closing Date) through the day preceding
such Payment Date (each such period, an "Interest Period") on the basis of the
actual number of days in the Interest Period and a 360-day year. Interest
payments on the Notes will be funded from P&I Collections [and with respect to
the Notes, if necessary, from draws on the Policy.
[On each Payment Date, LIBOR shall be established by the Indenture
Trustee and as to any Interest Period, LIBOR will equal the rate for United
States dollar deposits for one month which appears on the Telerate Screen Page
3750 as of 11:00 A.M., London time, on the second LIBOR Business Day prior to
the first day of such Interest Period. "Telerate Screen Page 3750" means the
display designated as page 3750 on the Telerate Service (or such other page as
may replace page 3750 on that service for the purpose of displaying London
interbank offered rates of major banks). If such rate does not appear on such
page (or such other page as may replace that page on that service, or if such
service is no longer offered, such other service for displaying LIBOR or
comparable rates as may be selected by the Indenture Trustee after consultation
with the Master Servicer), the rate will be the Reference Bank Rate. The
"Reference Bank Rate" will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks (which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by _________) as of 11:00 A.M., London time, on the day that is
two LIBOR Business Days prior to the immediately preceding Payment Date to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the Bond Principal Balance then outstanding. The
Indenture Trustee will request the principal London office of each of the
reference banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate will be the arithmetic mean of the quotations.
If on such date fewer than two quotations are provided as requested, the rate
will be the arithmetic mean of the rates quoted by one or more major banks in
New York City, selected by the Indenture Trustee after consultation with the
Master Servicer, as of 11:00 A.M., New York City time, on such date for loans in
U.S. Dollars to leading European banks for a period of one month in amounts
approximately equal to the Bond Principal Balance then outstanding. If no such
quotations can be obtained, the rate will be LIBOR for the prior Payment Date.
"LIBOR Business Day" means any day other than (i) a Saturday or a Sunday or (ii)
a day on which banking institutions in the State of [New York] or in the city of
London, England are required or authorized by law to be closed.]
PRINCIPAL PAYMENTS ON THE NOTES
S-23
<PAGE>
On each Payment Date, other than the Payment Date in _________,
principal payments except as provided below will be due and payable on the Notes
in an amount equal to the Principal Collection Distribution Amount (as defined
below) for such Payment Date, together with any Liquidation Loss Amounts. On the
Payment Date in ______, principal will be due and payable on the Notes in
amounts equal to the Bond Principal Balance on such Payment Date. In no event
will principal payments on the Notes on any Payment Date exceed the Bond
Principal Balance thereof on such date.
ALLOCATION OF P&I COLLECTIONS
The Master Servicer on behalf of the Issuer will establish an account
(the "Distribution Account") into which the Master Servicer will deposit P&I
Collections for each Payment Date on the Business Day prior thereto. The
Distribution Account will be an Eligible Account. Amounts on deposit in the
Distribution Account will be invested in Eligible Investments maturing on or
before the Business Day prior to the related Payment Date.
On each Payment Date, P&I Collections will be allocated from the
Distribution Account in the following order of priority:
(i) to the Notes, the sum of the following:
(a) as payment for the accrued interest due and any
overdue accrued interest at the Bond Rate (as defined herein) on the
Bond Principal Balance (as defined herein) of the Notes;
(b) an amount equal to the Principal Collection
Distribution Amount, applied to reduce the Bond Principal Balance of
the Notes; and
(c) an additional amount to be applied to reduce the
Bond Principal Balance (each such amount, a "Additional Principal
Distribution Amount"), to the extent necessary to bring the Outstanding
Reserve Amount up to the Reserve Amount Target; and
(ii) to the Insurer, the aggregate of all payments, if any, made
by the Insurer under the Policy [and any other amounts].
(iii) as payment for the premium for the Policy;
(iv) to reimburse prior draws made on the Policy (with interest
thereon);
(v) any other amounts owed to the Insurer pursuant to the
Insurance Agreement; and
(vi) the remaining amount, if any, of the P&I Collections shall
be allocated to the Certificates.
S-24
<PAGE>
For any Payment Date, the "Principal Collection Distribution Amount"
will equal Principal Collections for such Payment Date.
"Liquidation Loss Amount" means with respect to any Liquidated Mortgage
Loan, the unrecovered Principal Balance thereof at the end of the related
Collection Period in which such Mortgage Loan became a Liquidated Mortgage Loan,
after giving effect to the Net Liquidation Proceeds allocable to such Principal
Balance in connection therewith.
A "Liquidated Mortgage Loan" means, as to any Payment Date, any
Mortgage Loan in respect of which the Master Servicer has determined, based on
the servicing procedures specified in the Servicing Agreement, as of the end of
the preceding Collection Period that all liquidation proceeds which it expects
to recover with respect to the disposition of the related Mortgaged Property
have been recovered.
As of the Closing Date, the Reserve Amount Target is equal to at least
___% of the Cut-Off Date Pool Balance. The Reserve Amount Target may be
increased or reduced from time to time pursuant to the terms of the Pooling and
Servicing Agreement, with the consent of the Rating Agencies and the Indenture
Trustee. To the extent the Reserve Amount Target is reduced on any Payment Date,
the amount of the Principal Collections distributed pursuant to clause (ii)(b)
will be reduced on such Payment Date and on each subsequent Payment Date to the
extent the remaining Outstanding Reserve Amount is in excess of the reduced
Reserve Amount Target until the Outstanding Reserve Amount equals the Reserve
Amount Target.
The Indenture Trustee will establish the Payment Account into which the
Master Servicer will deposit the portion of the P&I Collections allocable to the
Mortgage Loan for each Payment Date on the Business Day prior thereto. The
Payment Account will be an Eligible Account. Amounts on deposit in the Payment
Account will be invested in Eligible Investments maturing on or before the
Business Day prior to the related Payment Date.
The "Bond Principal Balance" of the Notes on any day is the initial
principal balance thereof as of the Closing Date, reduced by all payments of
principal thereon as of such day.
Except as provided below, payments pursuant to clause (i) will be
allocated to the Notes based on the amount of interest such Bond is entitled to
receive pursuant to such clause. Except as provided below, payments pursuant to
clauses (ii), (iii) and (vi) will constitute payments of principal.
An "Amortization Event" will be deemed to occur upon (i) the occurrence
of certain events relating to a violation of the Seller's obligations under the
Mortgage Loan Purchase Agreement, (ii) the occurrence of certain events of
bankruptcy, insolvency or receivership relating to the Seller or the Master
Servicer, (iii) the Issuer becomes subject to regulation as an investment
company within the meaning of the Investment Company Act of 1940, as amended, or
(iv) the aggregate of all draws under the Policy exceeds __________;
S-25
<PAGE>
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the Seller, the conservator, receiver or
trustee-in-bankruptcy may have the power to prevent the commencement of the
Amortization Period.
OUTSTANDING RESERVE AMOUNT
The distribution of the Additional Principal Distribution Amount, if
any, to the Bondholders, will create the Outstanding Reserve Amount. The
Outstanding Reserve Amount, if any, will be available to absorb any Liquidation
Loss Amounts that are allocated to the Mortgage Loans and not covered by
Principal Collections and Interest Collections. Any Liquidation Loss Amounts
allocable to the Bondholders and not covered by such overcollateralization will
be covered by draws on the Policy to the extent provided herein. The
"Outstanding Reserve Amount" on any Payment Date is the amount, if any, by which
the Pool Balance as of the end of the related Collection Period exceed the Bond
Principal Balance on such day (after giving effect to all amounts payable and
allocable to principal on the Notes that are applied to reduce the Bond
Principal Balance on such Payment Date).
To the extent that such overcollateralization is insufficient or not
available to absorb Liquidation Loss Amounts, and payments are not made under
the Policy, a Bondholder may incur a loss.
THE PAYING AGENT
The Paying Agent shall initially be the [Indenture Trustee], together
with any successor thereto. The Paying Agent shall have the revocable power to
withdraw funds from the Payment Account for the purpose of making payments to
the Securityholders.
MATURITY
The Notes will be payable in full on ___________. In addition, the
Issuer will pay the Notes in full upon the exercise by the Master Servicer of
its option to purchase the assets of the Issuer after the Pool Balance is
reduced to an amount less than or equal to $________ (___% of the initial Pool
Balance). The purchase price will be equal to the sum of the outstanding Pool
Balance and accrued and unpaid interest thereon at the weighted average of the
Loan Rates through the day preceding the Payment Date on which the Notes are
paid in full together with all amounts due and owing to the Insurer.
DESCRIPTION OF THE POLICY
On the Closing Date, the Insurer will issue the Policy in favor of the
[Owner Trustee on behalf of the Issuer] pursuant to an insurance agreement (the
"Insurance Agreement") between the Insurer, the Master Servicer and the Trustee.
The Policy will unconditionally and irrevocably guarantee principal payments on
the Notes plus accrued and unpaid
S-26
<PAGE>
interest due on the Notes. On each Payment Date, a draw will be made on the
Policy equal to the sum of (a) the amount by which the sum of interest accrued
at (i) the Bond Rate on the outstanding Bond Principal Balance of the Notes and
(b) the amount (the "Guaranteed Principal Payment Amount"), if any, [by which
the Bond Principal Balance of the Notes exceeds the sum of the Pool Balance at
the end of the related Collection Period (after giving effect to all amounts
paid and allocable to principal on the Notes that are applied to reduce the Bond
Principal Balances on such Payment Date)]. Pursuant to the terms of [the
Indenture], draws under the Policy in respect of the Guaranteed Principal
Payment Amount will be paid on the Notes by the Indenture Trustee, as principal
pro rata, based on the outstanding Bond Principal Balances thereof. In addition,
the Policy will guarantee the payment of the outstanding Bond Principal Balance
of each Bond on the Payment Date in _____________ (after giving effect to all
other amounts paid and allocable to principal on such Payment Date). In the
absence of payments under the Policy, Bondholders will directly bear the credit
and other risks associated with their investment to the extent such risks are
not covered by overcollateralization. The Policy does not guarantee any payments
to the Certificates.
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS
The yield to maturity of the Notes will depend on the price paid by the
holder for such Bond, the Bond Interest Rate and the rate and timing of
principal payments (including payments in excess of required installments,
prepayments or terminations, liquidations and repurchases) on the Mortgage Loans
and the allocation thereof.
In general, if a Bond is purchased at a premium over its face amount
and payments of principal on such Bond occur at a rate faster than anticipated
at the time of purchase, the purchaser's actual yield to maturity will be lower
than that assumed at the time of purchase. Conversely, if a Bond is purchased at
a discount from its face amount and payments of principal on such Bond occur at
a rate slower than that assumed at the time of purchase, the purchaser's actual
yield to maturity will be lower than that originally anticipated.
The rate and timing of defaults on the Mortgage Loans will also affect
the rate and timing of principal payments on the Mortgage Loans and thus the
yield on the Notes. There can be no assurance as to the rate of losses or
delinquencies on any of the Mortgage Loans, however, such losses and
delinquencies may be expected to be higher than those of traditional first lien
mortgage loans. To the extent that any losses are incurred on any of the
Mortgage Loans that are not covered by overcollateralization or the Policy,
losses resulting from default by Mortgagors may be allocated to the Notes. See
"Risk Factors--Limitations, Reduction and Substitution of Credit Enhancement" in
the Prospectus. Even where the Policy covers all losses incurred on the Mortgage
Loans, the effect of losses may be to increase prepayment experience on the
Mortgage Loans, thus reducing average weighted life and affecting yield to
maturity.
S-27
<PAGE>
[With respect to ___ Mortgage Loans representing ___% of the Cut-off
Date Pool Balance, the Mortgage Rate at origination is below the rate that would
result from the sum of the then-applicable Index and Gross Margin. Under the
applicable underwriting standards, Mortgagors under such Mortgage Loans are
generally qualified based on an assumed payment which reflects a rate
significantly lower than the maximum rate. The repayment of any such Mortgage
Loan may thus be dependent on the ability of the mortgagor to make larger
interest payments following the adjustment of the Mortgage Rate.]
With respect to the Mortgage Loans required minimum monthly payments
are equal to [the amount of interest currently accruing thereon,] and therefore
are not expected to significantly amortize the outstanding principal amounts of
the Mortgage Loans prior to maturity. As a result, a borrower will generally be
required to pay a substantial principal amount at the maturity of a Mortgage
Loan. Such Mortgage Loans pose a greater risk of default than fully-amortizing
mortgage loans, because the Mortgagor's ability to make such a substantial
payment at maturity will generally depend on the Mortgagor's ability to obtain
refinancing of the Mortgage Loans or to sell the Mortgaged Property prior to the
maturity of the Mortgage Loan. See "Yield and Prepayment Considerations" in the
Prospectus and "Risk Factors" herein.
There can be no assurance as to the rate of principal payments on the
Mortgage Loans. The rate of principal payments may fluctuate substantially from
time to time.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Issuer by the Company were
or will be purchased by the Company from [Name of Master Servicer] (the
"Seller") pursuant to the Purchase Agreement. Under the Purchase Agreement, the
Seller has agreed to transfer to the Company the Initial Mortgage Loans.
Pursuant to an assignment by the Company executed on the Closing Date, upon such
transfer to the Company, the Initial Mortgage Loans will be transferred by the
Company to the Issuer, as well as the Company's rights in, to and under the
Purchase Agreement, which will include the right to purchase the Subsequent
Mortgage Loans. The following summary describes certain terms of the form of the
Purchase Agreement and is qualified in its entirety by reference to the form of
Purchase Agreement.
