Prospectus Supplement
(To Prospectus Dated September 22, 1998)
$374,189,000 (APPROXIMATE)
ASSET-BACKED FLOATING RATE NOTES, SERIES 1998-11
WILSHIRE REIT TRUST SERIES 1998-1
ISSUER
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
WILSHIRE REAL ESTATE INVESTMENT TRUST INC.
SELLER
WILSHIRE SERVICING CORPORATION
MASTER SERVICER
Wilshire REIT Trust Series 1998-1 (the "Issuer") will be formed pursuant to a
trust agreement, dated as of September 1, 1998 (the "Owner Trust Agreement"),
between Salomon Brothers Mortgage Securities VII, Inc. (the "Depositor") and
Wilmington Trust Company (the "Owner Trustee"). The Issuer will issue
approximately $374,189,000 aggregate principal amount (subject to a permitted
variance as described herein) of Asset-Backed Floating Rate Notes, Series
1998-11, which will consist of four classes of notes (collectively, the
"Notes"), designated as (i) the Class A Notes and (ii) the Class M-1 Notes, the
Class M-2 Notes and the Class M-3 Notes (collectively, the "Subordinate Notes").
The Notes will be issued pursuant to an indenture, dated as of September 1, 1998
(the "Indenture"), between the Issuer and Norwest Bank Minnesota, National
Association (the "Indenture Trustee"). All of the Notes are offered hereby.
(COVER CONTINUED ON NEXT PAGE)
-----------------------------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS"
BEGINNING ON PAGE S-23 OF THIS PROSPECTUS SUPPLEMENT AND "RISK FACTORS" IN THE
PROSPECTUS.
-----------------------------
PROCEEDS OF THE ASSETS IN THE TRUST ESTATE ARE THE SOLE SOURCE OF PAYMENTS ON
THE NOTES. THE NOTES REPRESENT NON-RECOURSE OBLIGATIONS SOLELY OF THE ISSUER AND
DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN THE DEPOSITOR, THE MASTER
SERVICER, THE SERVICERS, THE ORIGINATORS, THE OWNER TRUSTEE, THE INDENTURE
TRUSTEE, THE SELLER OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE NOTES NOR
THE UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
==============================================================================================================================
INITIAL NOTE NOTE INTEREST FINAL
CLASS BALANCE(1) RATE MATURITY DATE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
A....................................... $309,824,000 Variable(2) October 25, 2028
M-1..................................... $ 26,280,000 Variable(2) October 25, 2028
M-2..................................... $ 16,186,000 Variable(2) October 25, 2028
M-3..................................... $ 21,899,000 Variable(2) October 25, 2028
==============================================================================================================================
</TABLE>
(1) Approximate, subject to a permitted variance of plus or minus 5%. (2)
Calculated as described herein.
- ----------------------
The Notes will be purchased by the Underwriter from the Depositor and will be
offered by the Underwriter to the public 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 Notes, before deducting
expenses payable by the Depositor, will be approximately 100% of the initial
Note Balance thereof.
The Notes 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 Notes will be made through the facilities of The Depository
Trust Company, Cedel Bank, societe anonyme and the Euroclear System on or about
September 30, 1998 (the "Closing Date"). The Notes will be offered in Europe and
the United States of America.
SALOMON SMITH BARNEY
The date of this Prospectus Supplement is September 29, 1998.
<PAGE>
(COVER CONTINUED)
Payments on the Notes 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 October
1998 (each, a "Payment Date"). As described more fully herein, interest payable
with respect to each Payment Date will accrue on the Notes during the period
commencing on the Payment Date of the month immediately preceding the month in
which such Payment Date occurs (or, in the case of the first period, commencing
on the Closing Date) and ending on the day preceding such Payment Date. Interest
on the Notes will be calculated on the basis of a 360-day year and the actual
number of days in the applicable accrual period, and will be based on the
then-outstanding Note Balance thereof and the then-applicable Note Interest Rate
thereon, as described herein. The Note Interest Rate on the Notes is adjustable
and will be calculated for each Payment Date as described herein. Payments in
respect of principal of the Notes will be made as described under "Description
of the Notes--Principal Payments on the Notes" herein.
The Notes represent non-recourse debt obligations of the Issuer secured by the
trust estate (the "Trust Estate"), which consists primarily of a segregated pool
(the "Mortgage Pool") of conventional, one- to four-family, fixed-rate and
adjustable-rate, first lien mortgage loans having original terms to maturity of
not greater than 30 years ("Fixed Rate Mortgage Loans" and "Adjustable Rate
Mortgage Loans", together the "Mortgage Loans") and an aggregate principal
balance as of September 1, 1998 (the "Cut-off Date"), after application of
scheduled payments due on or before the Cut-off Date whether or not received, of
approximately $380,853,964, subject to a permitted variance as described herein
under "The Mortgage Pool". Proceeds of the Trust Estate will be the sole source
of payments on the Notes. The Issuer is not expected to have any significant
assets other than the Trust Estate pledged as collateral to secure the Notes.
Each Adjustable Rate Mortgage Loan provides for semi-annual adjustment to the
Mortgage Rate thereon (in the case of approximately 41.83% and approximately
10.56% of the Adjustable Rate Mortgage Loans, by aggregate principal balance as
of the Cut-off Date, after an initial period of approximately two years and
approximately three years, respectively, from the date of origination thereof)
based on six-month London interbank offered rates for United States dollar
deposits (the "Index") and for corresponding adjustments to the monthly payment
amount due thereon, in each case subject to the limitations described herein.
All of the Mortgage Loans will have been acquired by the Depositor from Wilshire
REIT 1998-1, Inc. (the "Wilshire SPE"), who will have acquired the Mortgage
Loans from Wilshire Real Estate Investment Trust Inc. (the "Seller"), as
described herein.
It is a condition of the issuance of the Notes that the Class A Notes be rated
"AAA" by Duff & Phelps Credit Rating Co. ("DCR") and "AAA" by Standard & Poor's
Ratings Services ("S&P"), that the Class M-1 Notes be rated at least "AA" by DCR
and at least "AA" by S&P, that the Class M-2 Notes be rated at least "A" by DCR
and at least "A" by S&P and that the Class M-3 Notes be rated at least "BBB" by
DCR.
The rights of the holders of the Class A Notes to receive payments in respect of
the Mortgage Loans will be senior to the rights of the holders of the
Subordinate Notes, the rights of the holders of Subordinate Notes with lower
numerical class designations will be senior to the rights of the holders of
Subordinate Notes with higher numerical class designations, and the rights of
the holders of all of the Notes to receive payments in respect of the Mortgage
Loans will be senior to the rights of the holders of the Equity Certificates (as
defined herein), in each case to the extent described herein.
The Notes initially will be represented by notes registered in the name of CEDE
& Co., as nominee of The Depository Trust Company ("DTC"). The interests of
beneficial owners of the Notes will be represented by book entries on the
records of participating members of DTC. Persons acquiring beneficial ownership
interests in the Notes may elect to hold such interests through DTC in the
United States, or Cedel or Euroclear (each as defined herein) in Europe.
Definitive Notes will be available for the Notes only under the limited
circumstances described herein. See "Description of the Notes--Registration"
herein.
THE YIELD TO MATURITY ON THE NOTES WILL BE SENSITIVE IN VARYING DEGREES TO THE
RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, DEFAULTS AND
REPURCHASES) ON THE MORTGAGE LOANS AND TO ADJUSTMENTS TO THE MORTGAGE RATES ON
THE ADJUSTABLE RATE MORTGAGE LOANS. THE MORTGAGE LOANS GENERALLY MAY BE PREPAID
IN FULL OR IN PART AT ANY TIME; HOWEVER, WITH RESPECT TO APPROXIMATELY 69.32% OF
THE MORTGAGE LOANS BY AGGREGATE PRINCIPAL BALANCE AS OF THE CUT-OFF DATE, A
VOLUNTARY PREPAYMENT IN FULL MAY SUBJECT THE RELATED MORTGAGOR TO A PREPAYMENT
CHARGE (A "PREPAYMENT CHARGE"). PREPAYMENT CHARGE OBLIGATIONS GENERALLY EXPIRE
BY THEIR TERMS AFTER A LIMITED PERIOD SPECIFIED IN THE RELATED MORTGAGE NOTE.
THE WEIGHTED AVERAGE MONTH OF ORIGINATION OF THE MORTGAGE LOANS WITH PREPAYMENT
CHARGES IS NOVEMBER 1997. THE YIELD TO INVESTORS IN THE NOTES MAY BE ADVERSELY
AFFECTED BY SHORTFALLS IN INTEREST COLLECTED ON THE MORTGAGE LOANS DUE TO
PREPAYMENTS, LIQUIDATIONS OR OTHERWISE. SHORTFALLS IN INTEREST COLLECTED ON THE
MORTGAGE LOANS DUE TO PREPAYMENTS WILL BE OFFSET BY THE RELATED SERVICER TO THE
EXTENT DESCRIBED HEREIN. IN ADDITION, THE YIELD TO MATURITY ON EACH CLASS OF
SUBORDINATE NOTES WILL BE EXTREMELY SENSITIVE TO LOSSES DUE TO DEFAULTS ON THE
MORTGAGE LOANS (AND THE TIMING THEREOF) TO THE EXTENT THAT SUCH LOSSES ARE NOT
COVERED BY NET MONTHLY EXCESS CASHFLOW OR THE OVERCOLLATERALIZED AMOUNT (EACH AS
DEFINED HEREIN) OR BY A CLASS OF SUBORDINATE NOTES WITH A HIGHER NUMERICAL CLASS
DESIGNATION. SEE "SUMMARY OF PROSPECTUS SUPPLEMENT--SPECIAL PREPAYMENT
CONSIDERATIONS" AND "--SPECIAL YIELD CONSIDERATIONS" AND "YIELD ON THE NOTES"
HEREIN.
S-2
<PAGE>
There is currently no secondary market for the Notes and there can be no
assurance that a secondary market for the Notes will develop. Salomon Smith
Barney Inc. (the "Underwriter") intends to establish a market in the Notes but
is not obligated to do so. There is no assurance that any such market, if
established, will continue. See "Secondary Market" herein.
No election will be made to treat the Issuer or the arrangement by which the
Notes are issued as a "real estate mortgage investment conduit" (a "REMIC") for
federal income tax purposes. For federal income tax purposes, the Notes will be
characterized as indebtedness and not as representing an ownership interest in
the Trust Estate or an equity interest in the Issuer or the Depositor. See
"Certain Federal Income Tax Consequences" herein and in the Prospectus.
To the extent that the statements contained herein do not relate to historical
or current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect payments to be made on, or the yield of, the Notes, which risks
and uncertainties are discussed under "Risk Factors" and "Yield on the Notes"
herein. As a consequence, no assurance can be given as to the actual payments
on, or the yield of, the Notes.