TRANSFER OF MORTGAGE LOANS
Pursuant to the Purchase Agreement, the Seller will transfer and assign
to the Company all of its right, title and interest in and to the Mortgage
Loans, the related mortgage note, mortgages and other related documents
(collectively, the "Related Documents"). The purchase price of the Mortgage
Loans is a specified percentage of the face amount thereof as of the time of
transfer and is payable by the Company, as provided in the Purchase Agreement.
S-28
<PAGE>
The Purchase Agreement will require that, within the time period
specified therein, the Seller, acting at the Company's request, deliver to
____________________ (the "Custodian") (as the Issuer's agent for such purpose)
the Mortgage Loans and the Related Documents. In lieu of delivery of original
mortgages, the Seller may deliver true and correct copies thereof which have
been certified as to authenticity by the appropriate county recording office
where such mortgage is recorded. In addition, under the terms of the Purchase
Agreement, the Seller will be required to record assignments of mortgages
relating to such Mortgage Loans.
REPRESENTATIONS AND WARRANTIES
The Seller will represent and warrant to the Company that, among other
things, as of _________________, it is duly organized and in good standing and
that it has the authority to consummate the transactions contemplated by the
Purchase Agreement.
The Seller will also represent and warrant to the Company, that, among
other things, (a) the information with respect to the Initial Mortgage Loans set
forth in the schedule attached to the Purchase Agreement is true and correct in
all material respects and (b) immediately prior to the sale of the Initial
Mortgage Loans to the Company, the Seller was the sole owner and holder of the
Initial Mortgage Loans free and clear of any and all liens and security
interests. The Seller will also represent and warrant to the Company, that,
among other things, as of ______________, (a) the Purchase Agreement constitutes
a legal, valid and binding obligation of the Seller and (b) the Purchase
Agreement constitutes a valid transfer and assignment to the Company of all
right, title and interest of the Seller in and to the Initial Mortgage Loans and
the proceeds thereof. Such representations and warranties will also be made by
the Seller with respect to the Subsequent Mortgage Loans as of the date of
transfer to the Issuer. The benefit of the representations and warranties made
to the Company by the Seller in the Purchase Agreement will be assigned by the
Company to the Issuer and by the Issuer to the Indenture Trustee in the
Indenture.
Within ____ days of the Closing Date, the Custodian will review or
cause to be reviewed the Mortgage Loans and the Related Documents and if any
Mortgage Loan or Related Document is found to be defective in any material
respect and such defect is not cured within ____ days following notification
thereof to the Seller and the Issuer by the Custodian, the Seller will be
obligated under the Purchase Agreement to deposit the Transfer Price into the
Custodial Account. In lieu of any such deposit, the Seller may substitute an
Eligible Substitute Loan. Any such purchase or substitution will result in the
removal of such Defective Loan from the Trust Fund and the lien of the
Indenture. The obligation of the Seller to remove a Defective Loan from the
Trust Fund is the sole remedy regarding any defects in the Mortgage Loans and
Related Documents available to the Indenture Trustee or the Bondholders against
the Seller.
With respect to any Mortgage Loan, the "Transfer Price" is equal to the
Principal Balance of such Mortgage Loan at the time of any removal described
above plus accrued and unpaid interest thereon to the date of removal. In
connection with the substitution of
S-29
<PAGE>
an Eligible Substitute Loan, the Seller will be required to deposit in the
Custodial Account an amount (the "Substitution Adjustment Amount") equal to the
excess of the Principal Balance of the related Defective Loan over the Principal
Balance of such Eligible Substitute Loan.
An "Eligible Substitute Loan" is a mortgage loan substituted by the
Seller for a Defective Loan which must, on the date of such substitution, (i)
have an outstanding Principal Balance (or in the case of a substitution of more
than one Mortgage Loan for a Defective Loan, an aggregate Principal Balance),
not in excess of the Principal Balance relating to such Defective Loan; (ii)
have a Loan Rate, Net Loan Rate and Gross Margin no lower than and not more than
1% in excess of the Loan Rate, Net Loan Rate and Gross Margin, respectively, of
such Defective Loan; (iii) have a Combined Loan-to-Value Ratio at the time of
substitution no higher than that of the Defective Loan at the time of
substitution; (iv) have a remaining term to maturity not more than one year
earlier and not later than the remaining term to maturity of the Defective Loan;
(v) comply with each representation and warranty as to the Mortgage Loans set
forth in the Purchase Agreement (deemed to be made as of the date of
substitution); and (vi) satisfy certain other conditions specified in the
Indenture.
In addition the Seller will be obligated to deposit the Transfer Price
or substitute an Eligible Substitute Loan with respect to a Mortgage Loan as to
which there is a breach of a representation or warranty in the Purchase
Agreement.
Mortgage Loans required to be removed from the Trust Fund as described
in the preceding paragraphs are referred to as "Defective Loans."
ASSIGNMENT TO THE ISSUER
The Master Servicer expressly acknowledges and consents to the
Company's transfer of its rights relating to the Mortgage Loans and its
obligation to pay for the Subsequent Mortgage Loans under the Purchase Agreement
to the Issuer, the Issuer's pledge of its interest in the Purchase Agreement to
the Indenture Trustee and the enforcement by the Indenture Trustee of any such
right or remedy against the Master Servicer.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing
Agreement, dated as of ________ 1, 19__ between the Company and the Master
Servicer. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the Servicing
Agreement. Whenever particular sections or defined terms of the Servicing
Agreement are referred to, such sections or defined terms are thereby
incorporated herein by reference.
P&I COLLECTIONS
S-30
<PAGE>
The Master Servicer shall establish and maintain an account (the
"Custodial Account") in which the Master Servicer shall deposit or cause to be
deposited any amounts representing payments on and any collections received in
respect of the Mortgage Loans received by it subsequent to the Cut-Off Date. The
Custodial Account shall be an Eligible Account. On the _____ day of each month
or if such day is not a Business Day, the next succeeding Business Day (the
"Determination Date"), the Master Servicer will notify the Indenture Trustee of
the amount of P&I Collections to be included in funds available distribution to
the Mortgage Loan for the related Payment Date.
"Eligible Investments" are specified in the Servicing Agreement and are
limited to investments which meet the criteria of the Rating Agencies from time
to time as being consistent with their then current ratings of the Notes.
On the Business Day prior to each Payment Date, the Master Servicer
will make the following withdrawals from the Custodial Account and deposit such
amounts as follows:
(i) to the Distribution Account, an amount equal to the P&I
Collections for such Payment Date; and
(ii) to pay to itself various reimbursement amounts and other
amounts as provided in the Servicing Agreement.
As to any Payment Date, "P&I Collections" will equal the sum of (a)
Interest Collections for such Payment Date and (b) Principal Collections for
such date.
All collections on the Mortgage Loans will generally be allocated
between amounts collected in respect of interest and amounts collected in
respect of principal. As to any Payment Date, "Interest Collections" will be
equal to the sum of (i) the amounts collected during the related Collection
Period, including Net Liquidation Proceeds (as defined below), allocated to
interest, reduced by the Servicing Fees for such Collection Period and (ii) the
interest portion of the Transfer Price for any Defective Loans. As to any
Payment Date, "Principal Collections" will be equal to the sum of (i) the amount
collected during the related Collection Period, including Net Liquidation
Proceeds (as defined herein) allocated to principal and (ii) the principal
portion of the Transfer Price for any Defective Loans and any Substitution
Adjustment Amounts.
As to any Payment Date other than the first Payment Date, the
"Collection Period" is the calendar month preceding the month of such Payment
Date and in the case of the first Payment Date the period from the Cut-Off Date
to ___________.
"Net Liquidation Proceeds" with respect to a Mortgage Loan are the
proceeds (excluding amounts drawn on the Policy) received in connection with the
liquidation of any Mortgage Loan, whether through trustee's sale, foreclosure
sale or otherwise, reduced by related expenses, but not including the portion,
if any, of such amount that exceeds the Principal Balance of the Mortgage Loan
at the end of the Collection Period immediately
S-31
<PAGE>
preceding the Collection Period in which such Mortgage Loan became a Liquidated
Mortgage Loan.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Mortgage Loans as of such date. The
Principal Balance of a Mortgage Loan (other than a Liquidated Mortgage Loan) on
any day is equal to the Cut-Off Date Principal Balance thereof, minus all
collections credited against the Principal Balance of such Mortgage Loan prior
to such day. The Principal Balance of a Liquidated Mortgage Loan after final
recovery of related Liquidation Proceeds shall be zero.
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Master Servicer will make reasonable efforts to collect all
payments called for under the Mortgage Loans and will, consistent with the
Servicing Agreement, follow such collection procedures as it follows from time
to time with respect to the mortgage loans in its servicing portfolio comparable
to the Mortgage Loans. Consistent with the above, the Master Servicer may in its
discretion waive any late payment charge or any assumption or other fee or
charge that may be collected in the ordinary course of servicing the Mortgage
Loans.
With respect to the Mortgage Loans, the Master Servicer may arrange
with a borrower a schedule for the payment of interest due and unpaid for a
period, provided that any such arrangement is consistent with the Master
Servicer's policies with respect to
mortgage loans.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer will foreclose upon or otherwise comparably convert
to ownership Mortgaged Properties securing such of the Mortgage Loans as come
into default when in accordance with applicable servicing procedures under the
Servicing Agreement, no satisfactory arrangements can be made for the collection
of delinquent payments. In connection with such foreclosure or other conversion,
the Master Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general subordinate mortgage servicing
activities, provided the Master Servicer will not be required to expend its own
funds in connection with foreclosure or other conversion, correction of default
on a related senior mortgage loan or restoration of any property unless, in its
sole judgment, such foreclosure, correction or restoration will increase Net
Liquidation Proceeds. The Master Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Bondholders.
EVIDENCE AS TO COMPLIANCE
The Servicing Agreement provides for delivery on or before March 31 in
each year, beginning in March 31, 19__, to the Indenture Trustee of an annual
statement signed by
S-32
<PAGE>
an officer of the Master Servicer to the effect that the Master Servicer has
fulfilled its material obligations under the Servicing Agreement throughout the
preceding calendar year, except as specified in such statement.
On or before March 31 of each year, beginning March 31, 19__, the
Master Servicer will furnish a report prepared by a firm of nationally
recognized independent public accountants (who may also render other services to
the Master Servicer) to the Indenture Trustee to the effect that such firm has
examined certain documents and the records relating to servicing of the Mortgage
Loans under the Servicing Agreement for the preceding calendar year and that, on
the basis of such examination, such firm believes that such servicing was
conducted in compliance with the Servicing Agreement except for (a) such
exceptions as such firm believes to be immaterial and (b) such other exceptions
as shall be set forth in such report.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Servicing Agreement provides that the Master Servicer may not
resign from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless (i) such duties and obligations are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or its affiliate or (ii) upon the satisfaction of the following
conditions: (a) the Master Servicer has proposed a successor servicer to the
Issuer and the Indenture Trustee in writing and such proposed successor servicer
is reasonably acceptable to the Issuer and the Indenture Trustee; (b) the Rating
Agencies have confirmed to the Issuer and the Indenture Trustee that the
appointment of such proposed successor servicer as the Master Servicer will not
result in the reduction or withdrawal of the then current rating of the Notes
and (c) such proposed successor servicer is reasonably acceptable to the
Insurer. No such resignation will become effective until the Indenture Trustee
or a successor servicer has assumed the Master Servicer's obligations and duties
under the Servicing Agreement.
The Master Servicer may perform any of its duties and obligations under
the Servicing Agreement through one or more subservicers or delegates, which may
be affiliates of the Master Servicer. Notwithstanding any such arrangement, the
Master Servicer will remain liable and obligated to the Issuer for the Master
Servicer's duties and obligations under the Servicing Agreement, without any
diminution of such duties and obligations and as if the Master Servicer itself
were performing such duties and obligations.
The Servicing Agreement provides that the Master Servicer will
indemnify the Owner Trustee and the Indenture Trustee, as the case may be, from
and against any loss, liability or expense, imposed by reason of its willful
misfeasance, bad faith or gross negligence in the performance of its duties
under the Servicing Agreement or by reason of its reckless disregard of its
obligations and duties under the Servicing Agreement. The Servicing Agreement
provides that neither the Master Servicer nor its directors, officers, employees
or agents will be under any other liability to the Owner Trustee, the Indenture
Trustee, or
S-33
<PAGE>
any other person for any action taken or for refraining from taking any action
pursuant to the Servicing Agreement. The Master Servicer and any director or
officer or employee or agent of the Master Servicer shall be indemnified by the
Issuer and held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Servicing Agreement or the
Securities, other than any loss, liability or expense related to any specific
Mortgage Loan or Mortgage Loans (except as any such loss, liability or expense
shall be otherwise reimbursable pursuant to the Servicing Agreement) and any
loss, liability or expense incurred by reason of its willful misfeasance, bad
faith or gross negligence in the performance of its duties thereunder or by
reason of its reckless disregard of its obligations and duties thereunder. In
addition, the Servicing Agreement provides that the Master Servicer will not be
under any obligation to appear in, prosecute or defend any legal action which is
not incidental to its servicing responsibilities under the Servicing Agreement
and which in its opinion may expose it to any expense or liability. The Master
Servicer may, in its sole discretion, undertake any such legal action which it
may deem necessary or desirable with respect to the Servicing Agreement and the
rights and duties of the parties thereto.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer shall be a party, or any corporation
succeeding to the business of the Master Servicer shall be the successor of the
Master Servicer hereunder, without the execution or filing of any paper or any
further act on the part of any of the parties hereto, anything in the Servicing
Agreement to the contrary notwithstanding.
EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of: (i) any failure by
the Master Servicer to (a) deposit in the Custodial Account or Payment Account
any deposit required to be made under the Servicing Agreement or (b) to pay when
due any amount payable by it under the terms of the Insurance Agreement, which
failure continues unremedied for three Business Days after the giving of written
notice of such failure to the Master Servicer by the Issuer or Indenture
Trustee, or to the Master Servicer, the Issuer and the Indenture Trustee by the
Insurer; (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 or Insurance Agreement which, in each case, materially and adversely
affects the interests of the Bondholders or the Insurer and continues unremedied
for ____ days or ____ days, respectively, after the giving of written notice of
such failure to the Master Servicer by the Issuer or the Indenture Trustee, or
to the Master Servicer, the Issuer and the Indenture Trustee by the Insurer;
(iii) certain events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings relating to the Master Servicer and
certain actions by the Master Servicer indicating insolvency, reorganization or
inability to pay its obligations; or (iv) any merger, consolidation, or
combination with another entity and the surviving entity thereof or corporate
successor is not rated at least investment grade by the Rating Agencies. Under
the above circumstances, the Indenture Trustee with the consent of the Insurer
or the Insurer may deliver written notice to the Master Servicer terminating
S-34
<PAGE>
all the rights and obligations of the Master Servicer under the Servicing
Agreement. Under certain other circumstances, the Insurer with the consent of
51% of the outstanding principal amount of the Notes and the Certificates may
terminate all the rights and obligations of the Master Servicer under the
Servicing Agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for the applicable periods referred to
therein or referred to under clause (ii) above for the applicable periods
referred to therein, shall not constitute an Event of Servicing Termination if
such delay or failure could not be prevented by the exercise of reasonable
diligence by the Master Servicer and such delay or failure was caused by an act
of God or other similar occurrence. Upon the occurrence of any such event the
Master Servicer shall not be relieved from using reasonable efforts to perform
its obligations in a timely manner in accordance with the terms of the Servicing
Agreement and the Master Servicer shall provide the Issuer, the Insurer and the
Indenture Trustee prompt notice of such failure or delay by it, together with a
description of its efforts to so perform its obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied, the
Indenture Trustee with the consent of the Insurer or the Insurer may terminate
all of the rights and obligations of the Master Servicer under the Servicing
Agreement with respect to the Mortgage Loans, whereupon the Indenture Trustee
will succeed to all the responsibilities, duties and liabilities of the Master
Servicer under the Servicing Agreement and will be entitled to similar
compensation arrangements. In the event that the Indenture Trustee would be
obligated to succeed the Master Servicer but is unwilling or unable so to act,
it may appoint, or petition a court of competent jurisdiction for the
appointment of, an established housing and home finance institution or other
mortgage loan or mortgage loan servicer with all licenses and permits required
to perform its obligations under the Servicing Agreement and having a net worth
of at least $25,000,000 and acceptable to the Insurer to act as successor to the
Master Servicer under the Servicing Agreement. Pending such appointment, the
Indenture Trustee will be obligated to act in such capacity unless prohibited by
law. Such successor will be entitled to receive the same compensation that the
Master Servicer would otherwise have received (or such lesser compensation as
the Issuer and such successor may agree). A receiver or conservator for the
Master Servicer may be empowered to prevent the termination and replacement of
the Master Servicer where the only Event of Servicing Termination that has
occurred is an Insolvency Event.
AMENDMENT
The Servicing Agreement may be amended from time to time by the Master
Servicer, the Issuer and the Indenture Trustee, [with the consent of the
Insurer,] provided that the Rating Agencies confirm in writing that such
amendment will not result in a downgrading or a withdrawal of the rating then
assigned to the Notes.
S-35
<PAGE>
DESCRIPTION OF THE INDENTURE
The following summary describes certain terms of the Indenture. The
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Indenture. Whenever particular
sections or defined terms of the Indenture are referred to, such sections or
defined terms are thereby incorporated herein by reference.
THE TRUST FUND
Simultaneously with the issuance of the Notes, the Issuer will pledge
the Trust Fund to the Indenture Trustee as collateral for the Notes.
REPORTS TO HOLDERS
The Indenture Trustee will mail to each Holder of Notes, at its address
listed on the Security Register maintained with the Indenture Trustee a report
setting forth certain amounts relating to the Notes for each Payment Date, among
other things:
(i) the amount of principal, if any, payable on such Payment
Date to Bondholders separately stating the portion thereof in respect of
Liquidation Loss Amounts and Additional Principal Distribution Amount and
stating the amount of any remaining Liquidation Loss Amounts;
(ii) the amount of interest payable on such Payment Date to
Bondholders separately stating the portion thereof in respect of overdue accrued
interest and stating the amount of remaining overdue accrued interest;
(iii) the Bond Principal Balance of the Notes after giving
effect to the payment of principal on such Payment Date;
(iv) P&I Collections for the related Collection Period;
(v) the aggregate Principal Balance of the Mortgage Loans as of
last day of the related Collection Period;
[(vi) the amount paid, if any, under the Policy separately
stating the portion thereof included in (i) and (ii) above; and]
(vii) the Outstanding Reserve Amount after giving effect to the
payment of principal on the Notes on such Payment Date.
In the case of information furnished pursuant to clauses (i) and (ii)
above, the amounts shall be expressed as a dollar amount per $1,000 in face
amount of Notes.
S-36
<PAGE>
CERTAIN COVENANTS
The Indenture will provide that the Issuer may not consolidate with or
merge into any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes the
Issuer's obligation to make due and punctual payments upon the Notes and the
performance or observance of any agreement and covenant of the Issuer under the
Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Issuer has been advised
that the ratings of the Notes then in effect would not be reduced or withdrawn
by any Rating Agency as a result of such merger or consolidation, (v) any action
that is necessary to maintain the lien and security interest created by the
Indenture is taken and (vi) the Issuer has received an Opinion of Counsel to the
effect that such consolidation or merger would have no material adverse tax
consequence to the Issuer or to any Bondholder or Certificateholder. The Issuer
will not, among other things, (i) except as expressly permitted by the
Indenture, sell, transfer, exchange or otherwise dispose of any of the assets of
the Issuer, (ii) claim any credit on or make any deduction from the principal
and interest payable in respect of the Notes (other than amounts withheld under
the Code or applicable state law) or assert any claim against any present or
former holder of Notes because of the payment of taxes levied or assessed upon
the Issuer, (iii) permit the validity or effectiveness of the Indenture to be
impaired or permit any person to be released from any covenants or obligations
with respect to the Notes under the Indenture except as may be expressly
permitted thereby or (iv) permit any lien, charge excise, claim, security
interest, mortgage or other encumbrance to be created on or extend to or
otherwise arise upon or burden the assets of the Issuer or any part thereof, or
any interest therein or the proceeds thereof. The Issuer may not engage in any
activity other than as specified under "The Issuer" herein.
MODIFICATION OF INDENTURE
With the consent of both the holders of a majority of the outstanding
Notes and the Insurer, the Issuer and the Indenture Trustee may execute a
supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the Indenture, or modify (except as provided below) in any
manner the rights of the Bondholders. Without the consent of the holder of each
outstanding Bond affected thereby, however, no supplemental indenture will: (i)
change the due date of any installment of principal of or interest on any Bond
or reduce the principal amount thereof, the interest rate specified thereon or
the redemption price with respect thereto or change any place of payment where
or the coin or currency in which any Bond or any interest thereon is payable;
(ii) impair the right to institute suit for the enforcement of certain
provisions of the Indenture regarding payment; (iii) reduce the percentage of
the aggregate amount of the outstanding Notes, the consent of the holders of
which is required for any supplemental indenture or the consent of the holders
of which is required for any waiver of compliance with certain provisions of the
Indenture or of certain defaults thereunder and their consequences as provided
for in the Indenture; (iv) modify or alter the provisions of the Indenture
regarding
S-37
<PAGE>
the voting of Notes held by the Issuer, the Company or an affiliate of any of
them; (v) decrease the percentage of the aggregate principal amount of Notes
required to amend the sections of the Indenture which specify the applicable
percentage of aggregate principal amount of the Notes necessary to amend the
Indenture or certain other related agreements; (vi) modify any of the provisions
of the Indenture in such manner as to affect the calculation of the amount of
any payment of interest of principal due on any Bond (including the calculation
of any of the individual components of such calculation); or (vii) permit the
creation of any lien ranking prior to or, except as otherwise contemplated by
the Indenture, on a parity with the lien of the Indenture with respect to any of
the collateral for the Notes or, except as otherwise permitted or contemplated
in the Indenture, terminate the lien of the Indenture on any such collateral or
deprive the holder of any Bond of the security afforded by the lien of the
Indenture.
The Issuer and the Indenture Trustee may also enter into supplemental
indentures, with the consent of the Insurer and without obtaining the consent of
the Bondholders, for the purpose of, among other things, to cure any ambiguity
or to correct or supplement any provision in the Indenture that may be
inconsistent with any other provision therein.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE ISSUER
Neither the Issuer, the Indenture Trustee nor any director, officer or
employee of the Issuer or the Indenture Trustee will be under any liability to
the Issuer or the related Bondholders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Indenture or for
errors in judgment; provided, however, that none of the Indenture Trustee, the
Issuer and any director, officer or employee thereof will be protected against
any liability which would otherwise be imposed by reason of willful malfeasance,
bad faith or negligence in the performance of duties or by reason of reckless
disregard of obligations and duties under the Indenture. Subject to certain
limitations set forth in the Indenture, the Indenture Trustee and any director,
officer, employee or agent of the Indenture Trustee shall be indemnified by the
Issuer and held harmless against any loss, liability or expense incurred in
connection with investigating, preparing to defend or defending any legal
action, commenced or threatened, relating to the Indenture other than any loss,
liability or expense incurred by reason of willful malfeasance, bad faith or
negligence in the performance of its duties under such Indenture or by reason of
reckless disregard of its obligations and duties under the Indenture. All
persons into which the Indenture Trustee may be merged or with which it may be
consolidated or any person resulting from such merger or consolidation shall be
the successor of the Indenture Trustee under each Indenture.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Notes [will][will not] be treated
as having been issued with "original issue discount" (as defined in the
Prospectus). See "Federal Income Tax Consequences" in the Prospectus. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, market discount and premium,
S-38
<PAGE>
if any, for federal income tax purposes will be [ ]% [ ]. No representation is
made that the Mortgage Loans will prepay at that rate or any other rate.
The Notes will not be treated as "qualifying real property loans" under
Section 593 (d) of the Code, assets described in Section 7701(a)(19)(C) of the
Code and "real estate assets" under Section 856(c)(5)(A) of the Code. In
addition, interest on the Notes will not be treated as "interest on obligations
secured by mortgages on real property" under Section 856(c)(3)(B) of the Code.
The Notes will also not be treated as "qualified mortgages" under Section
860G(a)(3)(C) of the Code.
Prospective investors in the Notes should see "Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the Prospectus for a
discussion of the application of certain federal income and state and local tax
laws to the Issuer and purchasers of the Notes.
ERISA CONSIDERATIONS
Any fiduciary or other investor of Plan assets that proposes to acquire
or hold the Notes on behalf of or with Plan assets of any Plan should consult
with its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment. See "ERISA Considerations" in the
Prospectus.
LEGAL INVESTMENT
The Notes will constitute "mortgage related securities" for purposes of
SMMEA so long as they are rated in the highest two rating categories by a Rating
Agency. See "Legal Investment" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Company, the Notes.
The Notes will be purchased from the Company by the Underwriter and
will be offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The proceeds to the Company from the sale of the Notes are expected to be
approximately $___________, before the deduction of expenses payable by the
Company estimated to be approximately $_______. The Underwriter may effect such
transactions by selling the Notes to or through dealers, and such dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriter. In connection with the sale of the Notes, the
Underwriter may be deemed to have received compensation from the Company in the
form of underwriting compensation. The Underwriter and any dealers that
participate
S-39
<PAGE>
with the Underwriter in the distribution of the Notes may be deemed to be
underwriters and any profit on the resale of the Notes positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
The Company has been advised by the Underwriter that it presently
intends to make a market in the Notes offered hereby; however, it is not
obligated to do so, any market-making may be discontinued at any time, and there
can be no assurance that an active public market for the Notes will develop.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute payments the Underwriter may be required
to make in respect thereof.
LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed upon for
the Company by [Thacher Proffitt & Wood], New York, New York and for the
Underwriter by ________________, New York, New York.
RATINGS
It is a condition to issuance that the Notes be rated "___" by
_______________ and "___" by ___________________. The Company has not requested
a rating on the Notes by any rating agency other than _______________ and
_______________. However, there can be no assurance as to whether any other
rating agency will rate the Notes, or, if it does, what rating would be assigned
by any such other rating agency. A rating on the Notes by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Notes by
___________ and ___________________________. A securities rating addresses the
likelihood of the receipt by holders of Notes of distributions on the Mortgage
Loans. The rating takes into consideration the structural, legal and tax aspects
associated with the Notes. The ratings on the Notes do not, however, constitute
statements regarding the possibility that Holders might realize a lower than
anticipated yield. A securities rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
S-40
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or by the Underwriter. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement
or the Prospectus.
----------
TABLE OF CONTENTS
[To be updated] Page
----
Prospectus Supplement
Summary.............................................................. S-
Risk Factors......................................................... S-
Description of the Mortgage Pool..................................... S-
Servicing of the Mortgage Loans...................................... S-
The Issuer........................................................... S-
The Owner Trustee.................................................... S-
Description of the Securities........................................ S-
Description of the Purchase
Agreement....................................................... S-
Assignment to the Issuer............................................. S-
Description of the Servicing
Agreement....................................................... S-
Description of the Indenture......................................... S-
Federal Income Tax Consequences...................................... S-
ERISA Considerations................................................. S-
Legal Investment..................................................... S-
Method of Distribution............................................... S-
Legal Matters........................................................ S-
Ratings.............................................................. S-
Prospectus
Summary of Prospectus ...............................................