-----------------------------
THE NOTES OFFERED BY THIS PROSPECTUS SUPPLEMENT WILL CONSTITUTE A PORTION OF A
SEPARATE SERIES OF NOTES BEING OFFERED BY THE DEPOSITOR PURSUANT TO ITS
PROSPECTUS DATED SEPTEMBER 22, 1998, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A
PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL.
S-3
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used but not defined herein shall have the meanings assigned
thereto in the Prospectus. An Index of Principal Definitions is included at the
end of the Prospectus.
Title of Series..................Wilshire REIT Trust Series 1998-1, Asset-Backed
Floating Rate Notes, Series 1998-11 (the
"Notes"). The Notes will consist of four
classes of notes, designated as (i) the Class A
Notes and (ii) the Class M-1 Notes, the Class
M-2 Notes and the Class M-3 Notes
(collectively, the "Subordinate Notes"). The
Notes will be issued pursuant to an indenture,
dated as of September 1, 1998 (the
"Indenture"), between the Issuer and the
Indenture Trustee.
The Class A Notes, the Class M-1 Notes, the
Class M-2 Notes and the Class M-3 Notes will
have aggregate initial Note Balances of
approximately $309,824,000, approximately
$26,280,000, approximately $16,186,000 and
approximately $21,899,000, respectively, in
each case subject to a permitted variance of
plus or minus 5%. The Note Interest Rates on
the Notes are adjustable, subject to a fixed
rate cap and an available interest rate cap and
will be calculated for each Payment Date as
described under "--Note Interest Rate" herein.
The "Final Maturity Date" of the Notes is the
Payment Date occurring in October 2028.
Issuer ..........................The Notes will be issued by Wilshire REIT Trust
Series 1998-1 (the "Issuer"), a Delaware
business trust established pursuant to a trust
agreement, dated as of September 1, 1998 (the
"Owner Trust Agreement"), between the Depositor
and the Owner Trustee. The Notes represent
non-recourse debt obligations of the Issuer
secured by a trust estate (the "Trust Estate"),
which consists primarily of the Mortgage Pool.
Proceeds of the Trust Estate will be the sole
source of payments on the Notes. The Issuer is
not expected to have any significant assets
other than the Trust Estate pledged as
collateral to secure the Notes.
Equity Certificates..............Trust Certificates, Series 1998-1 (the "Equity
Certificates"), will be issued pursuant to the
Owner Trust Agreement and will represent the
beneficial ownership interest in the Issuer.
The Equity Certificates are not being offered
hereby and will be delivered on the Closing
Date to the Wilshire SPE, as partial
consideration for the conveyance of the
Mortgage Loans by Wilshire SPE to the
Depositor.
Cut-off Date.....................September 1, 1998.
Closing Date.....................On or about September 30, 1998.
S-4
<PAGE>
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"
in the Prospectus.
Master Servicer..................Wilshire Servicing Corporation. See "The
Servicing Agreements--The Master Servicer"
herein.
Originators and Servicers........Ameriquest Mortgage Company ("Ameriquest"),
Long Beach Mortgage Company ("Long Beach") and
National Mortgage Corporation ("National
Mortgage"). See "The Mortgage
Pool--Underwriting Standards; Representations"
and "The Servicing Agreements--The Originators
and Servicers" herein.
Seller...........................Wilshire Real Estate Investment Trust Inc. See
"The Seller" herein.
Wilshire SPE.....................Wilshire REIT 1998-1, Inc. See "The Wilshire
SPE" herein.
Owner Trustee....................Wilmington Trust Company, a Delaware banking
company. See "The Owner Trustee" herein.
Indenture Trustee................Norwest Bank Minnesota, National Association, a
national banking association. See "The
Indenture Trustee" herein.
The Mortgage Pool................The Trust Estate consists primarily of a
segregated pool (the "Mortgage Pool") of
conventional one- to four-family, fixed-rate
and adjustable-rate first lien mortgage loans
("Fixed Rate Mortgage Loans" and "Adjustable
Rate Mortgage Loans", together the "Mortgage
Loans") having an aggregate principal balance
as of September 1, 1998 (the "Cut-off Date"),
after application of scheduled payments due on
or before the Cut-off Date whether or not
received, of approximately $380,853,964,
subject to a permitted variance as described
herein under "The Mortgage Pool". Mortgage Pool
will initially consist of approximately 1,161
Fixed Rate Mortgage Loans and approximately
2,605 Adjustable Rate Mortgage Loans. All of
the Mortgage Loans are secured by first liens
on residential real properties (the "Mortgaged
Properties). The Mortgage Loans have original
terms to maturity of not greater than 30 years.
Each Adjustable Rate Mortgage Loan provides for
semi-annual adjustment to the Mortgage Rate
thereon and for corresponding adjustments to
the monthly payment amount due thereon, in each
case on each adjustment date applicable thereto
(each such date, an "Adjustment Date");
provided, however, that in the case of
approximately 41.83% and approximately 10.56%
of the Adjustable Rate Mortgage Loans, by
aggregate principal balance as of the Cut-off
Date, the first Adjustment Date will occur
after an initial period of approximately two
years and approximately three years,
respectively, from the date of origination
thereof (each, a "Delayed First Adjustment
S-5
<PAGE>
Mortgage Loan"). The weighted average month of
origination of the two year Delayed First
Adjustment Mortgage Loans is April 1998, and
the weighted average month of origination of
the three year Delayed First Adjustment
Mortgage Loans is July 1998. On each Adjustment
Date, the Mortgage Rate on each Adjustable Rate
Mortgage Loan will be adjusted to equal the
sum, rounded as provided in the related
Mortgage Note, of the Index (as described
below) and a fixed percentage amount (the
"Gross Margin"), subject to periodic and
lifetime limitations as described herein. None
of the Adjustable Rate Mortgage Loans permits
the related mortgagor to convert the adjustable
Mortgage Rate thereon to a fixed Mortgage Rate.
As of the Cut-off Date, the Mortgage Loans have
Mortgage Rates ranging from approximately 6.75%
per annum to approximately 16.10% per annum and
a weighted average Mortgage Rate of
approximately 10.229% per annum. As of the
Cut-off Date, the Mortgage Loans will have a
weighted average remaining term to stated
maturity of approximately 28 years and 7
months.
As of the Cut-off Date, the Adjustable Rate
Mortgage Loans have a weighted average next
Adjustment Date in October 1999, Gross Margins
ranging from approximately 3.00% to
approximately 8.95% and a weighted average
Gross Margin of approximately 5.714%.
None of the Mortgage Loans are Buydown Mortgage
Loans. See "The Mortgage Pool" herein.
The Depositor will acquire all of the Mortgage
Loans on the Closing Date from the Wilshire
SPE. The Wilshire SPE in turn will have
acquired the Mortgage Loans on the Closing Date
from the Seller, who will have acquired the
Mortgage Loans on the Closing Date from Salomon
Brothers Realty Corp., an affiliate of the
Depositor and the Underwriter. Salomon Brothers
Realty Corp. in turn will have acquired the
Mortgage Loans directly or indirectly from the
Originators. Investors should note that, in the
case of the Adjustable Rate Ameriquest Mortgage
Loans (as defined herein), Salomon Brothers
Realty Corp. will have acquired such Mortgage
Loans on the Closing Date in connection with
the termination on the Closing Date of the
trust funds underlying two series of mortgage
pass-through certificates previously issued by
the Depositor, which trust funds hold the
Adjustable Rate Ameriquest Mortgage Loans as of
the date of this Prospectus Supplement. Such
previously issued mortgage pass-through
certificates were entitled (i) Salomon Brothers
Mortgage Securities VII, Inc., Asset- Backed
Floating Rate Certificates, Series 1996-LB3,
and
S-6
<PAGE>
(ii) Salomon Brothers Mortgage Securities VII,
Inc., Asset- Backed Floating Rate Certificates,
Series 1997-LB1. Adjustable Rate Ameriquest
Mortgage Loans acquired upon the termination of
the Series 1996-LB3 trust fund (the "1996-LB3
Mortgage Loans") represent approximately 14.99%
of the Mortgage Loans, and Adjustable Rate
Ameriquest Mortgage Loans acquired upon the
termination of the Series 1997-LB1 trust fund
represent approximately 17.70% of the Mortgage
Loans (the "1997-LB1 Mortgage Loans"), in each
case by aggregate principal balance as of the
Cut-off Date. Salomon Brothers Realty Corp.
will have acquired the remainder of the
Mortgage Loans in whole loan purchases directly
from Ameriquest in the case of 1.73% of the
Mortgage Loans (the "Fixed Rate Ameriquest
Mortgage Loans"), Long Beach in the case of
23.03% of the Mortgage Loans (the "Long Beach
Mortgage Loans") and National Mortgage in the
case of 42.55% of the Mortgage Loans (the
"National Mortgage Loans"), in each case by
aggregate principal balance as of the Cut-off
Date.
The Index........................As of any Adjustment Date, the Index applicable
to the determination of the Mortgage Rate on
each Adjustable Rate Mortgage Loan will be the
average of the interbank offered rates for
six-month United States dollar deposits in the
London market, generally as published in THE
WALL STREET JOURNAL and as most recently
available as of a date as specified in the
related Mortgage Note. See "The Mortgage
Pool--The Index" herein.
Registration; Denomination.......The Notes will initially be represented by one
or more global notes registered in the name of
CEDE & Co., as nominee of The Depository Trust
Company ("DTC") in minimum denominations of
$10,000 and integral multiples of $1.00 in
excess thereof. No person acquiring an interest
in the Notes (a "Note Owner") will be entitled
to receive a Note in fully registered,
certificated form (a "Definitive Note"), except
under the limited circumstances described
herein. See "Description of the
Notes--Definitive Notes" herein. Instead, DTC
will effect payments and transfers by means of
its electronic recordkeeping services, acting
through certain participating organizations
("Participants"). This may result in certain
delays in receipt of payments by an investor
and may restrict an investor's ability to
pledge its securities. Note Owners may elect to
hold their interests in the Notes through DTC
in the United States, or Cedel Bank societe
anonyme ("Cedel") or the Euroclear System
("Euroclear") in Europe. Transfers within DTC,
Cedel or Euroclear, as the case may be, will be
in accordance with the usual rules and
operating procedures of the relevant system.
Cross-market transfers between
S-7
<PAGE>
persons holding directly or indirectly through
DTC on the one hand, and counterparties holding
directly or indirectly through Cedel or
Euroclear, on the other, will be effected in
DTC through Citibank N.A. ("Citibank") or The
Chase Manhattan Bank ("Chase"), the relevant
depositaries of Cedel and Euroclear,
respectively, and each a Participant of DTC.
All references herein to holders of the Notes
will reflect the rights of Note Owners, as such
rights may be exercised through DTC and its
Participants, except as otherwise specified
herein. See "Description of the
Notes--Registration" herein.
Payments--General................The "Due Period" with respect to any Payment
Date commences on the second day of the month
immediately preceding the month in which such
Payment Date occurs and ends on the first day
of the month in which such Payment Date occurs.
The "Prepayment Period" with respect to any
Payment Date is the calendar month immediately
preceding the month in which such Payment Date
occurs. The "Determination Date" with respect
to any Payment Date is on the 15th day of the
month in which such Payment Date occurs or, if
such day is not a business day, on the
immediately preceding business day. The
"Interest Accrual Period" with respect to any
Payment Date is the period commencing on the
Payment Date of the month immediately preceding
the month in which such Pament Date occurs (or,
in the case of the first period, commencing on
the Closing Date) and ending on the day
preceding such Payment Date. All payments of
interest on the Notes will be based on a
360-day year and the actual number of days in
the applicable Interest Accrual Period. The
"Record Date" for each Payment Date (i) with
respect to any Note (other than Definitive
Notes) will be the close of business on the
business day immediately preceding such Payment
Date or (ii) with respect to any Definitive
Notes will be the close of business on the last
business day of the month preceding the month
in which such Payment Date occurs. See
"Description of the Notes" herein.
Note Interest Rates..............The Note Interest Rate on the Class A Notes
will be a rate per annum equal to the lesser of
(i) One-Month LIBOR (as defined herein) plus
0.32%, in the case of each Payment Date through
and including the Payment Date on which the
aggregate Note Balance is reduced to less than
20% of the aggregate initial Note Balance, or
One-Month LIBOR plus 0.64%, in the case of any
Payment Date thereafter, (ii) the Available
Interest Rate for such Payment Date and (iii)
13.75% per annum (the "Maximum Note Interest
Rate").
S-8
<PAGE>
The Note Interest Rate on the Class M-1 Notes
will be a rate per annum equal to the lesser of
(i) One-Month LIBOR plus 0.60%, in the case of
each Payment Date through and including the
Payment Date on which the aggregate Note
Balance is reduced to less than 20% of the
aggregate initial Note Balance, or One-Month
LIBOR plus 0.90%, in the case of any Payment
Date thereafter, (ii) the Available Interest
Rate for such Payment Date and (iii) the
Maximum Note Interest Rate.
The Note Interest Rate on the Class M-2 Notes
will be a rate per annum equal to the lesser of
(i) One-Month LIBOR plus 0.80%, in the case of
each Payment Date through and including the
Payment Date on which the aggregate Note
Balance is reduced to less than 20% of the
aggregate initial Note Balance, or One-Month
LIBOR plus 1.20%, in the case of any Payment
Date thereafter, (ii) the Available Interest
Rate for such Payment Date and (iii) the
Maximum Note Interest Rate.
The Note Interest Rate on the Class M-3 Notes
will be a rate per annum equal to the lesser of
(i) One-Month LIBOR plus 1.85%, in the case of
each Payment Date through and including the
Payment Date on which the aggregate Note
Balance is reduced to less than 20% of the
aggregate initial Note Balance, or One-Month
LIBOR plus 2.775%, in the case of any Payment
Date thereafter, (ii) the Available Interest
Rate for such Payment Date and (iii) the
Maximum Note Interest Rate.
With respect to any class of Notes and any
Payment Date, the lesser of the rate described
for such class in clause (i) above and the
Maximum Note Interest Rate is referred to
herein as the "Note Accrual Rate" or such class
and such Payment Date. The "Available Interest
Rate" for any Payment Date is a rate per annum
equal to the fraction, expressed as a
percentage, the numerator of which is (i) the
Current Interest Payment Amount (as defined
herein) for such Payment Date, and the
denominator of which is (ii) the aggregate Note
Balance of the Notes immediately prior to such
Payment Date multiplied by the actual number of
days elapsed in the related Interest Accrual
Period (as defined herein) and divided by 360.
Interest Payments................The holders of each class of Notes will be
entitled to receive on each Payment Date
interest payments in an amount equal to
interest accrued during the related Interest
Accrual Period on the then-outstanding Note
Balance thereof at the then-applicable Note
Interest Rate thereon (the "Interest Payment
Amount"), subject to the priorities set forth
below. On each Payment Date, the aggregate of
the Interest Payment Amounts for the Notes
shall be
S-9
<PAGE>
limited to the Current Interest Payment Amount.
The "Current Interest Payment Amount" for any
Payment Date shall be an amount equal to
interest collections or advances on the
Mortgage Loans during the related Due Period
(net of the Servicing Fees, the Master
Servicing Fee and the Indenture Trustee Fee).
On each Payment Date, the Current Interest
Payment Amount will be distributed in the
following order of priority:
FIRST, to the holders of the Class A Notes, the
Interest Payment Amount for such Notes;
SECOND, to the extent of the Current Interest
Payment Amount remaining after payment of the
Interest Payment Amount for the Class A Notes,
to the holders of the Class M-1 Notes, the
Interest Payment Amount for such Notes;
THIRD, to the extent of the Current Interest
Payment Amount remaining after payment of the
Interest Payment Amounts for the Class A Notes
and the Class M-1 Notes, to the holders of the
Class M-2 Notes, the Interest Payment Amount
for such Notes; and
FOURTH, to the extent of the Current Interest
Payment Amount remaining after payment of the
Interest Payment Amounts for the Class A Notes,
the Class M-1 Notes and the Class M-2 Notes, to
the holders of the Class M-3 Notes, the
Interest Payment Amount for such Notes.
With respect to any Payment Date, to the extent
that the aggregate of the Interest Payment
Amounts for the Notes is limited by the Current
Interest Payment Amount for the related Due
Period, the holders of certain classes of Notes
may receive an Interest Payment Amount
calculated at the Available Interest Rate
rather than at the applicable Note Accrual Rate
for such classes and such Payment Date. With
respect to any class of Notes and any Payment
Date, any shortfall in payment of interest
represented by the excess, if any, of the
Interest Payment Amount that would be payable
on such class at the applicable Note Accrual
Rate over the Interest Payment Amount actually
paid on such class at the Available Interest
Rate, together with any such shortfall in
payment of interest remaining unpaid from
previous Payment Dates plus interest accrued
thereon at the related Note Accrual Rate, is
referred to as an "Interest Carry Forward
Amount". The Interest Carry Forward Amount, if
any, for any class of the Notes for any Payment
Date is payable to the extent of available
funds remaining after certain other payments on
the Notes on such Payment Date, but before any
payments on the Equity Certificates on such
Payment Date. See "Description of the
Notes--Overcollateralization Provisions" herein
S-10
<PAGE>
Principal Payments...............Payments in respect of principal will be made
to the holders of the Notes then entitled to
such payments in the following manner:
On each Payment Date (a) prior to the Stepdown
Date or (b) on which a Trigger Event is in
effect, the Principal Payment Amount (as
defined herein) shall be distributed: first, to
the Class A Notes, until the Note Balance
thereof has been reduced to zero; second, to
the Class M-1 Notes, until the Note Balance
thereof has been reduced to zero; third, to the
Class M-2 Notes, until the Note Balance thereof
has been reduced to zero; and fourth, to the
Class M-3 Notes, until the Note Balance thereof
has been reduced to zero.
On each Payment Date (a) on or after the
Stepdown Date and (b) on which a Trigger Event
is not in effect, the holders of the Class A
Notes and the Subordinate Notes shall be
entitled to receive payments in respect of
principal to the extent of the Principal
Payment Amount in the following amounts and
order of priority:
FIRST, the lesser of (x) the Principal Payment
Amount and (y) the Class A Principal Payment
Amount (as defined herein), shall be
distributed to the holders of the Class A
Notes, until the Note Balance thereof has been
reduced to zero;
SECOND, the lesser of (x) the excess of (i) the
Principal Payment Amount over (ii) the amount
distributed to the holders of the Class A Notes
pursuant to clause FIRST above, and (y) the
Class M-1 Principal Payment Amount (as defined
herein), shall be distributed to the holders of
the Class M-1 Notes, until the Note Balance
thereof has been reduced to zero;
THIRD, the lesser of (x) the excess of (i) the
Principal Payment Amount over (ii) the sum of
the amounts distributed to the holders of the
Class A Notes pursuant to clause FIRST above
and to the holders of the Class M-1 Notes
pursuant to clause SECOND above, and (y) the
Class M-2 Principal Payment Amount (as defined
herein), shall be distributed to the holders of
the Class M-2 Notes, until the Note Balance
thereof has been reduced to zero; and
FOURTH, the lesser of (x) the excess of (i) the
Principal Payment Amount over (ii) the sum of
the amounts distributed to the holders of the
Class A Notes pursuant to clause FIRST above,
to the holders of the Class M-1 Notes pursuant
to clause SECOND above and to the holders of
the Class M-2 Notes pursuant to clause THIRD
above, and (y) the Class M-3 Principal Payment
Amount (as defined herein), shall be
distributed to the holders of the Class M-3
S-11
<PAGE>
Notes, until the Note Balance thereof has been
reduced to zero.
The Principal Payment Amount will include, to
the extent of available funds and except as
otherwise described herein, the following
amounts: the principal portion of all scheduled
monthly payments due on the Mortgage Loans to
the extent received or advanced during the
related Due Period and all unscheduled amounts
received in respect of the Mortgage Loans
during the related Prepayment Period that are
allocable to principal (including proceeds of
repurchases, prepayments, liquidations and
insurance and shortfalls relating to
substitution) and will be adjusted as a result
of the then current required level of
subordination, all as described herein. The
Principal Payment Amount for the first Payment
Date will include approximately $6,627,953
collected by the Servicers in respect of
prepayments on the Mortgage Loans during the
September 1998 Prepayment Period.
With respect to any Payment Date, the "Stepdown
Date" is the later to occur of (x) the Payment
Date occurring in October 2001 and (y) the
first Payment Date on which the Credit
Enhancement Percentage (as defined herein) is
greater than or equal to 37.30%.
With respect to any Payment Date, a "Trigger
Event" is in effect if the percentage obtained
by dividing (x) the principal amount of
Mortgage Loans delinquent 60 days or more by
(y) the aggregate principal balance of the
Mortgage Loans, in each case, as of the last
day of the previous calendar month, exceeds the
lesser of (i) 35.00% of the Credit Enhancement
Percentage and (ii) 13.055%.