Risk Factors.........................................................
The Mortgage Pools...................................................
Servicing of Mortgage Loans..........................................
Description of Credit Enhancement....................................
Purchase Obligations.................................................
Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder.......................................
The Company..........................................................
The Agreements.......................................................
Yield Considerations.................................................
Maturity and Prepayment Considerations...............................
Certain Legal Aspects of Mortgage Loans..............................
Federal Income Tax Consequences......................................
State and Other Tax Consequences.....................................
ERISA Considerations.................................................
Legal Investment Matters ............................................
Use of Proceeds......................................................
Methods of Distribution..............................................
Legal Matters........................................................
Financial Information................................................
Rating...............................................................
Index of Principal Definitions.......................................
Salomon Brothers Mortgage
Securities VII, Inc.
Salomon MBN Trust
19__-___
$__________________
Collateralized
Mortgage Notes
Series 19__-___
----------
PROSPECTUS SUPPLEMENT
----------
------------------------------------------
____________, 19__
[UNDERWRITER]
<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 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 SEPTEMBER 2, 1998
[Version 1]
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 "Certain
Federal Income Tax Consequences".
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS"
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
<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 OF CONTENTS
CAPTION PAGE
Available Information......................................... 4
Reports to Securityholders.................................... 4
Incorporation of Certain Information by Reference............. 4
Summary of Prospectus......................................... 5
Risk Factors.................................................. 16
The Trust Funds............................................... 24
The Mortgage Loans....................................... 24
Agency Securities........................................ 30
Private Mortgage-Backed Securities....................... 35
Funding Agreements....................................... 37
Use of Proceeds............................................... 38
Yield Considerations.......................................... 38
Maturity and Prepayment Considerations........................ 39
The Depositor................................................. 40
Mortgage Loan Program......................................... 40
Underwriting Standards................................... 41
Qualifications of Originators and Mortgage
Loan Sellers............................................. 42
Representations by or on behalf of Mortgage Loan
Sellers; Repurchases..................................... 43
Description of the Securities................................. 45
General.................................................. 45
Assignment of Trust Fund Assets.......................... 47
Deposits to Certificate Account.......................... 50
Payments on Mortgage Loans............................... 51
Payments on Agency Securities and Private
Mortgage-Backed Securities............................... 53
Distributions............................................ 53
Available Distribution Amount............................ 53
Interest on the Securities............................... 54
Principal of the Securities.............................. 54
Pre-Funding Account...................................... 55
Allocation of Losses..................................... 55
Advances in Respect of Delinquencies..................... 56
Reports to Securityholders............................... 57
Collection and Other Servicing Procedures................ 58
Sub-Servicing............................................ 60
Realization Upon Defaulted Mortgage Loans................ 60
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...................................... 63
Events of Default and Rights Upon Events of Default...... 64
Amendment................................................ 67
Termination.............................................. 68
Optional Purchase of Defaulted Mortgage Loans............ 68
Duties of the Trustee.................................... 69
The Trustee.............................................. 69
Description of Credit Support................................. 69
Subordination............................................ 69
Letter of Credit......................................... 71
Mortgage Pool Insurance Policy........................... 72
Special Hazard Insurance Policy.......................... 74
Bankruptcy Bond.......................................... 75
Financial Guarantee Insurance............................ 76
Reserve Fund............................................. 76
Cash Flow Agreements..................................... 76
Description of Primary Insurance Policies..................... 76
Primary Mortgage Insurance Policies...................... 77
Primary Hazard Insurance Policies........................ 77
FHA Insurance............................................ 78
VA Guarantees............................................ 79
Certain Legal Aspects of Mortgage Loans....................... 79
General.................................................. 80
2
<PAGE>
CAPTION PAGE
Single-Family Loans and Multifamily Loans................ 80
Leases and Rents......................................... 81
Cooperative Loans........................................ 81
Contracts................................................ 82
Foreclosure on Mortgages................................. 84
Foreclosure on Cooperative Shares........................ 85
Repossession with respect to Contracts................... 86
Louisiana Law............................................ 87
Rights of Redemption with respect to Single-Family
Properties and Multifamily Properties.................. 88
Notice of Sale; Redemption Rights with respect to
Manufactured Homes..................................... 88
Anti-Deficiency Legislation and Other Limitations
on Lenders............................................. 88
Junior Mortgages......................................... 90
Consumer Protection Laws with respect to Contracts....... 90
Other Limitations........................................ 91
Enforceability of Certain Provisions..................... 92
Subordinate Financing.................................... 93
Applicability of Usury Laws.............................. 94
Alternative Mortgage Instruments......................... 94
Formaldehyde Litigation with respect to Contracts........ 95
Soldiers' and Sailors' Civil Relief Act of 1940.......... 95
Environmental Legislation................................ 96
Forfeitures in Drug and RICO Proceedings................. 97
Negative Amortization Loans.............................. 97
Certain Federal Income Tax Consequences....................... 97
General.................................................. 97
REMICs................................................... 98
Notes.................................................... 116
Grantor Trust Funds...................................... 116
Partnership Trust Funds.................................. 126
State and Other Tax Consequences.............................. 133
ERISA Considerations.......................................... 133
Representation from Plans Investing in Notes with
"Substantial Equity Features" or Certain Securities.... 138
Tax Exempt Investors..................................... 139
Consultation with Counsel................................ 139
Legal Investment.............................................. 139
Methods of Distribution....................................... 140
Legal Matters................................................. 141
Financial Information......................................... 141
Index of Principal Definitions................................ 142
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
9
<PAGE>
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.
. 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
10
<PAGE>
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
11
<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,
under the circumstances and in the manner set
forth herein under "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
12
<PAGE>
Certificates and REMIC Residual Certificates
(i) owned by a "domestic building and loan
association" will be treated as "loans secured
by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C) and (ii)
owned by a real estate investment trust will be
treated as "real estate assets" for purposes of
Section 856(c)(4)(A) of the Code and interest
income therefrom will be treated as "interest
on obligations secured by mortgages on real
property" for purposes of Section 856(c)(3)(B)
of the Code. In addition, REMIC Regular
Certificates will be "obligation[s]. . .which.
. .[are] principally secured by an interest in
real property" within the meaning of Section
860G(a)(3)(C) of the Code. Moreover, if 95% or
more of the assets and the income of the Trust
Fund qualify for any of the foregoing
treatments, the REMIC Regular Certificates and
(with the exception of Section 860G(a)(3)(C) of
the Code) REMIC Residual Certificates will
qualify for the foregoing treatments in their
entirety.
REMIC Residual Certificates generally will be
treated as representing an interest in
qualifying assets and income to the same extent
described above for institutions subject to
Sections 7701(a)(19)(C), 856(c)(4)(A) and
856(c)(3)(B) of the Code. A portion (or, in
certain cases, all) of the income from REMIC
Residual Certificates (i) may not be offset by
any losses from other activities of the holder
of such REMIC Residual Certificates, (ii) may
be treated as unrelated business taxable
income, for holders of REMIC Residual
Certificates that are subject to tax on
unrelated business taxable income (as defined
in Section 511 of the Code), and (iii) may be
subject to foreign withholding rules. In
addition, transfers of certain REMIC Residual
Certificates may be disregarded under some
circumstances for all federal income tax
purposes. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of
REMIC Residual Certificates--Excess
Inclusions," and "--Noneconomic REMIC Residual
Certificates" herein.
Unless otherwise provided in the related
Prospectus Supplement, Grantor Trust
Certificates may be either Certificates having
a 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
13
<PAGE>
Sections 7701(a)(19)(C), 856(c)(4)(A) and
856(c)(3)(B) of the Code, although the policy
considerations underlying those Sections
suggest that such treatment should be
available. Partnership Certificates will be
treated as partnership interests for purposes
of federal income taxation, and accordingly,
will not represent an interest in qualifying
assets for purposes of Section 7701(a)(19)(C)
of the Code, but will represent qualifying
assets and income under Sections 856(c)(4)(A)
and 856(c)(3)(B) of the Code to the extent
their proportionate share of the assets of the
related Trust Fund so qualify. Debt
Certificates will not represent qualifying
assets or income for purposes of any of the
preceding Sections.
Investors are advised to consult their tax
advisors and to review "Certain Federal Income
Tax Consequences" herein and in the related
Prospectus Supplement.
Rating...........................At the date of issuance, as to each series,
each class of 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
14
<PAGE>
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.
15
<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
16
<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.
17
<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.
19
<PAGE>
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
20
<PAGE>
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
21
<PAGE>
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
22
<PAGE>
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. The yield to maturity on Strip Securities will be
extremely sensitive to the rate of prepayments on the related Mortgage Loans. 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. 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 "Certain 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 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.
23
<PAGE>
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 property acquired in respect of
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
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. 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 Certificates by the
Master Servicer or the Depositor may adversely affect the yield to holders of
certain classes of such Securities.
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".
24
<PAGE>
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;
(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
25
<PAGE>
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. 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.
26
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, the
aggregate principal balance on the Cut-off Date of Mortgage Loans secured by
condominium units will not exceed 30% of the aggregate principal balance of the
Mortgage Loans in the related Mortgage Pool. A Mortgage Loan secured by a
condominium unit will not be included in a Mortgage Pool unless, at the time of
sale of such Mortgage Loan by the Mortgage Loan Seller, certain representations
and warranties as to the condominium project are made by the Mortgage Loan
Seller or an affiliate thereof or by such other person acceptable to the
Depositor having knowledge regarding the subject matter of such representations
and warranties. Unless otherwise specified in the related Prospectus Supplement,
such Mortgage Loan Seller, or another party on its behalf, will have made the
following representations and warranties. If a condominium project is subject to
developer control or to incomplete phasing or add-ons, at least 70% of the units
have been sold to bona fide purchasers and are occupied as primary residences or
vacation or second homes. If a condominium project has been controlled by the
unit owners (other than the developer) for less than two years and is not
subject to incomplete phasing or add-ons, at least 70% of the units have been
sold to bona fide purchasers and at least 60% of the units are occupied as
primary residences or vacation or second homes. The foregoing percentages may be
modified in the case of a particular project upon proof of demonstrated market
acceptance but in no event will any such percentage be reduced below 51%. If a
condominium project has been controlled by the unit owners (other than the
developer) for at least two years, has all common elements completed and is not
subject to phasing or add-ons, the Mortgage Loan Seller, or another party on its
behalf, must represent and warrant, unless otherwise specified in the related
Prospectus Supplement, that the marketability of the project has been proven and
that at least 90% of the units have been sold to bona fide purchasers. See
"Mortgage Loan Program--Representations by or on behalf of Mortgage Loan
Sellers; Repurchases" herein for a description of certain other representations
made by or on behalf of Mortgage Loan Sellers at the time Mortgage Loans are
sold.
If provided in the related Prospectus Supplement, certain of the Mortgage
Pools may contain Mortgage Loans subject to temporary buydown plans ("Buydown
Mortgage Loans"), pursuant to 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
27
<PAGE>
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 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
28
<PAGE>
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, 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
29
<PAGE>
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of this paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under this chapter."
AGENCY SECURITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
GNMA is a wholly-owned corporate instrumentality of the United States with
the United States Department of Housing and Urban Development. Section 306(g) of
Title II of the National Housing Act of 1934, as amended (the "Housing Act"),
authorizes GNMA to guarantee the timely payment of the principal of and interest
on certificates which represent an interest in a pool of mortgage loans insured
by FHA under the Housing Act, or Title V of the Housing Act of 1949 ("FHA
Loans"), or partially guaranteed by the VA under the Servicemen's Readjustment
Act of 1944, as amended, or Chapter 37 of Title 38, United States Code ("VA
Loans").
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guarantee under this subsection." In order to meet
its obligations under any such guarantee, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury in an amount which is at
anytime sufficient to enable GNMA, with no limitations as to amount, to perform
its obligations under its guarantee.
GNMA CERTIFICATES
Each GNMA Certificate held in a Trust Fund (which may be issued under
either the GNMA I program or the GNMA II program) will be a "fully modified
pass-through" mortgaged-backed certificate issued and serviced by a mortgage
banking company or other financial concern ("GNMA Issuer") approved by GNMA or
approved by FNMA as a seller-servicer of FHA Loans and/or VA Loans. The mortgage
loans underlying the GNMA Certificates will consist of FHA Loans and/or VA
Loans. Each such mortgage loan is secured by a one- to four-family residential
property. GNMA will approve the issuance of each such GNMA Certificate in
accordance with a guaranty agreement (a "Guaranty Agreement") between GNMA and
the GNMA Issuer. Pursuant to its Guaranty Agreement, a GNMA Issuer will be
required to advance its own funds in order to make timely 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.
30
<PAGE>
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such GNMA Certificate. In the event no payment is made by a
GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered holder of
the GNMA Certificates held in a Trust Fund, will have the right to proceed
directly against GNMA under the terms of the Guaranty Agreements relating to
such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for 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.
31
<PAGE>
FEDERAL HOME LOAN MORTGAGE CORPORATION
FHLMC is a corporate instrumentality of the United States created pursuant
to Title III of the Emergency Home Finance Act of 1970, as amended (the "FHLMC
Act"). The common stock of FHLMC is owned by the Federal Home Loan Banks. FHLMC
was established primarily for the purpose of increasing the availability of
mortgage credit for the financing of urgently needed housing. It seeks to
provide an enhanced degree of liquidity for residential mortgage investments
primarily by assisting in the development of secondary markets for conventional
mortgages. The principal activity of FHLMC currently consists of the purchase of
first lien conventional mortgage loans or participation interests in such
mortgage loans and the sale of the mortgage loans or participations so purchased
in the form of mortgage securities, primarily FHLMC Certificates. FHLMC is
confined to purchasing, so far as practicable, mortgage loans that it deems to
be of such quality, type and class as to meet generally the purchase standards
imposed by private institutional mortgage investors.
FHLMC CERTIFICATES
Each FHLMC Certificate represents an undivided interest in a pool of
mortgage loans that may consist of first lien conventional loans, FHA Loans or
VA Loans (a "FHLMC Certificate group"). FHLMC Certificates are sold under the
terms of a Mortgage Participation Certificate Agreement. A FHLMC Certificate may
be issued under either FHLMC's Cash Program or Guarantor Program.
Mortgage loans underlying the FHLMC Certificates held in a Trust Fund will
consist of mortgage loans with original terms to maturity of between 10 and 30
years. Each such mortgage loan must meet the applicable standards set forth in
the FHLMC Act. A FHLMC Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another FHLMC Certificate group. Under the Guarantor
Program, any such FHLMC Certificate group may include only whole loans or
participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
collection by such holder of all principal on the underlying mortgage loans,
without any offset or deduction, to the extent of such holder's pro rata share
thereof, but does not, except if and to the 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,
32
<PAGE>
and FHLMC has not adopted standards which require that the demand be made within
any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial repayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, there is no limitation on the amount by which
interest rates on the mortgage loans underlying a FHLMC Certificate may exceed
the pass-through rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans from sellers at specified percentages
of their unpaid principal balances, adjusted for accrued or prepaid interest,
which when applied to the interest rate of the mortgage loans and participations
purchased, results in the yield (expressed as a percentage) required by FHLMC.
The required yield, which includes a minimum servicing fee retained by the
servicer, is calculated using the outstanding principal balance. The range of
interest rates on the mortgage loans and participations in a FHLMC Certificate
group under the Cash Program will vary since mortgage loans and participations
are purchased and assigned to a FHLMC Certificate group based upon their yield
to FHLMC rather than on the interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC Certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC.
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.
33
<PAGE>
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA CERTIFICATES
FNMA Certificates are Guaranteed Mortgage Pass-Through Certificates
representing fractional undivided interests in a pool of mortgage loans formed
by FNMA. Each mortgage loan must meet the applicable standards of the FNMA
purchase program. Mortgage loans comprising a pool are either provided by FNMA
from its own portfolio or purchased pursuant to the criteria of the FNMA
purchase program.
Mortgage loans underlying FNMA Certificates held in a Trust Fund will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under a
regular servicing option (pursuant to which the mortgagee or other servicers
assumes the entire risk of foreclosure losses), the annual interest rates on the
mortgage loans underlying a FNMA Certificate will be between 50 basis points and
250 basis points greater than in its annual pass-through rate and under a
special servicing option (pursuant to which FNMA assumes the entire risk for
foreclosure losses), the annual interest rates on the mortgage loans underlying
a FNMA Certificate will generally be between 55 basis points and 255 basis
points greater than the annual FNMA Certificate pass-through rate. If specified
in the Prospectus Supplement, FNMA Certificates may be backed by adjustable rate
mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount 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.
34
<PAGE>
With respect to FNMA Certificates issued in book-entry form, distributions
thereon will be made by wire, and with respect to fully registered FNMA
Certificates, distributions thereon will be made by check.
STRIPPED MORTGAGE-BACKED SECURITIES
Agency Securities may consist of one or more stripped mortgage-backed
securities, each as described herein and in the related Prospectus Supplement.
Each such Agency Security will represent an undivided interest in all or part of
either the principal distributions (but not the interest distributions) or the
interest distributions (but not the principal distributions), or in some
specified portion of the principal and interest distributions (but not all of
such distributions) on certain FHLMC, FNMA or GNMA Certificates. The underlying
securities will be held under a trust agreement by FHLMC, FNMA or GNMA, each as
trustee, or by another trustee named in the related Prospectus Supplement.
FHLMC, FNMA or GNMA will guarantee each stripped Agency Security to the same
extent as such entity guarantees the underlying securities backing such stripped
Agency Security, unless otherwise specified in the related Prospectus
Supplement.
OTHER AGENCY SECURITIES
If specified in the related Prospectus Supplement, a Trust Fund may include
other mortgage pass-through certificates issued or guaranteed by GNMA, FNMA or
FHLMC. The characteristics of any such mortgage pass-through certificates will
be described in such Prospectus Supplement. If so specified, a combination of
different types of Agency Securities may be held in a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
GENERAL
Private Mortgage-Backed Securities may consist of (a) mortgage pass-through
certificates evidencing an undivided interest in a pool of mortgage loans or (b)
collateralized mortgage obligations secured by mortgage loans. Private
Mortgage-Backed Securities will have been issued pursuant to a pooling and
servicing agreement, an indenture or similar agreement (a "PMBS Agreement"). The
seller/servicer of the underlying mortgage loans will have entered into the PMBS
Agreement with the trustee under such PMBS Agreement (the "PMBS Trustee"). The
PMBS Trustee or its agent, or a custodian, will possess the mortgage loans
underlying such Private Mortgage-Backed Security. Mortgage loans underlying a
Private Mortgage-Backed Security will 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.
35
<PAGE>
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) 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
36
<PAGE>
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
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
37
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 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
38
<PAGE>
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".
The Prospectus Supplement for each series of Securities may set forth
additional information regarding yield considerations.
MATURITY AND PREPAYMENT CONSIDERATIONS
The original terms to maturity of the Trust Fund Assets in a particular
Trust Fund will vary depending upon the type of mortgage loans underlying or
comprising the Trust Fund Assets in such Trust Fund. Each Prospectus Supplement
will contain information with respect to the type and maturities of the Trust
Fund Assets in the related Trust Fund. Unless otherwise specified in the related
Prospectus Supplement, all of the Single-Family Loans, Cooperative Loans and
Contracts and all of the mortgage loans underlying the Agency Securities,
Private Mortgage-Backed Securities and Funding Agreements may be prepaid without
penalty in full or in part at any time. If so provided in the related Prospectus
Supplement, certain of the Mortgage Loans may contain provisions prohibiting
prepayment for a specified period after the origination date (a "Lockout
Period"), prohibiting partial prepayments entirely or prohibiting prepayment in
full or in part without a prepayment penalty.
The prepayment experience on the mortgage loans underlying or comprising
the Trust Fund Assets in a Trust Fund will affect the weighted average life of
the related series of 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
39
<PAGE>
or certain transfers by the borrower of the underlying Mortgaged Property. The
Multifamily Loans may contain due-on-encumbrance provisions (permitting the
lender to accelerate the maturity of the Multifamily Loan upon further
encumbrance by the borrower of the underlying Multifamily Property).
Conventional mortgage loans that underlie FHLMC Certificates and FNMA
Certificates may contain, and in certain instances must contain, such
due-on-sale provisions. FHA Loans, VA Loans and other mortgage loans underlying
GNMA Certificates contain no such clause and may be assumed by the purchaser of
the mortgaged property. Thus, the rate of prepayments on FHA Loans, VA Loans and
other mortgage loans underlying GNMA Certificates may be lower than that of
conventional Mortgage Loans bearing comparable interest rates.
With respect to a series of 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".
40
<PAGE>
UNDERWRITING STANDARDS
All Mortgage Loans will have been subject to underwriting standards
acceptable to the Depositor and applied as described below. Each Mortgage Loan
Seller, or another party on its behalf, will represent and warrant that Mortgage
Loans purchased by or on behalf of the Depositor from it have been originated by
the related Originators in accordance with such underwriting standards.
Unless otherwise specified in the related Prospectus Supplement, the
underwriting standards are applied by the Originators to evaluate the borrower's
credit standing and repayment ability, and the value and adequacy of the
Mortgaged Property as collateral. Initially, a prospective borrower is required
to fill out a detailed application regarding pertinent credit information. As
part of the description of the borrower's financial condition, the borrower is
required to provide a current balance sheet describing assets and liabilities
and a statement of income and expenses, as well as an authorization to apply for
a credit report that summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In addition, an employment
verification is obtained that reports the borrower's current salary and may
contain information regarding length of employment and whether it is expected
that the borrower will continue such employment in the future. If a prospective
borrower is self-employed, the borrower is required to submit copies of signed
tax returns. The borrower may also be required to authorize verification of
deposits at financial institutions where the borrower has demand or savings
accounts. In the case of a Multifamily Loan, the borrower is also required to
provide certain information regarding the related Multifamily Property,
including a current rent schedule, the type and length of leases and pro forma
operating income statements. In addition, the Depositor will consider the
location of the Multifamily Property, the availability of competitive lease
space and rental income of comparable properties in the relevant market area,
the overall economy and demographic features of the geographic area and the
mortgagor's prior experience in owning and operating properties similar to the
Multifamily Properties.
In determining the adequacy of the property as collateral, an appraisal is
made of each property considered for financing, except in the case of new
Manufactured Homes, as described under "The Trust Funds". Each appraiser is
selected in accordance with predetermined guidelines established for appraisers.
The appraiser is required to inspect the property and verify that it is in good
condition and that construction, if new, has been completed. With respect to
properties other than Multifamily Properties, the appraisal is based on the
market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the home. With respect to
Multifamily Properties, the appraisal must specify whether an income 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
41
<PAGE>
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.
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
42
<PAGE>
Deposit Insurance Corporation (the "FDIC"). In addition, with respect to FHA
Loans or VA Loans, each Originator must be approved to originate such Mortgage
Loans by the FHA or VA, as applicable. In addition, each Originator and Mortgage
Loan Seller must satisfy certain criteria as to financial stability evaluated on
a case by case basis by the Depositor.
REPRESENTATIONS BY OR ON BEHALF OF MORTGAGE LOAN SELLERS; REPURCHASES
Each Mortgage Loan Seller, or a party on its behalf, will have made
representations and warranties in respect of the Mortgage Loans sold by such
Mortgage Loan Seller. Such representations and warranties include, among other
things: (i) that any required hazard insurance was effective at the origination
of each Mortgage Loan, and that each such policy remained in effect on the date
of purchase of the Mortgage Loan from the Mortgage Loan Seller by or on behalf
of the Depositor; (ii) that, in the case of Single-Family Loans and Multifamily
Loans, either (A) title insurance insuring (subject only to permissible title
insurance exceptions) the lien status of the Mortgage was effective at the
origination of each Mortgage Loan and such policy remained in effect on the date
of purchase of the Mortgage Loan from the Mortgage Loan Seller by or on behalf
of the Depositor or (B) if the Mortgaged Property securing any Mortgage Loan is
located in an area where such policies are generally not available, there is in
the related mortgage file an attorney's certificate of title indicating (subject
to such permissible exceptions set forth therein) the first lien status of the
mortgage; (iii) that the Mortgage Loan Seller had good title to each Mortgage
Loan and each Mortgage Loan was subject to no offsets, defenses, counterclaims
or rights of rescission except to the extent that any buydown agreement
described herein may forgive certain indebtedness of a borrower; (iv) that each
Mortgage constituted a valid first lien on, or security interest in, the
Mortgaged Property (subject only to permissible title insurance exceptions and
Senior Liens, if any) and that the Mortgaged Property was free from damage and
was in good repair; (v) that there were no delinquent tax or assessment liens
against the Mortgaged Property; (vi) that each Mortgage Loan was current as to
all required payments; and (vii) that each Mortgage Loan was made in compliance
with, and is enforceable under, all applicable local, state and federal laws and
regulations in all material respects. If a person other than a Mortgage Loan
Seller makes any of the foregoing representations and warranties on behalf of
such Mortgage Loan Seller, the identity of such person will be specified in the
related Prospectus Supplement. Any person making representations and warranties
on behalf of a Mortgage Loan Seller shall be an affiliate thereof or such other
person acceptable to the Depositor having knowledge regarding the subject matter
of such representations and warranties.
All of the representations and warranties made by or on behalf of a
Mortgage Loan Seller in respect of a Mortgage Loan will have been made as of the
date on which such Mortgage Loan Seller sold the Mortgage Loan to or on behalf
of the Depositor. A substantial period of time may have elapsed between such
date and the date of initial issuance of the series of 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.
43
<PAGE>
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 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
44
<PAGE>
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 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
45
<PAGE>
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.
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
46
<PAGE>
reduction in amounts otherwise distributable to Securityholders. See "Certain
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, 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.
47
<PAGE>
(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 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
48
<PAGE>
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
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.
49
<PAGE>
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, 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
50
<PAGE>
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 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
51
<PAGE>
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.
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.
52
<PAGE>
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).
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),
53
<PAGE>
(b) all prepayments, together with related payments of the
interest thereon, Liquidation Proceeds, Insurance Proceeds and other
unscheduled recoveries received subsequent to the related Prepayment
Period, and
(c) all amounts in the Certificate Account that are due or
reimbursable to the Depositor, the Trustee, a Mortgage Loan Seller, a
Sub-Servicer or the Master Servicer or that are payable in respect of
certain expenses of the related Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Certificate Account;
(iii) all advances with respect to such Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid with respect to interest shortfalls resulting from
prepayments during the related Prepayment Period; and
(v) to the extent not on deposit in the related Certificate Account as
of the corresponding Determination Date, any amounts collected under, from
or in respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related 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
54
<PAGE>
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 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
55
<PAGE>
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.
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
56
<PAGE>
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.
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;
57
<PAGE>
(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 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
58
<PAGE>
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.
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.
59
<PAGE>
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, 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
60
<PAGE>
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 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
61
<PAGE>
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 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.