On the Final Maturity Date or the Payment Date
immediately following the acceleration of the
Notes due to any Event of Default, principal
will be payable on each class of Notes in an
amount equal to the Note Balance thereof on
such Payment Date. In addition, on the Final
Maturity Date or the Payment Date immediately
following the acceleration of the Notes due to
any Event of Default, amounts in respect of
accrued interest, Interest Carry Forward
Amounts and Allocated Realized Loss Amounts
will be payable on each class of Notes in the
priorities set forth in the Indenture. There
can be no assurance, however, that sufficient
funds will be available on any such date to
retire the Note Balances and pay such other
amounts.
The Note Balance of a Note outstanding at any
time represents the then maximum amount that
the holder thereof is entitled to receive as
payments allocable to principal from the cash
flow on the Mortgage Loans and
S-12
<PAGE>
the other assets in the Trust Estate. The "Note
Balance" of any class of Notes as of any date
of determination is equal to the initial Note
Balance thereof, reduced by the aggregate of
(a) all amounts allocable to principal
previously distributed with respect to such
Note and (b) any reductions in the Note Balance
thereof deemed to have occurred in connection
with allocations of Realized Losses in the
manner described herein.
As of the Closing Date, the amount of
overcollateralization provided by the Mortgage
Pool will equal the initial required amount.
However, on any Payment Date on which the
amount of overcollateralization provided by the
Mortgage Pool is less than the then current
required amount, the subordination and cash
flow provisions of the Indenture will, to the
extent of available funds, result in a limited
acceleration of principal payments to the
holders of the Notes then entitled to payments
of principal. Such subordination and cash flow
provisions may therefore have the effect of
shortening the weighted average life of the
Notes by increasing the rate at which principal
is distributed to the holders thereof. The
subordination and cash flow provisions are more
fully described under "--Credit Enhancement"
below and "Description of the
Notes--Overcollateralization Provisions"
herein. In addition, as between the Class A
Notes and the Subordinate Notes, the allocation
of payments in respect of principal to the
Class A Notes on each Payment Date (a) prior to
the Stepdown Date or (b) on which a Trigger
Event has occurred, will have the effect of
accelerating the amortization of the Class A
Notes while, in the absence of Realized Losses,
increasing the respective percentage interest
in the principal balance of the Mortgage Loans
evidenced by the Subordinate Notes and the
Overcollateralized Amount. Increasing the
respective percentage interest in the Trust
Estate of the Subordinate Notes and the
Overcollateralized Amount relative to that of
the Class A Notes is intended to preserve the
availability of the subordination provided by
the Subordinate Notes and the
Overcollateralized Amount.
Credit Enhancement...............The credit enhancement provided for the benefit
of the holders of the Class A Notes consists of
subordination and overcollateralization, each
as described below and under "Description of
the Notes--Credit Enhancement" and
"--Overcollateralization Provisions" herein.
SUBORDINATION: The rights of the holders of the
Subordinate Notes and the Equity Certificates
to receive payments will be subordinated, to
the extent described herein, to the rights of
the holders of the Class A Notes. This
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<PAGE>
subordination is intended to enhance the
likelihood of regular receipt by the holders of
the Class A Notes of the full amount of
interest and principal to which they are
entitled and to afford such holders protection
against Realized Losses.
The protection afforded to the holders of the
Class A Notes by means of the subordination of
the Subordinate Notes and the Equity
Certificates will be accomplished by (i) the
preferential right of the holders of the Class
A Notes to receive on any Payment Date, prior
to payment on the Subordinate Notes and the
Equity Certificates, payments in respect of
interest and principal, subject to available
funds, and (ii) if necessary, the right of the
holders of the Class A Notes to receive future
payments of amounts that would otherwise be
payable to the holders of the Subordinate Notes
and the Equity Certificates.
In addition, the rights of the holders of
Subordinate Notes with lower numerical class
designations will be senior to the rights of
holders of Subordinate Notes with higher
numerical class designations, and the rights of
the holders of all of the Subordinate Notes to
receive payments in respect of the Mortgage
Loans will be senior to the rights of the
holders of the Equity Certificates, in each
case to the extent described herein. This
subordination is intended to enhance the
likelihood of regular receipt by the holders of
Subordinate Notes with lower numerical class
designations relative to the holders of
Subordinate Notes with higher numerical class
designations (and by the holders of all of the
Subordinate Notes relative to the holders of
the Equity Certificates) of the full amount of
interest and principal to which they are
entitled and to afford such holders protection
against Realized Losses, as described under
"Description of the Notes--Allocation of
Realized Losses" herein.
OVERCOLLATERALIZATION: As of the Closing Date,
the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date will exceed the
aggregate Note Balance of the Notes by an
amount equal to approximately $6,664,964. Such
amount represents approximately 1.75% of the
aggregate principal balance of the Mortgage
Loans as of the Cut-off Date, which is the
initial amount of overcollateralization
required to be provided by the Mortgage Pool
under the Indenture.
With respect to any Payment Date, the excess,
if any, of (a) the aggregate principal balance
of the Mortgage Loans immediately following
such Payment Date over (b) the Note Balance of
the Notes, after taking into account the
payment of the amounts described in clauses
(b)(i) through
S-14
<PAGE>
(iv) of the definition of Principal Payment
Amount on such Payment Date, is the
"Overcollateralized Amount" for the Notes as of
such Payment Date. Under the Indenture, the
Overcollateralized Amount is required to be
maintained at the "Required Overcollateralized
Amount". In the event that Realized Losses are
incurred on the Mortgage Loans, such Realized
Losses may result in an overcollateralization
deficiency since the allocation of such
Realized Losses will reduce the principal
balance of the Mortgage Loans without a
corresponding reduction to the aggregate Note
Balance of the Notes. In such event, the
Indenture requires the payment from Net Monthly
Excess Cashflow (as defined herein), subject to
available funds, of an amount equal to any such
overcollateralization deficiency, which shall
constitute a principal payment on the Notes in
reduction of the Note Balances thereof. This
has the effect of accelerating the amortization
of the Notes relative to the amortization of
the Mortgage Loans, and of increasing the
Overcollateralized Amount.
On and after the Stepdown Date and provided
that a Trigger Event is not in effect, the
Required Overcollateralized Amount may be
permitted to decrease ("step down") below the
initial approximate $6,664,964 level to a level
equal to approximately 3.50% of the then
current aggregate outstanding principal balance
of the Mortgage Loans (after giving effect to
principal payments to be distributed on such
Payment Date), subject to a floor of
$2,856,405. In the event that the Required
Overcollateralized Amount is permitted to step
down on any Payment Date, the Indenture
provides that a portion of the principal which
would otherwise be distributed to the holders
of the Notes on such Payment Date shall be
distributed to the holders of the Equity
Certificates pursuant to the priorities set
forth under "Description of the
Notes--Overcollateralization Provisions"
herein. This has the effect of decelerating the
amortization of the Notes relative to the
amortization of the Mortgage Loans, and of
reducing the Overcollateralized Amount.
However, if on any Payment Date a Trigger Event
is in effect, the Required Overcollateralized
Amount will not be permitted to step down on
such Payment Date.
Allocation of Losses;
Subordination..................Any Realized Loss on the Mortgage Loans will be
allocated, first, to Net Monthly Excess
Cashflow, second, to the Overcollateralized
Amount, third, to the Class M-3 Notes, fourth,
to the Class M-2 Notes, and fifth, to the Class
M-1 Notes. With respect to any class of
Subordinate Notes and any Payment Date, an
"Allocated Realized Loss Amount" refers to the
sum of (i) any such Realized Loss
S-15
<PAGE>
allocated to such class of Subordinate Notes on
such Payment Date and (ii) any Allocated
Realized Loss Amount for such class remaining
unpaid from previous Payment Dates plus accrued
interest thereon at the Note Accrual Rate for
such class. The Indenture does not permit the
allocation of Realized Losses to the Class A
Notes. Investors in the Class A Notes should
note that although Realized Losses cannot be
allocated to the such Notes, under certain loss
scenarios there will not be enough principal
and interest collected on the Mortgage Loans to
pay the Class A Notes all interest and
principal amounts to which they are then
entitled. The subordination provided (i) to the
Class A Notes by the Subordinate Notes and the
Overcollateralized Amount, (ii) to Subordinate
Notes with lower numerical class designations
by Subordinate Notes with higher numerical
class designations and (iii) to each class of
Subordinate Notes by the Overcollateralized
Amount, is intended to cover Realized Losses on
the Mortgage Loans.
Once Realized Losses have been allocated to the
Subordinate Notes, such Realized Losses will
not be reinstated thereafter. However,
Allocated Realized Loss Amounts may be paid to
the holders of such classes of Notes, after
certain distributions to the holders of the
Class A Notes and Subordinate Notes with lower
numerical class designations, but before the
Equity Certificates are entitled to any
distributions. See "Description of the
Notes--Overcollateralization Provisions"
herein.
Neither the Notes nor the Mortgage Loans are
insured or guaranteed by any governmental
agency or instrumentality or by the Depositor,
the Master Servicer, the Owner Trustee, the
Indenture Trustee, the Originators, the Seller,
the Wilshire SPE or any of their respective
affiliates.
P&I Advances.....................Each Servicer is required to make advances in
respect of delinquent payments of principal and
interest on the Mortgage Loans, subject to the
limitations described herein. See "Description
of the Notes--P&I Advances" herein and
"Description of the Securities--Advances in
respect of Delinquencies" in the Prospectus.
Sale of Defaulted
Mortgage Loans.................If consent to the operation of the provisions
described below shall have been given by the
related Servicer (unless the Directing Holder,
as defined below, is the Seller or an affiliate
thereof, in which case such consent shall not
be required), then with respect to any Mortgage
Loan that is delinquent in excess of the number
of days provided in the related Servicing
Agreement, (i) the holder of a majority
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<PAGE>
in Percentage Interest of the Equity
Certificates (the "Directing Holder") may
direct the related Servicer to commence
foreclosure and (ii) prior to commencement of
foreclosure of any Mortgage Loan, the related
Servicer will notify the Directing Holder of
such proposed foreclosure in order to permit
the Directing Holder the right to instruct such
Servicer to delay the proposed foreclosure. In
the case of the exercise by the Directing
Holder of the right to direct the related
Servicer pursuant to either clause (i) or
clause (ii) above, the Directing Holder will
deposit into the related Collateral Account (as
defined herein) an amount equal to 125% of the
Valuation (as defined herein) of any such
Mortgage Loan, plus three months' interest at
the related Mortgage Rate. In general, upon
final liquidation, the amount realized on any
such Mortgage Loan will be deposited into the
related Certificate Account, with the excess of
the Valuation of such Mortgage Loan over such
amount realized being withdrawn from the
related Collateral Account. After final
liquidation with respect to any such Mortgage
Loan, any amount remaining in the related
Collateral Account with respect to such
Mortgage Loan will be remitted to the Directing
Holder. See "The Servicing Agreements--Sale of
Defaulted Mortgage Loans" herein.