62
<PAGE>
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 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
63
<PAGE>
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 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
64
<PAGE>
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 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
65
<PAGE>
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
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.
66
<PAGE>
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 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
67
<PAGE>
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 property acquired upon foreclosure of any such
Trust Fund Asset and (ii) the purchase of all of the assets of the Trust Fund by
the party entitled to effect such termination, under the circumstances and in
the manner set forth in the related Prospectus Supplement. In no event, however,
will the trust created by the 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 property acquired for the benefit of Securityholders in
respect of such loans, and (ii) the aggregate fair market value of all of the
assets in the Trust Fund (as determined by the Trustee, the 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 Mortgage Loans at the Cut-off Date for that
series specified in the related Prospectus Supplement.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer has the option to purchase from the Trust Fund any Mortgage Loan 90
days or more delinquent at a purchase price generally equal to the outstanding
principal balance of such Mortgage Loan as of the date of purchase, plus all
accrued and unpaid interest on such principal balance computed at the Interest
Rate.
68
<PAGE>
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.
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
69
<PAGE>
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 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
70
<PAGE>
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
(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.
71
<PAGE>
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
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
72
<PAGE>
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
determining whether recoveries under the Mortgage Pool Insurance Policy are
jeopardized for reasons related to the financial condition of the insurer. If
the Master Servicer determines that recoveries are so jeopardized, it will
exercise its best reasonable efforts to obtain from another Qualified Insurer a
replacement policy as described above, subject to the same cost limitation.
73
<PAGE>
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 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
74
<PAGE>
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
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".
75
<PAGE>
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.
76
<PAGE>
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 the primary mortgage insurance policy
(ordinary wear and tear excepted); and (iii) tender to the insurer good and
merchantable title to, and possession of, the Mortgaged Property.
PRIMARY HAZARD INSURANCE POLICIES
Each Agreement will require the Master Servicer to cause the borrower on
each Mortgage Loan to maintain a primary hazard insurance policy providing for
coverage of the standard form of fire insurance policy with extended coverage
customary in the state in which the Mortgaged Property is located. Unless
otherwise specified in the related Prospectus Supplement, such coverage will be
in general in an amount equal to the lesser of the principal balance owing on
such Mortgage Loan and the amount necessary to fully compensate for any damage
or loss to the improvements on the Mortgaged Property on a replacement cost
basis, but in either case not less than the amount necessary to avoid the
application of any co-insurance clause contained in the hazard insurance policy.
The ability of the Master Servicer to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any primary hazard insurance policy and under any flood insurance
policy referred to below, or upon the extent to which information in this regard
is furnished by borrowers. All amounts collected by the Master Servicer under
any such policy (except for amounts to be applied to the restoration or repair
of the Mortgaged Property or released to the borrower in accordance with the
Master Servicer's normal servicing procedures, subject to the terms and
conditions of the related Mortgage and Mortgage Note) will be deposited in the
Certificate Account. The Agreement provides that the Master Servicer may satisfy
its obligation to cause each borrower to maintain such a hazard insurance policy
by the Master Servicer's maintaining a blanket policy insuring against hazard
losses on the Mortgage Loans. If such blanket policy contains a deductible
clause, the Master Servicer will deposit in the Certificate Account all sums
that would have been deposited therein but for such clause. The Master Servicer
also is required to maintain a fidelity bond and errors and omissions policy
with respect to its officers and employees that provides coverage against losses
that may be sustained as a result of an officer's or employee's misappropriation
of funds or errors and omissions in failing to maintain insurance, subject to
certain limitations as to amount of coverage, deductible amounts, conditions,
exclusions and exceptions.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore
77
<PAGE>
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
78
<PAGE>
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".
79
<PAGE>
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.
80
<PAGE>
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
81
<PAGE>
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.
82
<PAGE>
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.
83
<PAGE>
FORECLOSURE ON MORTGAGES
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust, which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In some states, the trustee must record a
notice of default and send a copy to the borrower-trustor and to any person who
has recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any junior lienholder. The
trustor, borrower, or any person having a junior encumbrance on the real estate,
may, during a reinstatement period, cure the default by paying the entire amount
in arrears plus the costs and expenses incurred in enforcing the obligation.
Generally, state law controls the amount of foreclosure expenses and costs,
including attorneys' fees, that may be recovered by a lender. If the deed of
trust is not reinstated, a notice of sale must be posted in a public place and,
in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property, recorded and sent to all parties having an
interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage and in the mortgaged
property. It is regulated by statutes and rules and subject throughout to the
court's equitable powers. Generally, a mortgagor is bound by the terms of the
mortgage note and the mortgage as made and cannot be relieved from its own
default. However, since a foreclosure action is equitable in nature and is
addressed to a court of equity, the court may relieve a mortgagor of a default
and deny the mortgagee foreclosure on proof that the mortgagor's default was
neither willful nor in bad faith and that the mortgagee's action was such as to
establish a waiver, or fraud, bad faith, oppressive or unconscionable conduct as
to warrant a court of equity to refuse affirmative relief to the mortgagee.
Under certain circumstances a court of equity may relieve the mortgagor from an
entirely technical default where such default was not willful.
A foreclosure action or sale pursuant to a power of sale is subject to most
of the delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring up to several years to complete. Moreover,
recent judicial decisions suggest that a non-collusive, regularly conducted
foreclosure sale or sale pursuant to a power of sale may be challenged as a
fraudulent conveyance, regardless of the parties' intent, if a court determines
that the sale was for less than fair consideration and such sale occurred while
the mortgagor was insolvent and within one year (or within the state statute of
limitations if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law) of the filing of bankruptcy. Similarly, a suit
against the debtor on the mortgage note may take several years.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is a public sale.
However, because of the difficulty potential third party purchasers at the sale
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee for an amount equal to the principal amount of the mortgage or deed of
trust plus accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burdens of ownership, including obtaining
casualty insurance, paying taxes and making such repairs at its own expense as
are necessary to render the property suitable for sale. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss may be reduced by the receipt of
any mortgage insurance proceeds.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or
84
<PAGE>
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.
85
<PAGE>
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
86
<PAGE>
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
87
<PAGE>
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
88
<PAGE>
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.
89
<PAGE>
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,
90
<PAGE>
Regulation "Z", the Equal Credit Opportunity Act, Regulation "B", the Fair
Credit Reporting Act, the 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
91
<PAGE>
the ability of a lender to realize upon collateral and/or enforce a deficiency
judgment. For example, in a Chapter 13 proceeding under the federal bankruptcy
law, a court may prevent a lender from repossessing a home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the market
value of the home at the time of bankruptcy (as determined by the court),
leaving the party providing financing as a general unsecured creditor for the
remainder of the indebtedness. A bankruptcy court may also reduce the monthly
payments due under a contract or change the rate of interest and time of
repayment of the indebtedness.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, all the related
Mortgage Loans will contain due-on-sale clauses. These clauses permit the lender
to accelerate the maturity of the loan if the borrower sells, transfers, or
conveys the property without the prior consent of the lender. The enforceability
of these clauses has been impaired in various ways in certain states by statute
or decisional law. The ability of lenders and their assignees and transferees to
enforce due-on-sale clauses was addressed by the Garn-St Germain Depository
Institutions Act of 1982 (the "Garn-St Germain Act"), which was enacted on
October 15, 1982. This legislation, subject to certain exceptions, preempts
state constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses. The Garn-St Germain Act does "encourage" lenders to permit
assumptions of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
SINGLE-FAMILY LOANS AND MULTIFAMILY LOANS
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
92
<PAGE>
the creation of a junior encumbrance. Regulations promulgated under the Garn-St
Germain Act also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a Mortgage Loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the Mortgage Loans related to a series and the number of such Mortgage
Loans which may be outstanding until maturity.
TRANSFER OF MANUFACTURED HOMES
Generally, manufactured housing contracts contain provisions prohibiting
the sale or transfer of the related manufactured homes without the consent of
the obligee on the contract and permitting the acceleration of the maturity of
such contracts by the obligee on the contract upon any such sale or transfer
that is not consented to. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will, to the extent it has knowledge of such
conveyance or proposed conveyance, exercise or cause to be exercised its rights
to accelerate the maturity of the related Contracts through enforcement of
due-on-sale clauses, subject to applicable state law. In certain cases, the
transfer may be made by a delinquent obligor in order to avoid a repossession
proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the due-on-sale clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement 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
93
<PAGE>
or delay the taking of action by the senior lender. Moreover, the bankruptcy of
a junior lender may operate to stay foreclosure or similar proceeds by the
senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision that expressly
rejects application of the federal law. In addition, even where Title V is not
so rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor has been advised by counsel that a court interpreting Title V
would hold that mortgage loans originated on or after January 1, 1980 are
subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no Mortgage
Loans originated after the 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
94
<PAGE>
respect to origination of alternative mortgage instruments by federal credit
unions and (iii) all other non-federally chartered housing creditors, including,
without limitation, state-chartered savings and loan associations, savings banks
and mutual savings banks and mortgage banking companies may originate
alternative mortgage instruments in accordance with the regulations promulgated
by the Federal Home Loan Bank Board, predecessor to the Office of Thrift
Supervision with respect to origination of alternative mortgage instruments by
federal savings and loan associations. Title VIII further provides that any
state may reject applicability of the provisions of Title VIII by adopting,
prior to October 15, 1985, a law or constitutional provision expressly rejecting
the applicability of such provisions. Certain states have taken such action.
The Depositor has been advised by its counsel that it is their opinion that
a court interpreting Title VIII would hold that ARM Loans that were originated
by state-chartered lenders before the date of enactment of any state law or
constitutional provision rejecting applicability of Title VIII would not be
subject to state laws imposing restrictions or prohibitions on the ability of
state-chartered lenders to originate alternative mortgage instruments.
All of the ARM Loans that were originated by a state-chartered lender after
the enactment of a state law or constitutional provision rejecting the
applicability of Title VIII complied with applicable state law. All of the ARM
Loans that were originated by federally chartered lenders or that were
originated by state-chartered lenders prior to enactment of a state law or
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
95
<PAGE>
application of the lender. The Relief Act applies to borrowers who are members
of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast Guard,
and officers of the U.S. Public Health Service assigned to duty with the
military. Because the Relief Act applies to borrowers who enter military service
(including reservists who are called to active duty) after origination of the
related Mortgage Loan, no information can be provided as to the number of loans
that may be affected by the Relief Act. Application of the Relief Act would
adversely affect, for an indeterminate period of time, the ability of the Master
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
Any shortfalls in interest collections resulting from the application of the
Relief Act would result in a reduction of the amounts distributable to the
holders of the related series of 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.
96
<PAGE>
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged property
prior to the origination of the mortgage loan or prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Accordingly, the Master Servicer has
not made and will not make such evaluations prior to the origination of the
Mortgage Loans. Neither the Master Servicer nor any replacement Servicer will be
required by any Agreement to undertake any such evaluations prior to foreclosure
or accepting a deed-in-lieu of foreclosure. The Master Servicer does not make
any representations or warranties or assume any liability with respect to the
absence or effect of contaminants on any related real property or any casualty
resulting from the presence or effect of contaminants. However, the Master
Servicer will not be obligated to foreclose on related real property or accept a
deed-in-lieu of foreclosure if it knows or reasonably believes that there are
material contaminated conditions on such property. A failure so to foreclose may
reduce the amounts otherwise available to 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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Certificates offered hereunder. This discussion is directed solely to
Certificateholders that hold the Certificates as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986 (the "Code") and
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinion
97
<PAGE>
referred to below, are based are subject to change or differing interpretations,
which could apply retroactively. Taxpayers and preparers of tax returns
(including those filed by any REMIC or other issuer) should be aware that under
applicable Treasury regulations a provider of advice on specific issues of law
is not considered an income tax return preparer unless the advice (i) is given
with respect to events that have occurred at the time the advice is rendered and
is not given with respect to the consequences of contemplated actions, and (ii)
is directly relevant to the determination of an entry on a tax return.
Accordingly, taxpayers should consult their own tax advisors and tax return
preparers regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein. In addition to the federal
income tax consequences described herein, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership and
disposition of the Certificates. See "State and Other Tax Consequences."
Certificateholders are advised to consult their own tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Certificates offered hereunder.
The following discussion addresses securities of four general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, that the Trustee will elect to have treated as a real estate
mortgage investment conduit ("REMIC") under Sections 860A through 860G (the
"REMIC Provisions") of the Code, (ii) certificates ("Grantor Trust
Certificates") representing interests in a Trust Fund ("Grantor Trust Fund") as
to which no such election will be made, (iii) certificates ("Partnership
Certificates") representing interests in a Trust Fund ("Partnership Trust Fund")
which is treated as a partnership for federal income tax purposes, and (iv)
certificates ("Debt Certificates") representing indebtedness of a Partnership
Trust Fund for federal income tax purposes. The Prospectus Supplement for each
series of Certificates will indicate which of the foregoing treatments will
apply to such series and, if a REMIC election (or elections) will be made for
the related Trust Fund, will identify all "regular interests" and "residual
interests" in the REMIC. For purposes of this tax discussion, (i) references to
a "Certificateholder" or a "holder" are to the beneficial owner of a Certificate
and (ii) unless indicated otherwise in the applicable Prospectus Supplement,
references to "Mortgage Loans" include Agency Securities, Private
Mortgage-Backed Securities and Funding Agreements.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code and
in the Treasury regulations issued thereunder (the "OID Regulations"), and in
part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the "REMIC Regulations"). The OID Regulations do not adequately address certain
issues relevant to, and in some instances provide that they are not applicable
to, securities such as the Certificates.