Notwithstanding the foregoing, the provisions
described above shall not be operative in the
case of the Mortgage Loans serviced by
Ameriquest.
Optional Redemption..............At its option, the majority holder of the
Equity Certificates may redeem the Notes, in
whole but not in part, on any Payment Date on
or after the Payment Date on which the
aggregate Note Balance is reduced to less than
20% of the aggregate initial Note Balance. Any
such redemption will be paid in cash at a price
equal to the sum of (w) 100% of the aggregate
Note Balance then outstanding, (x) the
aggregate of any Allocated Realized Loss
Amounts on the Notes remaining unpaid
immediately prior to such Payment Date, (y) the
aggregate of the Interest Payment Amounts on
the Notes for such Payment Date and (z) the
aggregate of any Interest Carry Forward Amounts
for such Payment Date. Upon any such
redemption, the remaining assets in the Trust
Estate shall be released from the lien of the
Indenture.
In addition, with respect to the 1996-LB3
Mortgage Loans, the majority holder of the
Equity Certificates may at its option obtain
the release of such portion of the Mortgage
Pool (together with any properties acquired in
respect thereof) remaining in the Trust Estate
from the lien of the Indenture, and in
connection therewith effect a partial
S-17
<PAGE>
redemption of the Notes, on any Payment Date on
or after the Payment Date following the Due
Period in which the aggregate principal balance
of the 1996-LB3 Mortgage Loans (and properties
acquired in respect thereof) remaining in the
Trust Estate is reduced to less than
$19,989,567.32. The 1996-LB3 Mortgage Loans
have an aggregate principal balance of
approximately $57,071,340 as of the Cut-off
Date. Any such redemption shall be paid in cash
at a price generally equal to the sum of (x)
100% of the then-outstanding principal balance
of each such Mortgage Loan plus accrued
interest thereon at their respective Mortgage
Rates through the last day of the calendar
month preceding the month in which such
redemption occurs and (y) the then fair market
value of each such property, in each case plus
any unreimbursed servicing advances. For
purposes of payments on the Notes and Equity
Certificates on the Payment Date of such
redemption, such redemption price shall be
applied by the Indenture Trustee as a final
liquidation of each of such Mortgage Loans and
properties. The redemption price relating to
any such properties, at their then fair market
value, may result in a shortfall in payment to,
and/or the allocation of Realized Losses to,
one or more classes of the Notes. See "The
Indenture and Owner Trust Agreement--Optional
Redemption" herein and "Description of the
Securities--Termination" in the Prospectus.
Special Prepayment
Considerations.................The rate and timing of payments allocable to
principal on the Notes will depend, in general,
on the rate and timing of principal payments
(including prepayments and collections upon
defaults, liquidations and repurchases) on the
Mortgage Loans and the allocation thereof to
pay principal on the Notes as provided herein.
As is the case with mortgage securities
generally, the Notes are subject to substantial
inherent cash-flow uncertainties because the
Mortgage Loans may be prepaid at any time;
however, with respect to approximately 69.32%
of the Mortgage Loans by aggregate principal
balance as of the Cut-off Date, a voluntary
prepayment in full may subject the related
mortgagor to a Prepayment Charge. Prepayment
Charge obligations generally expire by their
terms after a limited period specified in the
related Mortgage Note. The weighted average
month of origination of the Mortgage Loans with
Prepayment Charges is November 1997. See "The
Mortgage Pool" herein.
Generally, when prevailing interest rates are
increasing, prepayment rates on mortgage loans
tend to decrease; a decrease in the prepayment
rates on the Mortgage Loans
S-18
<PAGE>
will result in a reduced rate of return of
principal to investors in the Notes at a time
when reinvestment at such higher prevailing
rates would be desirable. Conversely, when
prevailing interest rates are declining,
prepayment rates on mortgage loans tend to
increase; an increase in the prepayment rates
on the Mortgage Loans will result in a greater
rate of return of principal to investors in the
Notes at a time when reinvestment at comparable
yields may not be possible.
Payments of principal will be made to the
Subordinate Notes according to the priorities
described herein. The timing of commencement of
principal payments and the weighted average
life of each such class of Notes will be
affected by the rates of prepayment on the
Mortgage Loans experienced both before and
after the commencement of principal payments on
such class. For further information regarding
the effect of principal prepayments on the
weighted average lives of the Notes, see "Yield
on the Notes" herein and the table entitled
"Percent of Initial Note Balance Outstanding at
the Following Percentages of the Prepayment
Assumption" therein.
Special Yield Considerations.....The yield to maturity on the Notes will depend,
in general, on (i) the applicable Note Interest
Rate and Note Accrual Rate thereon from time to
time, (ii) the applicable purchase price and
(iii) the rate and timing of principal payments
(including prepayments and collections upon
defaults, liquidations and repurchases) on the
Mortgage Loans and the allocation thereof to
reduce the Note Balance of such Notes, as well
as other factors.
The yield to investors on any class of Notes
will be adversely affected by any allocation
thereto of interest shortfalls on the Mortgage
Loans.
In general, if the Notes are purchased at a
premium and principal payments thereon occur at
a rate faster than anticipated at the time of
purchase, the investor's actual yield to
maturity will be lower than that assumed at the
time of purchase. Conversely, if the Notes are
purchased at a discount and principal payments
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 Notes were determined based on a number of
assumptions, including a prepayment assumption
of 28% CPR (as defined herein) and weighted
average lives corresponding thereto. No
representation is made that the Mortgage Loans
will prepay at such rate or at any other rate.
The
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<PAGE>
yield assumptions for the Notes will vary as
determined at the time of sale.
SUBORDINATE NOTES. The multiple class structure
of the Subordinate Notes causes the yield of
certain of such classes to be particularly
sensitive to changes in the rates of prepayment
of the Mortgage Loans. Because payments of
principal will be made to the Subordinate Notes
according to the priorities described herein,
the yield to maturity on the Notes of any such
class will be sensitive to the rates of
prepayment on the Mortgage Loans experienced
both before and after the commencement of
principal payments on such classes. The yield
to maturity on the Subordinate Notes will also
be extremely sensitive to losses due to
defaults on the Mortgage Loans (and the timing
thereof), to the extent such losses are not
covered by Net Monthly Excess Cashflow, the
Overcollateralized Amount or Subordinate Notes
with a higher numerical class designations.
Furthermore, as described herein, the timing of
receipt of principal and interest by the
Subordinate Notes may be adversely affected by
losses even if such class of Notes does not
ultimately bear such loss.
Certain Federal Income Tax
Consequences...................Upon the issuance of the Notes, Thacher
Proffitt & Wood, counsel to the Depositor, will
deliver its opinion generally to the effect
that based on the application of existing law
and assuming compliance with the Owner Trust
Agreement and assuming that the Seller
qualifies as a "real estate investment trust"
under Section 856 of the Code, for federal
income tax purposes, (a) the Notes will be
characterized as indebtedness and not as
representing an ownership interest in the Trust
Estate or an equity interest in the Issuer or
the Depositor and (b) the Issuer will not be
(i) classified as an association taxable as a
corporation for federal income tax purposes
(other than as a "qualified REIT subsidiary" as
defined in Section 856(i) of the Code) or (ii)
a "publicly traded partnership" as defined in
Treasury Regulation Section 1.7704. Each holder
of a Note, by its acceptance of such Note, will
agree to treat the Notes as indebtedness. For
further information regarding certain federal
income tax consequences of an investment in the
Notes, see "Certain Federal Income Tax
Consequences" herein and "Certain Federal
Income Tax Consequences" and "State and Other
Tax Consequences" in the Prospectus.
For federal income tax reporting purposes, the
Notes will not be treated as having been issued
with original issue discount. The Class A Notes
may be treated for federal income tax purposes
as having been issued at a premium.
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<PAGE>
The prepayment assumption that will be used in
determining the rate of accrual of original
issue discount, premium and market discount, if
any, for federal income tax purposes is 28%
CPR. No representation is made that the
Mortgage Loans will prepay at that rate or at
any other rate. See "Yield on the Notes"
herein.
For further information regarding the federal
income tax consequences of investing in the
Notes, see "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
Ratings..........................It is a condition of the issuance of the Notes
that the Class A Notes be rated "AAA" by Duff &
Phelps Credit Rating Co. ("DCR") and "AAA" by
Standard & Poor's Ratings Services ("S&P"),
that the Class M-1 Notes be rated at least "AA"
by DCR and at least "AA" by S&P, that the Class
M-2 Notes be rated at least "A" by DCR and at
least "A" by S&P and that the Class M-3 Notes
be rated at least "BBB" by DCR. The Depositor
has not requested that any rating agency rate
the Notes other than as stated above. If
another rating agency were to rate the Notes,
such rating agency may assign a rating
different from the ratings described above. A
security rating is not a recommendation to buy,
sell or hold securities and may be subject to
revision or withdrawal at any time by the
assigning rating organization. A security
rating does not address the frequency of
prepayments on the Mortgage Loans or the
corresponding effect on yield to investors. The
ratings on the Notes by DCR and S&P do not
address the likelihood of receipt by
Noteholders of any Interest Carry Forward
Amounts. See "Yield on the Notes" and "Ratings"
herein and "Yield Considerations" in the
Prospectus.
Legal Investment.................The Class A Notes and the Class M-1 Notes will
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long
as they are rated not lower than the second
highest rating category by a Rating Agency (as
defined in the Prospectus) and, as such, will
be legal investments for certain entities to
the extent provided in SMMEA. SMMEA, however,
provides for state limitation on the authority
of such entities to invest in "mortgage related
securities", provided that such restricting
legislation was enacted prior to October 3,
1991. The Class M-2 Notes and the Class M-3
Notes will not constitute "mortgage related
securities" for purposes of SMMEA. Institutions
whose investment activities are subject to
legal investment laws and regulations or to
review by regulatory authorities may be subject
to restrictions on investment in the Notes. Any
such institution should consult with their
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<PAGE>
own legal advisors in determining whether and
to what extent the Notes constitute legal
investments or are subject to restrictions on
investment. See "Legal Investment" herein and
in the Prospectus.
ERISA Considerations.............A fiduciary of an employee benefit plan and
certain other retirement plans and
arrangements, including individual retirement
accounts and annuities, Keogh plans, and
collective investment funds and separate
accounts in which such plans, accounts,
annuities or arrangements are invested, that is
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code (each, a "Plan"),
should carefully review with its legal advisors
whether the purchase or holding of Notes could
give rise to a transaction that is prohibited
or is not otherwise permissible either under
ERISA or Section 4975 of the Code.