REMICS
CLASSIFICATION OF REMICS
Upon the issuance of each series of REMIC Certificates, Thacher Proffitt &
Wood, counsel to the Depositor, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement, the related Trust Fund (or each applicable portion thereof)
will qualify as a REMIC and the REMIC Certificates offered with respect thereto
will be considered to evidence ownership of "regular interests" ("REMIC Regular
Certificates") or "residual interests" ("REMIC Residual Certificates") in that
REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes
98
<PAGE>
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 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
99
<PAGE>
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 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
100
<PAGE>
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 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
101
<PAGE>
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 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
102
<PAGE>
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.
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
103
<PAGE>
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 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.
104
<PAGE>
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.
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
105
<PAGE>
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 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
106
<PAGE>
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 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
107
<PAGE>
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 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.
108
<PAGE>
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 "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
109
<PAGE>
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.
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
110
<PAGE>
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 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
111
<PAGE>
be deductible, but instead will be added to such REMIC Residual
Certificateholder's adjusted basis in the newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (a "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions a prohibited transaction means the
disposition of a Mortgage Loan, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the REMIC Certificates. It is not anticipated that any REMIC
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would be
subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property," determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer or Trustee in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling and Servicing Agreement and in respect of
compliance with applicable laws and regulations. Any such tax not borne by the
Master Servicer or the Trustee will be charged against the related Trust Fund
resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) of the total anticipated excess inclusions
with respect to such REMIC Residual Certificate for periods after the transfer
and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be 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
112
<PAGE>
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 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.
113
<PAGE>
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.
114
<PAGE>
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.
115
<PAGE>
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
116
<PAGE>
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
117
<PAGE>
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.
118
<PAGE>
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
119
<PAGE>
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
120
<PAGE>
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
121
<PAGE>
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
122
<PAGE>
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
123
<PAGE>
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
124
<PAGE>
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.
125
<PAGE>
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
126
<PAGE>
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
127
<PAGE>
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.
128
<PAGE>
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
129
<PAGE>
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
130
<PAGE>
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
131
<PAGE>
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.
132
<PAGE>
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences", potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
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
133
<PAGE>
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 19, 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 Servicer, any Sub-Servicer
and any obligor with respect to assets included in the Trust Fund
134
<PAGE>
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
135
<PAGE>
(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:
136
<PAGE>
(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)
137
<PAGE>
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.
138
<PAGE>
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 "Certain 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
139
<PAGE>
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
140
<PAGE>
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 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.
141
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
- ---- ----------
1998 Policy Statement ..........................................140
401(c) Regulations .............................................137
Accrual Securities ...............................................7
Accrued Certificate Interest ....................................54
Accrued Note Interest ...........................................54
Accrued Security Interest .......................................54
Agency Securities ................................................1
Agreement .......................................................45
ARM Loans ....................................................8, 25
Available Distribution Amount ...................................53
Average Interest Rate ..........................................136
Bankruptcy Amount ...............................................69
BIF .............................................................42
Buydown Account .............................................17, 52
Buydown Funds ...............................................17, 27
Buydown Mortgage Loans ......................................17, 27
Buydown Period ..............................................17, 27
Cash Flow Agreement ......................................1, 11, 76
Certificate .....................................................45
Certificate Account .........................................10, 50
Certificate Principal Balance ...................................54
Certificate Register ............................................53
Certificateholders ...........................................4, 58
Certificates .....................................................5
Charter Act .....................................................33
Class Exemptions ...............................................137
Closing Date ...................................................100
Code .....................................................7, 46, 97
Commission .......................................................4
Committee Report ...............................................100
Contingent Payment Regulations .................................124
Contracts .......................................................24
Contributions Tax ..............................................112
Cooperative ..................................................8, 24
Cooperative Loans ............................................8, 24
Cooperative Notes ...............................................29
Cooperative Unit ................................................24
Credit Support ..............................................11, 46
Cut-off Date ....................................................11
Defaulted Mortgage Amount .......................................69
Deficient Valuation .............................................56
Deleted Mortgage Loan ...........................................48
Depositor .......................................................24
Determination Date ..............................................53
Distribution Date ...............................................11
DOL ............................................................133
DOL Regulations ................................................133
DTC .............................................................45
DTC Registered Securities .......................................45
Due Period ......................................................53
Equity Certificates ..............................................5
ERISA ......................................................14, 133
ERISA Permitted Investments ....................................137
ERISA Plans ....................................................133
Event of Default ................................................66
Excluded Plan ..................................................135
Exemption ..................................................14, 134
142
<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
- ---- ----------
Exemption Rating Agencies ......................................134
FDIC ............................................................43
FHA ..............................................................9
FHA Loans .......................................................30
FHLMC ............................................................1
FHLMC Act .......................................................32
FHLMC Certificates ...............................................9
Finance Company .................................................37
Financial Guarantee Insurance ...................................76
FNMA .............................................................1
FNMA Certificates ................................................9
FTC Rule ........................................................91
Funding Agreement ............................................1, 37
Garn-St Germain Act .............................................92
GNMA .............................................................1
GNMA Certificates ................................................9
GNMA Issuer .....................................................30
Grantor Trust Certificates ..................................12, 98
Grantor Trust Fractional Interest Certificate ..................116
Grantor Trust Fractional Interest Certificates .................13
Grantor Trust Fund ..............................................98
Grantor Trust Strip Certificate ................................117
Grantor Trust Strip Certificates ................................13
Guaranty Agreement ..............................................30
High LTV Loans ..................................................26
Holder-in-Due-Course ............................................91
Housing Act .....................................................30
HUD .............................................................78
Indenture ........................................................5
Insurance Instruments ...........................................58
Insurance Proceeds ..............................................51
Interest Rate ................................................8, 25
IRS ............................................................101
Issue Premium ..................................................107
Issuer ...........................................................5
Letter of Credit Bank ...........................................71
Liquidated Loan .................................................55
Liquidation Proceeds ............................................51
Loan-to-Value Ratio .............................................26
Lockout Period ..................................................39
Manufacturer's Invoice Price ....................................26
Mark-to-Market Regulations .....................................110
Master Servicer ..................................................5
Mortgage Loan Seller ............................................24
Mortgage Loans ................................................1, 7
Mortgage Notes ..................................................29
Mortgage Pool ....................................................7
Mortgaged Properties .........................................8, 24
Mortgages .......................................................29
Multifamily Loans ...............................................24
Multifamily Properties ..........................................24
NCUA ...........................................................140
Net Interest Rate ...............................................47
New Withholding Regulations ....................................115
Nonrecoverable Advance ..........................................56
Note Interest Rate ...............................................6
143
<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
- ---- ----------
Note Principal Balance ..........................................54
Note Register ...................................................53
Noteholders ..................................................4, 58
Notes ............................................................5
OID Regulations .................................................98
Originator ......................................................24
OTS ............................................................140
Owner Trust Agreement ............................................5
Owner Trustee ....................................................5
Parties in Interest ............................................133
Pass-Through Rate ................................................6
Permitted Investments ...........................................50
Plan ............................................................14
Plan Assets ....................................................133
Plans ..........................................................133
PMBS Agreement ..................................................35
PMBS Issuer .....................................................35
PMBS Servicer ...................................................35
PMBS Trustee ....................................................35
Pre-Funding Account .............................................55
Pre-Funding Limit ..............................................136
Pre-Funding Period .............................................136
Prepayment Assumption .....................................100, 120
Prepayment Period ...............................................39
Principal Balance ............................................6, 54
Private Mortgage-Backed Securities ...............................1
Prohibited Transactions Tax ....................................112
PTCE ...........................................................137
PTCE 83-1 ......................................................137
Purchase Price ..................................................44
Rating Agency ...................................................47
Record Date .....................................................53
Related Proceeds ................................................56
Relief Act ......................................................95
REMIC ...........................................................98
REMIC Certificates ..............................................98
REMIC Provisions ................................................98
REMIC Regular Certificates ..................................12, 98
REMIC Regulations ...............................................98
REMIC Residual Certificates .................................12, 98
Reserve Fund ....................................................76
Reserve Funds ...................................................70
Retained Interest ...............................................45
SAIF ............................................................42
Sales of Grantor Trust Certificates ............................119
Salomon Smith Barney ........................................14, 141
Scheduled Principal Balance .....................................70
Securities ....................................................1, 5
Security Interest Rate ...........................................6
Security Register ...............................................53
Securityholders ..............................................4, 57
Senior Liens ....................................................25
Senior Percentage ...............................................55
Senior Securities ............................................6, 46
Senior/Subordinate Series .......................................46
Servicing Default ...............................................65
144
<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
- ---- ----------
Single Family Loans .............................................24
Single Family Properties ........................................24
SMMEA ......................................................14, 139
Special Hazard Amount ...........................................69
Special Hazard Realized Losses ..................................70
Special Hazard Subordination Amount .............................70
Stated Principal Balance ........................................44
Strip Securities .............................................6, 46
Stripped Interest ...............................................38
Sub-Servicer ....................................................60
Sub-Servicing Account ...........................................51
Sub-Servicing Agreement .........................................60
Subordinate Securities .......................................6, 46
Subsequent Mortgage Loans ......................................136
Substitute Mortgage Loan ........................................48
Tax Favored Plans ..............................................133
Tax-Exempt Investor ............................................139
Tiered REMICs ...................................................99
Title V .........................................................94
Title VIII ......................................................94
Trust Fund ....................................................1, 6
Trust Fund Asset .................................................6
Trust Fund Assets ................................................1
Trustee ..........................................................5
UBTI ...........................................................139
Underwriter ....................................................134
VA Loans ........................................................30
Window Period Loans .............................................92
145
<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 SEPTEMBER 2, 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 "Certain 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
Certain 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
CERTAIN 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
8
<PAGE>
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
9
<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
10
<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
11
<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 "Certain
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,
12
<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
15
<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".
16
<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
17
<PAGE>
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
18
<PAGE>
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".
CERTAIN 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 "Certain 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".
19
<PAGE>
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
20
<PAGE>
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.
21
<PAGE>
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
22
<PAGE>
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,
23
<PAGE>
(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
24
<PAGE>
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
25
<PAGE>
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
26
<PAGE>
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.
27
<PAGE>
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
28
<PAGE>
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.
29
<PAGE>
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
30
<PAGE>
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
31
<PAGE>
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
32
<PAGE>
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
33
<PAGE>
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
34
<PAGE>
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
35
<PAGE>
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
36
<PAGE>
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
37
<PAGE>
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");
38
<PAGE>
(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";
39
<PAGE>
(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 "Certain 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");
40
<PAGE>
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
41
<PAGE>
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 "Certain 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
42
<PAGE>
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.
43
<PAGE>
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
44
<PAGE>
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
45
<PAGE>
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
46
<PAGE>
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,
47
<PAGE>
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,
48
<PAGE>
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.
49
<PAGE>
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
50
<PAGE>
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
51
<PAGE>
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
52
<PAGE>
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
53
<PAGE>
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
54
<PAGE>
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
55
<PAGE>
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
56
<PAGE>
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
57
<PAGE>
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
58
<PAGE>
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.
59
<PAGE>
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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
Offered Certificates. This discussion is directed solely to
60
<PAGE>
Certificateholders that hold the Certificates as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986 (the "Code") and it
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinion referred to
below, are based are subject to change or differing interpretations, which could
apply retroactively. Taxpayers and preparers of tax returns (including those
filed by any REMIC or other issuer) should be aware that under applicable
Treasury regulations a provider of advice on specific issues of law is not
considered an income tax return preparer unless the advice (i) is given with
respect to events that have occurred at the time the advice is rendered and is
not given with respect to the consequences of contemplated actions, and (ii) is
directly relevant to the determination of an entry on a tax return. Accordingly,
taxpayers should consult their 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". Certificateholders
are advised to 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 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.
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
61
<PAGE>
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
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
62
<PAGE>
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.
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
63
<PAGE>
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 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.
64
<PAGE>
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 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
65
<PAGE>
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 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.
66
<PAGE>
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 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.
67
<PAGE>
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 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,
68
<PAGE>
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 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
69
<PAGE>
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
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
70
<PAGE>
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
long-term capital gains of individuals of 28%. No such rate differential exists
for corporations. In addition,
71
<PAGE>
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 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.
72
<PAGE>
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.
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
73
<PAGE>
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 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,
74
<PAGE>
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 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.
75
<PAGE>
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 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
76
<PAGE>
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 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
77
<PAGE>
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.
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
78
<PAGE>
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.
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
79
<PAGE>
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).
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
80
<PAGE>
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 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.
81
<PAGE>
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
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
82
<PAGE>
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.
83
<PAGE>
STATE AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences", potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of the 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
84
<PAGE>
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 Sections 4975(a) and (b) of the
Code by reason of Sections 4975(c)(1)(A) through (D) of the Code, in
85
<PAGE>
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 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
86
<PAGE>
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
87
<PAGE>
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
88
<PAGE>
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 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.
89
<PAGE>
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.
90
<PAGE>
<TABLE>
<CAPTION>
INDEX OF PRINCIPAL DEFINITIONS
Page
----
<S> <C>
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................................................................................................72
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
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
</TABLE>
93
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The expenses expected to be incurred in connection with the issuance
and distribution of the Securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
SEC Registration Fee............................ $885,000.00
Printing and Engraving Fees..................... 20,000.00*
Legal Fees and Expenses......................... 150,000.00*
Accounting Fees and Expenses.................... 50,000.00*
Trustee Fees and Expenses....................... 20,000.00*
Rating Agency Fees.............................. 75,000.00*
Miscellaneous................................... 15,000.00*
---------
Total................................ $1,215,000.00
==========
---------
* Based on the offering of a single series of Securities.