Under the Plan Asset Regulations (as defined
herein), generally, when a Plan acquires an
"equity interest" in another entity (such as
the Trust Estate), the underlying assets of
that entity may be considered to be Plan Assets
(as defined herein). The Plan Asset 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." Although not
entirely free from doubt, it is believed that,
as of the date hereof, the Notes will be
treated as debt obligations without significant
equity features for the purposes of the Plan
Asset Regulations. See "ERISA Considerations"
herein and in the Prospectus.
S-22
<PAGE>
RISK FACTORS
In addition to the matters described elsewhere in this Prospectus
Supplement and the Prospectus, prospective investors should carefully consider
the following factors before deciding to invest in the Notes.
UNDERWRITING STANDARDS AND POTENTIAL DELINQUENCIES
THE ORIGINATORS' UNDERWRITING STANDARDS ARE PRIMARILY INTENDED TO ASSESS
THE VALUE OF THE MORTGAGED PROPERTY AND TO EVALUATE THE ADEQUACY OF SUCH
PROPERTY AS COLLATERAL FOR THE MORTGAGE LOAN. THE ORIGINATORS PROVIDE LOANS
PRIMARILY TO BORROWERS WHO DO NOT QUALIFY FOR LOANS CONFORMING TO FNMA AND FHLMC
GUIDELINES. WHILE THE ORIGINATORS' PRIMARY CONSIDERATION IN UNDERWRITING A
MORTGAGE LOAN IS THE VALUE OF THE MORTGAGED PROPERTY, EACH ORIGINATOR ALSO
CONSIDERS, AMONG OTHER THINGS, A MORTGAGOR'S CREDIT HISTORY, REPAYMENT ABILITY
AND DEBT SERVICE- TO-INCOME RATIO, AS WELL AS THE TYPE AND USE OF THE MORTGAGED
PROPERTY. NONE OF THE ORIGINATORS' UNDERWRITING STANDARDS PROHIBIT A MORTGAGOR
FROM OBTAINING SECONDARY FINANCING AT THE TIME OF ORIGINATION OF THE RELATED
ORIGINATOR'S FIRST LIEN. ANY SUCH SECONDARY FINANCING WOULD REDUCE THE EQUITY
THE MORTGAGOR WOULD OTHERWISE HAVE IN THE RELATED MORTGAGED PROPERTY AS
INDICATED IN THE RELATED ORIGINATOR'S LOAN-TO-VALUE RATIO DETERMINATION.
AS A RESULT OF THE ORIGINATORS' UNDERWRITING STANDARDS, THE MORTGAGE LOANS
ARE LIKELY TO EXPERIENCE RATES OF DELINQUENCY, FORECLOSURE AND BANKRUPTCY THAT
ARE HIGHER, AND THAT MAY BE SUBSTANTIALLY HIGHER, THAN THOSE EXPERIENCED BY
MORTGAGE LOANS UNDERWRITTEN IN A MORE TRADITIONAL MANNER.
Furthermore, changes in the values of Mortgaged Properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Mortgage Loans than on mortgage loans originated in a more traditional
manner. No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at the levels in effect on the dates of origination
of the related Mortgage Loans. See "The Mortgage Pool--Underwriting Standards;
Representations" herein.
SOURCE OF THE MORTGAGE LOANS
The Depositor will acquire all of the Mortgage Loans on the Closing Date
from the Wilshire SPE. The Wilshire SPE in turn will have acquired the Mortgage
Loans on the Closing Date from the Seller, who will have acquired the Mortgage
Loans on the Closing Date from Salomon Brothers Realty Corp. Salomon Brothers
Realty Corp. in turn will have acquired the Mortgage Loans directly or
indirectly from the Originators. Investors should note that, in the case of the
Adjustable Rate Ameriquest Mortgage Loans, Salomon Brothers Realty Corp., an
affiliate of the Depositor and the Underwriter, will have acquired such Mortgage
Loans on the Closing Date in connection with the termination on the Closing Date
of the trust funds underlying two series of mortgage pass-through certificates
previously issued by the Depositor, which trust funds hold the Adjustable Rate
Ameriquest Mortgage Loans as of the date of this Prospectus Supplement. Such
previously issued mortgage pass-through certificates were entitled (i) Salomon
Brothers Mortgage Securities VII, Inc., Asset-Backed Floating Rate Certificates,
Series 1996-LB3, and (ii) Salomon Brothers Mortgage Securities VII, Inc.,
Asset-Backed Floating Rate Certificates, Series 1997-LB1.
ADDITIONAL RISKS ASSOCIATED WITH THE MORTGAGE LOANS
Approximately 1.56% of the Mortgage Loans were thirty days or more but less
than sixty days delinquent in their monthly payments and approximately 0.50% of
the Mortgage Loans were sixty days or more but less than ninety days delinquent
in their monthly payments as of the last day of the calendar month preceding the
Cut-off Date, in each case by aggregate principal balance as of the Cut-off
Date.
S-23
<PAGE>
However, approximately 19.39% of the Mortgage Loans, by aggregate principal
balance as of the Cutoff Date, have a first payment date occurring on or after
the Cut-off Date and, therefore, such Mortgage Loans could not have been
delinquent as of the last day of the calendar month preceding the Cut-off Date.
Approximately 29.52% of the Mortgage Loans, by aggregate principal balance
as of the Cut-off Date, had a loan-to-value ratio at origination in excess of
80%. No Mortgage Loan with a loan-to-value ratio at origination in excess of 80%
will be covered by a primary mortgage insurance policy. Mortgage Loans with
higher loan-to-value ratios may present a greater risk of loss. There can be no
assurance that the loan-to-value ratio of any Mortgage Loan determined at any
time after origination is less than or equal to its original loan-to-value
ratio. See "The Mortgage Pool--General" herein.
Approximately 26.37% of the Mortgage Loans are secured by Mortgaged
Properties located in the State of California, and approximately 10.63% of the
Mortgage Loans are secured by Mortgaged Properties located in the State of
Colorado, in each case by aggregate principal balance as of the Cut- off Date.
As of the Cut-off Date, the aggregate principal balance of Mortgage Loans in the
California zip code with the largest amount of such Mortgage Loans, by aggregate
principal balance as of the Cut- off Date, was approximately $1,109,337. If the
California or Colorado residential real estate market should experience an
overall decline in property values after the dates of origination of the
Mortgage Loans, the rates of delinquencies, foreclosures, bankruptcies and
losses on the Mortgage Loans may increase over historical levels of comparable
type loans, and may increase substantially.
ADDITIONAL RISKS ASSOCIATED WITH THE SUBORDINATE NOTES
The weighted average lives of, and the yields to maturity on, the
Subordinate Notes will be progressively more sensitive, in increasing order of
their numerical class designations, to the rate and timing of mortgagor defaults
and the severity of ensuing losses on the Mortgage Loans. If the actual rate and
severity of losses on the Mortgage Loans is higher than those assumed by an
investor in a Subordinate Note, the actual yield to maturity of such Note may be
lower than the yield anticipated by such holder based on such assumption. The
timing of losses on the Mortgage Loans will also affect an investor's actual
yield to maturity, even if the rate of defaults and severity of losses over the
life of the Mortgage Pool are consistent with an investor's expectations. In
general, the earlier a loss occurs, the greater the effect on an investor's
yield to maturity. Realized Losses on the Mortgage Loans in any Due Period, to
the extent they exceed the Overcollateralized Amount (as defined herein)
following payments of principal on the related Payment Date, will reduce the
Note Balance of the class of Subordinate Notes then outstanding with the highest
numerical class designation. As a result of such reductions, less interest will
accrue on such class of Subordinate Notes than would otherwise be the case.
Unless the Note Balance of the Class A Notes has been reduced to zero, the
Subordinate Notes will not be entitled to any principal payments until the
Stepdown Date or during any period in which a Trigger Event is in effect. As a
result, the weighted average lives of the Subordinate Notes will be longer than
would otherwise be the case if payments of principal were allocated on a PRO
RATA basis among the Class A Notes and Subordinate Notes. As a result of the
longer weighted average lives of the Subordinate Notes, the holders of such
Notes have a greater risk of suffering a loss on their investments. Further,
because a Trigger Event is based on delinquencies and not losses, it is possible
for the Subordinate Notes to receive no principal payments (unless the Note
Balance of the Class A Notes has been reduced to zero) on and after the Stepdown
Date even if no losses have occurred on the Mortgage Pool.
S-24
<PAGE>
LIMITED OBLIGATIONS
The Notes will not represent an interest in or obligation of the
Originators, the Depositor, the Master Servicer, the Seller, the Wilshire SPE,
the Owner Trustee, the Indenture Trustee or any of their respective affiliates.
The only obligations of the foregoing entities with respect to the Notes or any
Mortgage Loan will be the obligations of the Seller pursuant to certain limited
representations and warranties made with respect to the Mortgage Loans and of
the Servicers with respect to their servicing obligations under the related
Servicing Agreement (including the limited obligation to make certain P&I
Advances, as described herein). Neither the Notes nor the underlying Mortgage
Loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the Issuer, the Originators, the Depositor, the Master
Servicer, the Seller, the Wilshire SPE, the Owner Trustee, the Indenture Trustee
or any of their respective affiliates. Proceeds of the assets included in the
Trust Estate (including the Mortgage Loans) will be the sole source of payments
on the Notes, and there will be no recourse to the Issuer, the Originators, the
Depositor, the Master Servicer, the Seller, the Wilshire SPE, the Owner Trustee,
the Indenture Trustee or any of their respective affiliates or any other entity
in the event that such proceeds are insufficient or otherwise unavailable to
make all payments provided for under the Notes.
YIELD CONSIDERATIONS
The Note Interest Rate for each class of the Notes adjusts monthly based on
One-Month LIBOR, subject to the Maximum Note Interest Rate and the Available
Interest Rate. However, the Mortgage Rates on the Fixed Rate Mortgage Loans are
fixed and will not vary with any index, and the Mortgage Rates on the Adjustable
Rate Mortgage Loans adjust semi-annually (after an initial fixed rate period in
the case of Delayed First Adjustment Mortgage Loans) based on the Index (which
may not move in tandem with One-Month LIBOR), subject to periodic and lifetime
limitations as described herein. As a result of the foregoing as well as other
factors such as the prepayment behavior of the Mortgage Pool, relative increases
in One-Month LIBOR or relative decreases in the weighted average of the Mortgage
Rates on the Mortgage Loans (i) could cause the Current Interest Payment Amount
generated by the Mortgage Pool to be less than the aggregate of the Interest
Payment Amounts that would otherwise be payable on the Notes, leading one or
more classes of Notes to incur Interest Carry Forward Amounts, or (ii) could
cause the Maximum Note Interest Rate to apply to one or more classes of Notes.
Because the Mortgage Rate for each Adjustable Rate Mortgage Loan will be
adjusted, subject to periodic and lifetime limitations, to equal the sum of the
Index and the related Gross Margin, such rates could be higher than prevailing
market interest rates, possibly resulting in an increase in the rate of
prepayments on the Adjustable Rate Mortgage Loans after their adjustments. In
particular, investors should note that approximately 41.83% of the Adjustable
Rate Mortgage Loans are two year Delayed First Adjustment Mortgage Loans and
approximately 10.56% of the Adjustable Rate Mortgage Loans are three year
Delayed First Adjustment Mortgage Loans, in each case by aggregate principal
balance as of the Cut-ff Date. The weighted average next Adjustment Date for the
two year Delayed First Adjustment Mortgage Loans is May 2000, and the weighted
average next Adjustment Date for the three year Delayed First Adjustment
Mortgage Loans is August 2001.
OTHER LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosure, and require licensing of the Originators. In
addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the Mortgage Loans.
The Mortgage Loans are also subject to federal laws, including:
(i) the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Mortgage Loans;
S-25
<PAGE>
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Certain of the Mortgage Loans may be subject to the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "Riegle Act"), which
incorporates the Home Ownership and Equity Protection Act of 1994. The Riegle
Act adds certain additional provisions to Regulation Z, which is the
implementing regulation of the Federal Truth-in-Lending Act. These provisions
impose additional disclosure and other requirements on creditors with respect to
non-purchase money mortgage loans with high interest rates or high up-front fees
and charges. In general, mortgage loans within the purview of the Riegle Act
have annual percentage rates over 10% greater than the yield on treasury
securities of comparable maturity and/or fees and points which exceed the
greater of 8% of the total loan amount or $400. The provisions of the Riegle Act
apply on a mandatory basis to all applicable mortgage loans originated on or
after October 1, 1995. These provisions can impose specific statutory
liabilities upon creditors who fail to comply with their provisions and may
affect the enforceability of the related loans. In addition, any assignee of the
creditor would generally be subject to all claims and defenses that the consumer
could assert against the creditor, including, without limitation, the right to
rescind the mortgage loan.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws, policies
and principles may limit the ability of the Servicers to collect all or part of
the principal of or interest on the Mortgage Loans, may entitle the borrower to
a refund of amounts previously paid and, in addition, could subject the
Originators, the Seller and/or the Issuer to damages and administrative
enforcement.
The Seller will represent that as of the Closing Date, each Mortgage Loan
is in compliance with applicable federal and state laws and regulations. In the
event of a breach of such representation, the Seller will be obligated to cure
such breach or repurchase or replace the affected Mortgage Loan in the manner
described in the Prospectus.
RISKS ASSOCIATED WITH FAILURE OF A "REIT" OR A "QUALIFIED REIT SUBSIDIARY" TO BE
SOLE OWNER OF THE ISSUER
It is anticipated that the Issuer will be characterized as a "taxable
mortgage pool" (a "TMP") for federal income tax purposes. In general, a TMP is
treated as a "separate" corporation not includible with any other corporation in
a consolidated income tax return, and is subject to corporate income taxation.
However, it is anticipated that for federal income tax purposes, one hundred
percent of the Issuer will at all times be owned by the Seller or one or more
"qualified REIT subsidiaries" of the Seller. So long as the Issuer is directly
or indirectly wholly owned solely by the Seller and the Seller qualifies as a
"real estate investment trust" (a "REIT") (as defined in Section 856(a) of the
Code), the characterization of the Issuer as a TMP will result in only the
shareholders of the Seller being required to treat a portion of their dividends
received from the Seller as "excess inclusions" and will not result in any
entity-level tax or corporate income with respect to the Issuer. The Seller's
status as a REIT is dependent upon, among other things, the Seller filing a
timely tax return electing such status. Holders of the Notes should be aware
that the equity in the Issuer may be pledged under repurchase agreements. The
lender under such an arrangement, including an affiliate of the Underwriter in a
capacity as such a lender, would have the right to sell the equity in the event
of default on such indebtedness. If a REIT or a "qualified REIT subsidiary"
ceases to be the sole owner of the Issuer, the Issuer would be subject to
corporate income taxation and thus funds that would otherwise be available
S-26
<PAGE>
to make payments on the Notes would be used to pay income tax. See "Certain
Federal Income Tax Consequences" herein.
TRANSFER OF SERVICING
The Master Servicer and National Mortgage have advised the Depositor that
with respect to a portion of the Mortgage Loans initially to be serviced by
National Mortgage, the servicing thereof is expected to be transferred to the
Master Servicer by October 30, 1998, whereupon the Master Servicer will act in
the capacity as "Servicer" under the applicable Servicing Agreement to the
extent of such Mortgage Loans. Such portion of the Mortgage Loans that are
expected to be subject to such servicing transfer represents approximately
23.72% of the Mortgage Loans, by aggregate principal balance as of the Cut-off
Date. Investors should note that when servicing of mortgage loans is
transferred, there may be a rise in delinquencies associated with such transfer.
THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of approximately 1,161 conventional, one- to
four-family, fixed-rate Mortgage Loans (the "Fixed Rate Mortgage Loans") and
approximately 2,605 conventional, one-to four-family, adjustable-rate Mortgage
Loans (the "Adjustable Rate Mortgage Loans" and, together with the Fixed Rate
Mortgage Loans, the "Mortgage Loans"), in each case secured by first liens on
residential real properties (the "Mortgaged Properties") and having an aggregate
principal balance as of September 1, 1998 (the "Cut-off Date") of approximately
$380,853,964, after application of scheduled payments due on or before the
Cut-off Date whether or not received, subject to a permitted variance of plus or
minus 5%. The Mortgage Loans have original terms to maturity of not greater than
30 years. References to percentages of the Mortgage Loans, unless otherwise
noted, are calculated based on the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date. The Mortgage Loans are secured by first mortgages
or deeds of trust or other similar security instruments creating first liens on
residential properties consisting of attached, detached or semi-detached, one-
to four-family dwelling units, townhouses, individual condominium units,
individual units in planned unit developments and manufactured housing.
The Mortgage Loans to be included in the Mortgage Pool will be acquired by
the Depositor on the Closing Date from Wilshire REIT 1998-1, Inc. (the "Wilshire
SPE"), who will have acquired the Mortgage Loans on the Closing Date from the
Seller. See "--Underwriting Standards; Representations" below and "The Wilshire
SPE" and "The Seller" herein. The Seller in turn will have acquired the Mortgage
Loans on the Closing Date from Salomon Brothers Realty Corp., an affiliate of
the Depositor and the Underwriter. Salomon Brothers Realty Corp. will have
acquired the Mortgage Loans directly or indirectly from the Originators.
Investors should note that, in the case of the Adjustable Rate Ameriquest
Mortgage Loans, Salomon Brothers Realty Corp. will have acquired such Mortgage
Loans on the Closing Date in connection with the termination on the Closing Date
of the trust funds underlying two series of mortgage pass-through certificates
previously issued by the Depositor, which trust funds hold the Adjustable Rate
Ameriquest Mortgage Loans as of the date of this Prospectus Supplement. Such
previously issued mortgage pass-through certificates were entitled (i) Salomon
Brothers Mortgage Securities VII, Inc., Asset-Backed Floating Rate Certificates,
Series 1996-LB3, and (ii) Salomon Brothers Mortgage Securities VII, Inc.,
Asset-Backed Floating Rate Certificates, Series 1997-LB1. Adjustable Rate
Ameriquest Mortgage Loans acquired upon the termination of the Series 1996-LB3
trust fund (the "1996-LB3 Mortgage Loans") represent approximately 14.99% of the
Mortgage Loans, and Adjustable Rate Ameriquest Mortgage Loans acquired upon the
termination of the Series 1997-LB1 trust fund represent approximately 17.70% of
the Mortgage Loans (the "1997-LB1 Mortgage Loans"), in each case by aggregate
principal balance as of the Cut-off Date. Salomon Brothers Realty Corp. will
S-27
<PAGE>
have acquired the remainder of the Mortgage Loans in whole loan purchases
directly from Ameriquest in the case of 1.73% of the Mortgage Loans (the "Fixed
Rate Ameriquest Mortgage Loans"), Long Beach in the case of 23.03% of the
Mortgage Loans (the "Long Beach Mortgage Loans") and National Mortgage in the
case of 42.55% of the Mortgage Loans (the "National Mortgage Loans"), in each
case by aggregate principal balance as of the Cut-off Date.
Each Adjustable Rate Mortgage Loan provides for semi-annual adjustment to
the Mortgage Rate thereon and for corresponding adjustments to the monthly
payment amount due thereon, in each case on each adjustment date applicable
thereto (each such date, an "Adjustment Date"); provided, however, that in the
case of approximately 41.83% and approximately 10.56% of the Adjustable Rate
Mortgage Loans by aggregate principal balance as of the Cut-off Date, the first
Adjustment Date will occur after an initial period of approximately two years
and approximately three years, respectively, from the date of origination
thereof (each, a "Delayed First Adjustment Mortgage Loan"). The weighted average
month of origination of the two year Delayed First Adjustment Mortgage Loans is
April 1998, and the weighted average month of origination of the three year
Delayed First Adjustment Mortgage Loans is July 1998. On each Adjustment Date,
the Mortgage Rate on each Adjustable Rate Mortgage Loan will be adjusted to
equal the sum, rounded as provided in the related Mortgage Note, of the Index
(as described below) and a fixed percentage amount (the "Gross Margin");
provided, however, that the Mortgage Rate on each Adjustable Rate Mortgage Loan,
including each Delayed First Adjustment Mortgage Loan, will generally not
increase or decrease by more than a specified periodic adjustment limitation
(the "Periodic Rate Cap") on any related Adjustment Date and will not exceed a
specified maximum Mortgage Rate over the life of such Adjustable Rate Mortgage
Loan (the "Maximum Mortgage Rate") or be less than a specified minimum Mortgage
Rate over the life of such Adjustable Rate Mortgage Loan (the "Minimum Mortgage
Rate"). For Adjustment Dates other than the first Adjustment Date after
origination, the Periodic Rate Cap for the majority of the Adjustable Rate
Mortgage Loans is 1.00% per annum, and with respect to substantially all of the
Adjustable Rate Mortgage Loans, for Adjustment Dates other than the first
Adjustment Date after origination, the Periodic Rate Cap will not exceed 1.50%
per annum. Effective with the first monthly payment due on each Adjustable Rate
Mortgage Loan after each related Adjustment Date, the monthly payment amount
will be adjusted to an amount that will amortize fully the outstanding principal
balance of the related Adjustable Rate Mortgage Loan over its remaining term and
pay interest at the Mortgage Rate as so adjusted. Due to the application of the
Periodic Rate Caps and the Maximum Mortgage Rates, the Mortgage Rate on each
Mortgage Loan, as adjusted on any related Adjustment Date, may be less than the
sum of the Index and Gross Margin, calculated as described herein. See "--The
Index" herein. None of the Adjustable Rate Mortgage Loans permits the related
mortgagor to convert the adjustable Mortgage Rate thereon to a fixed Mortgage
Rate.