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 8(b) of the proposed form of Underwriting Agreement, the
Underwriters are obligated under certain circumstances to indemnify certain
controlling persons of the Depositor against certain liabilities, including
liabilities under the Securities Act of 1933.
Subsection (a) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another cor poration, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no cause to believe his conduct was unlawful.
Subsection (b) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that such person acted in any of the capacities set forth
above, against expenses (including attorneys' fees) actually and reasonably
incurred by him in con nection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification may be made in respect of any claim, issue or matter as to which
II - 1
<PAGE>
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful on the merits or
otherwise in the defense of any action, suit or proceeding referred to in
subsections (a) and (b), or in the defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith; that
indemnification and advancement of ex penses provided by, or granted pursuant
to, Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and empowers the corporation to purchase and
maintain insurance on behalf of a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
The By-Laws of the Depositor provide, in effect, that to the extent and
under the circumstances permitted by subsections (a) and (b) of Section 145 of
the General Corporation Law of Delaware, the Depositor (i) shall indemnify and
hold harmless each person who was or is a party or is threatened to be made a
party to any action, suit or proceeding described in subsections (a) and (b) by
reason of the fact that he is or was a director or officer, or his testator or
intestate is or was a director or officer of the Depositor against expenses,
judgments, fines and amounts paid in settlement, and (ii) shall indemnify and
hold harmless each person who was or is a party or is threatened to be made a
party to any such action, suit or proceeding if such person is or was serving at
the request of the Depositor as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
Pursuant to Section 145 of the General Corporation Law of Delaware,
liability insurance is maintained covering directors and principal officers of
the Depositor.
The Pooling and Servicing Agreement or Trust Agreement with respect to
each series of Certificates and the Servicing Agreement, Indenture and Owner
Trust Agreement with respect to each series of Notes will provide that no
director, officer, employee or agent of the Depositor is liable to the Trust
Fund or the Securityholders, except for such person's own willful misfeasance,
bad faith or gross negligence in the performance of duties or reckless disregard
of obligations and duties. The Pooling and Servicing Agreement or Trust
Agreement with respect to each series of Certificates and the Servicing
Agreement, Indenture and Owner Trust Agreement with respect to each series of
Notes will further provide that, with the exceptions stated above, a director,
officer, employee or agent of the Depositor is entitled to be indemnified
against any loss, liability or expense incurred in connection with legal action
relating to such Pooling and Servicing Agreement, Trust Agreement, Servicing
Agreement, Indenture or Owner Trust Agreement and related Securities other than
such expenses related to particular Mortgage Loans.
II - 2
<PAGE>
Item 16. EXHIBITS.
1.1 Form of Underwriting Agreement is incorporated by
reference from Registration Statement on Form S-3
(File No. 33-78332).
3.1 Certificate of Incorporation of the Registrant is
incorporated by reference from Registration Statement
on Form S-3 (File No. 33-78332).
3.2 By-laws of the Registrant are incorporated by
reference from Registration Statement on Form S-3
(File No. 33-78332).
4.1 Form of Pooling and Servicing Agreement, for a series
consisting of Senior and Subordinate Certificates is
incorporated by reference from Registration Statement
on Form S-3 (File No. 33-78332).
4.2 Form of Pooling and Servicing Agreement, for a series
consisting of a single class of Certificates is
incorporated by reference from Registration Statement
on Form S-3 (File No. 33-78332).
4.3 Form of Trust Agreement, for a resecuritization of
Mortgage Pass-Through Certificates is incorporated by
reference from Registration Statement on Form S-3
(File No. 333-14225).
4.4 Form of Servicing Agreement, for a series consisting
of Mortgage-Backed Notes is incorporated by reference
from Registration Statement on Form S-3 (File No.
333-44593).
4.5 Form of Trust Agreement, for a series consisting of
Mortgage-Backed Notes is incorporated by reference
from Registration Statement on Form S-3 (File No.
333-44593).
4.6 Form of Indenture, for a series consisting of
Mortgage-Backed Notes is incorporated by reference
from Registration Statement on Form S-3 (File No.
333-44593).
5.1 Opinion of Thacher Proffitt & Wood.
8.1 Opinion of Thacher Proffitt & Wood with respect to
certain tax matters (included as part of Exhibit
5.1).
23.1 Consent of Thacher Proffitt & Wood (included as part
of Exhibits 5.1 and 8.1).
24.1 Power of Attorney is incorporated by reference from
Registration Statement on Form S-3 (File No.
333-39061).
II - 3
<PAGE>
Item 17. UNDERTAKINGS.
A. UNDERTAKING PURSUANT TO RULE 415.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933; (ii) to reflect in the prospectus any facts or
events arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; (iii) to include
any material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material
change of such information in the Registration Statement;
PROVIDED, HOWEVER, that paragraphs (i) and (ii) do not apply if the
information required to be included in the post-effective amendment is
contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
B. UNDERTAKING IN CONNECTION WITH INCORPORATION BY REFERENCE OF CERTAIN
FILINGS UNDER THE SECURITIES EXCHANGE ACT OF 1934.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
C. UNDERTAKING IN RESPECT OF INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item 15 above,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for
II - 4
<PAGE>
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted against the Registrant by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issues.
II - 5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Salomon Brothers Mortgage Securities VII, Inc. certifies that it has reasonable
grounds to believe that it meets all of the requirements for filing on Form S-3
and has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, State of
New York, on the 2nd day of September, 1998.
SALOMON BROTHERS MORTGAGE
SECURITIES VII, INC.
By: /s/ Gregory P. Petroski
-----------------------------
Name: Gregory P. Petroski
Title: Assistant Secretary
II - 6
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Gregory P. Petroski * Director and President September 2, 1998
- ----------------------------- (Principal Executive Officer)
Thomas G. Maheras
/s/ Gregory P. Petroski * Treasurer (Principal September 2, 1998
- ------------------------------ Financial and Principal
Thomas W. Jasper Accounting Officer)
/s/ Gregory P. Petroski * Director and September 2, 1998
- ------------------------------- Vice President
Jeffrey A. Perlowitz
/s/ Gregory P. Petroski * Director and Assistant September 2, 1998
- ------------------------------- Secretary
Gregory P. Petroski
</TABLE>
* By: /s/ Gregory P. Petroski
--------------------------------
Gregory P. Petroski
Attorney-in-fact
II - 7
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number
- ------
1.1 Form of Underwriting Agreement is incorporated by reference
from Registration Statement on on Form S-3 (File No.
33-78332).
3.1 Certificate of Incorporation of the Registrant is incorporated
by reference from Registration Statement on Form S-3 (File No.
33-78332).
3.2 By-laws of the Registrant are incorporated by reference from
Registration Statement on Form S-3 (File No. 33-78332).
4.1 Form of Pooling and Servicing Agreement, for a series
consisting of Senior and Subordinate Certificates is
incorporated by reference from Registration Statement on Form
S-3 (File No. 33-78332).
4.2 Form of Pooling and Servicing Agreement, for a series
consisting of a single class of Certificates is incorporated
by reference from Registration Statement on Form S-3 (File No.
33-78332).
4.3 Form of Trust Agreement, for a resecuritization of Mortgage
Pass-Through Certificates is incorporated by reference from
Registration Statement on Form S-3 (File No. 333-14225).
4.4 Form of Servicing Agreement, for a series consisting of
Mortgage-Backed Notes is incorporated by reference from
Registration Statement on Form S-3 (File No. 333-44593).
4.5 Form of Trust Agreement, for a series consisting of
Mortgage-Backed Notes is incorporated by reference from
Registration Statement on Form S-3 (File No. 333-44593).
4.6 Form of Indenture, for a series consisting of Mortgage- Backed
Notes is incorporated by reference from Registration Statement
on Form S-3 (File No. 333-44593).
5.1 Opinion of Thacher Proffitt & Wood.
II - 8
<PAGE>
8.1 Opinion of Thacher Proffitt & Wood with respect to certain tax
matters (included as part of Exhibit 5.1).
23.1 Consent of Thacher Proffitt & Wood (included as part of
Exhibits 5.1 and 8.1).
24.1 Power of Attorney is incorporated by reference from
Registration Statement on Form S-3 (File No. 333-39061).
II - 9
[LETTERHEAD OF THACHER PROFFITT & WOOD]
[Exhibit 5.1]
September 2, 1998
Salomon Brothers Mortgage Securities VII, Inc.
Seven World Trade Center
New York, New York 10048
Re: Salomon Brothers Mortgage Securities VII, Inc.
Mortgage Pass-Through Certificates and
Mortgage-backed Notes Registration Statement On Form S-3
--------------------------------------------------------
Ladies and Gentlemen:
We are counsel to Salomon Brothers Mortgage Securities VII,
Inc., a Delaware corporation (the "Registrant"), in connection with the
registration under the Securities Act of 1933, as amended (the "Act"), of
Mortgage Pass-Through Certificates (the "Certificates") and Mortgage-Backed
Notes (the "Notes"; and together with the Certificates, the "Securities"), the
related preparation and filing of a Registration Statement on Form S-3 (the
"Registration Statement"). The Certificates are issuable in series, either (i)
under pooling and servicing agreements (each such agreement, a "Pooling and
Servicing Agreement"), among the Registrant, a master servicer to be identified
in the prospectus supplement for such series of Certificates and a trustee also
to be identified in that prospectus supplement or (ii) under trust agreements
(each such agreement, a "Trust Agreement"), between the Registrant and a trustee
to be identified in the prospectus supplement for such series of Certificates.
The Notes are issuable in series under indentures (each such agreement, an
"Indenture"; a Pooling and Servicing Agreement, a Trust Agreement or an
Indenture, an "Agreement" ), between an issuer and an indenture trustee, to be
identified in the prospectus supplement for such series of Notes. Each Agreement
will be substantially in the form filed as an Exhibit to the Registration
Statement.
In connection with rendering this opinion letter, we have
examined the forms of the Agreements incorporated by reference in the
Registration Statement, the Registration Statement and such
<PAGE>
Salomon Brothers Mortgage Securities VII, Inc.
September 2, 1998 Page 2.
records and other documents as we have deemed necessary. As to matters of fact,
we have examined and relied upon representations or certifications of officers
of the Registrant or public officials. We have assumed the authenticity of all
documents submitted to us as originals, the genuineness of all signatures, the
legal capacity of natural persons and the conformity to the originals of all
documents. We have assumed that all parties, other than the Registrant, had the
corporate power and authority to enter into and perform all obligations
thereunder and, as to such parties, we also have assumed the enforceability of
such documents.
In rendering this opinion letter, we express no opinion as to
the laws of any jurisdiction other than the laws of the State of New York and
the corporate laws of the State of Delaware, nor do we express any opinion,
either implicitly or otherwise, on any issue not expressly addressed below. In
rendering this opinion letter, we have not passed upon and do not pass upon the
application of "doing business" or the securities laws of any jurisdiction. This
opinion letter is further subject to the qualification that enforceability may
be limited by (i) bankruptcy, insolvency, liquidation, receivership, moratorium,
reorganization or other laws affecting the enforcement of the rights of
creditors generally and (ii) general principles of equity, whether enforcement
is sought in a proceeding in equity or at law.
Based on the foregoing, we are of the opinion that:
1. When a Pooling and Servicing Agreement or a Trust Agreement
for a series of Certificates has been duly authorized by all necessary action
and duly executed and delivered by the parties thereto, such Pooling and
Servicing Agreement or Trust Agreement will be a legal and valid obligation of
the Registrant.
2. When an Indenture for a series of Notes has been duly
authorized by all necessary action and duly executed and delivered by the
parties thereto, such Indenture will be a legal and valid obligation of the
applicable issuer.
3. When a Pooling and Servicing Agreement or a Trust Agreement
for a series of Certificates has been duly authorized by all necessary action
and duly executed and delivered by the parties thereto, and when the
Certificates of such series have been duly executed and authenticated in
accordance with the provisions of that Pooling and Servicing Agreement or Trust
Agreement, and issued and sold as contemplated in the Registration Statement and
the prospectus and prospectus supplement delivered in connection therewith, such
Certificates will be legally and validly issued and outstanding, fully paid and
non-assessable, and the holders of such Certificates will be entitled to the
benefits of that Pooling and Servicing Agreement or Trust Agreement.
4. When an Indenture for a series of Notes has been duly
authorized by all necessary action and duly executed and delivered by the
parties thereto, and when the Notes of such series have been duly executed and
authenticated in accordance with the provisions of that Indenture, and issued
and sold as contemplated in the Registration Statement and the prospectus and
prospectus supplement delivered in
<PAGE>
Salomon Brothers Mortgage Securities VII, Inc.
September 2, 1998 Page 3.
connection therewith, such Notes will be legally and validly issued and
outstanding, fully paid and non-assessable, and the holders of such Notes will
be entitled to the benefits of that Indenture.
5. The description of federal income tax consequences
appearing under the heading "Certain Federal Income Tax Consequences" in the
prospectuses contained in the Registration Statement, while not purporting to
discuss all possible federal income tax consequences of an investment in
Securities, is accurate with respect to those tax consequences that are
discussed.
We hereby consent to the filing of this opinion letter as an
Exhibit to the Registration Statement, and to the use of our name in the
prospectuses included in the Registration Statement under the heading "Legal
Matters" and in the prospectus supplement for any series of Securities in which
our name appears under the heading "Legal Matters" and/or "Certain Federal
Income Tax Consequences", without admitting that we are "experts" within the
meaning of the Act, and the rules and regulations thereunder, with respect to
any part of the Registration Statement, including this Exhibit.
Very truly yours,
THACHER PROFFITT & WOOD
By: /s/ Thacher Proffitt & Wood
---------------------------