The Mortgage Loans generally have scheduled monthly payments due (with
respect to each Mortgage Loan, a "Due Date") on the first day of the month .
Each Mortgage Loan will contain a customary "due-on-sale" clause or will be
assumable by a creditworthy purchaser of the related Mortgaged Property.
Approximately 69.32% of the Mortgage Loans provide for payment by the
mortgagor of a Prepayment Charge in limited circumstances on certain voluntary
prepayments in full made within one to five years from the date of origination
of such Mortgage Loans. The amount of the Prepayment Charge is as provided in
the related Mortgage Note. Prepayment Charge obligations generally expire by
their terms after a limited period specified in the related Mortgage Note. The
weighted average month of origination of the Mortgage Loans with Prepayment
Charges is November 1997. The holders of the Equity Certificates will be
entitled to all Prepayment Charges received on the Mortgage Loans, and such
amount will be available for distribution on the Notes. Under certain instances,
as described in the related Servicing Agreement, the related Servicer may waive
the payment of any otherwise applicable Prepayment Charge, and accordingly,
there can be no assurance that the Prepayment Charges will have any effect on
the prepayment performance of the Mortgage Loans.
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<PAGE>
None of the Mortgage Loans are Buydown Mortgage Loans.
Approximately 0.04% of the Mortgage Loans are balloon loans (the "Balloon
Loans"). Each Balloon Loan is a Fixed Rate Mortgage Loan that amortizes over 360
months, but the final payment (the "Balloon Payment") on each Balloon Loan is
due and payable on the 180th month. The amount of the Balloon Payment on each
Balloon Loan is substantially in excess of the amount of the scheduled monthly
payment on such Balloon Loan for the period prior to the Due Date of such
Balloon Payment.
The average principal balance of the Mortgage Loans at origination was
approximately $101,855. No Mortgage Loan had a principal balance at origination
greater than approximately $825,000 or less than approximately $10,000. The
average principal balance of the Mortgage Loans as of the Cut-off Date was
approximately $101,129.
The Mortgage Loans had Mortgage Rates as of the Cut-off Date ranging from
approximately 6.75% per annum to approximately 16.10% per annum, and the
weighted average Mortgage Rate was approximately 10.229% per annum. The weighted
average loan-to-value ratio of the Mortgage Loans at origination was
approximately 76.96%. At origination, no Mortgage Loan will have a loan-to-value
ratio greater than approximately 93.91% or less than approximately 5.88%.
The weighted average remaining term to maturity of the Mortgage Loans will
be approximately 28 years and 7 months as of the Cut-off Date. None of the
Mortgage Loans will have a first Due Date prior to June 1996 or after November
1998, or will have a remaining term to maturity of less than 8 years or greater
than 30 years as of the Cut-off Date. The latest maturity date of any Mortgage
Loan is October 2028.
As of the Cut-off Date, the Adjustable Rate Mortgage Loans had Gross
Margins ranging from approximately 3.00% to approximately 8.95%, Minimum
Mortgage Rates ranging from approximately 5.35% per annum to approximately
16.10% per annum and Maximum Mortgage Rates ranging from approximately 12.50%
per annum to approximately 22.10% per annum. As of the Cut-off Date, the
weighted average Gross Margin was approximately 5.714%, the weighted average
Minimum Mortgage Rate was approximately 9.707% per annum and the weighted
average Maximum Mortgage Rate was approximately 15.857% per annum. The latest
first Adjustment Date following the Cut-off Date on any Adjustable Rate Mortgage
Loan occurs in October 2001 and the weighted average next Adjustment Date for
all of the Mortgage Loans following the Cut-off Date is October 1999.
The Mortgage Loans are expected to have the following characteristics as of
the Cut-off Date (the sum in any column may not equal the total indicated due to
rounding):
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF
ORIGINAL AGGREGATE
NUMBER PRINCIPAL ORIGINAL
RANGE ($) OF LOANS BALANCE PRINCIPAL BALANCE
--------- -------- -------- ------------------
<S> <C> <C> <C>
0.01 - 50,000.00 . . . . . . . . . . . . . 874 $ 30,837,855.32 8.04%
50,000.01 - 100,000.00 . . . . . . . . . . . . . 1,471 109,948,350.00 28.66
100,000.01 - 150,000.00 . . . . . . . . . . . . . 790 96,130,764.00 25.06
150,000.01 - 200,000.00 . . . . . . . . . . . . . 317 54,735,525.50 14.27
200,000.01 - 250,000.00 . . . . . . . . . . . . . 137 30,456,216.00 7.94
250,000.01 - 300,000.00 . . . . . . . . . . . . . 76 20,936,552.00 5.46
300,000.01 - 350,000.00 . . . . . . . . . . . . . 33 10,591,175.00 2.76
350,000.01 - 400,000.00 . . . . . . . . . . . . . 33 12,297,366.00 3.21
400,000.01 - 450,000.00 . . . . . . . . . . . . . 12 5,115,467.88 1.33
450,000.01 - 500,000.00 . . . . . . . . . . . . . 11 5,258,000.00 1.37
500,000.01 - 550,000.00 . . . . . . . . . . . . . 4 2,065,250.00 0.54
550,000.01 - 600,000.00 . . . . . . . . . . . . . 3 1,701,000.00 0.44
600,000.01 - 650,000.00 . . . . . . . . . . . . . 2 1,240,580.00 0.32
700,000.01 - 750,000.00 . . . . . . . . . . . . . 2 1,448,750.00 0.38
800,000.01 - 850,000.00 . . . . . . . . . . . . . 1 825,000.00 0.22
----- --------------- ------
Total........................................ 3,766 $383,587,851.70 100.00%
===== =============== ======
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE ($) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------- -------- ------------------ -----------------
<S> <C> <C> <C>
0.01 - 50,000.00 . . . . . . . . . . . . . 889 31,135,794.97 8.18%
50,000.01 - 100,000.00 . . . . . . . . . . . . . 1,465 109,149,500.53 28.66
100,000.01 - 150,000.00 . . . . . . . . . . . . . 787 95,512,131.47 25.08
150,000.01 - 200,000.00 . . . . . . . . . . . . . 311 53,496,342.11 14.05
200,000.01 - 250,000.00 . . . . . . . . . . . . . 139 30,801,813.69 8.09
250,000.01 - 300,000.00 . . . . . . . . . . . . . 75 20,655,755.49 5.42
300,000.01 - 350,000.00 . . . . . . . . . . . . . 33 10,595,052.41 2.78
350,000.01 - 400,000.00 . . . . . . . . . . . . . 32 11,906,311.67 3.13
400,000.01 - 450,000.00 . . . . . . . . . . . . . 13 5,545,172.33 1.46
450,000.01 - 500,000.00 . . . . . . . . . . . . . 10 4,792,713.19 1.26
500.000.01 - 550.000.00 . . . . . . . . . . . . . 4 2,060,567.28 0.54
550,000.01 - 600,000.00 . . . . . . . . . . . . . 3 1,699,734.85 0.45
600,000.01 - 650,000.00 . . . . . . . . . . . . . 2 1,239,853.74 0.33
650,000.01 - 700,000.00 . . . . . . . . . . . . . 1 698,577.32 0.18
700,000.01 - 750,000.00 . . . . . . . . . . . . . 1 741,935.15 0.19
800,000.01 - 850,000.00 . . . . . . . . . . . . . 1 822,707.99 0.22
----- --------------- -------
Total.......................................... 3,766 $380,853,964.19 100.00%
===== =============== ======
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE RATES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------- -------- ---------------- ----------------
<S> <C> <C> <C>
6.500 - 6.999........................... 1 $ 123,058.95 0.03%
7.000 - 7.499........................... 4 486,008.05 0.13
7.500 - 7.999........................... 14 2,266,497.86 0.60
8.000 - 8.499........................... 50 7,654,100.59 2.01
8.500 - 8.999........................... 327 43,669,218.12 11.47
9.000 - 9.499........................... 305 39,500,526.22 10.37
9.500 - 9.999........................... 857 95,606,694.30 25.10
10.000 - 10.499........................... 467 50,721,379.28 13.32
10.500 - 10.999........................... 605 57,832,082.33 15.18
11.000 - 11.499........................... 277 24,808,099.96 6.51
11.500 - 11.999........................... 367 26,636,160.59 6.99
12.000 - 12.499........................... 209 15,896,148.83 4.17
12.500 - 12.999........................... 191 11,727,635.93 3.08
13.000 - 13.499........................... 39 1,773,321.53 0.47
13.500 - 13.999........................... 30 1,436,140.37 0.38
14.000 - 14.499........................... 11 361,138.55 0.09
14.500 - 14.999........................... 7 131,574.67 0.03
15.000 - 15.499........................... 2 68,694.90 0.02
15.500 - 15.999........................... 2 136,122.47 0.04
16.000 - 16.499........................... 1 19,360.69 0.01
----- --------------- ------
Total................................ 3,766 $380,853,964.19 100.00%
===== =============== ======
</TABLE>
S-30
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM MORTGAGE RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MAXIMUM NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------- -------- ------------------ -----------------
<S> <C> <C> <C>
12.500 - 12.999......................................... 20 $ 3,217,306.10 1.12%
13.000 - 13.499......................................... 18 2,228,780.83 0.78
13.500 - 13.999......................................... 106 12,589,038.17 4.39
14.000 - 14.499......................................... 79 9,374,244.02 3.27
14.500 - 14.999......................................... 281 35,179,833.11 12.28
15.000 - 15.499......................................... 241 32,020,076.96 11.17
15.500 - 15.999......................................... 607 71,859,666.91 25.08
16.000 - 16.499......................................... 379 42,740,744.84 14.92
16.500 - 16.999......................................... 428 43,565,608.56 15.20
17.000 - 17.499......................................... 127 14,036,509.61 4.90
17.500 - 17.999......................................... 149 10,095,807.01 3.52
18.000 - 18.499......................................... 53 3,976,221.76 1.39
18.500 - 18.999......................................... 54 2,819,215.79 0.98
19.000 - 19.499......................................... 18 972,266.57 0.34
19.500 - 19.999......................................... 22 1,027,476.88 0.36
20.000 - 20.499......................................... 12 471,234.94 0.16
20.500 - 20.999......................................... 8 333,274.95 0.12
21.000 - 21.499......................................... 1 17,896.61 0.01
21.500 - 21.999......................................... 1 16,467.13 0.01
22.000 - 22.499......................................... 1 19,360.69 0.01
----- -------------- ------
Total.............................................. 2,605 $286,561,031.44 100.00%
===== ============== ======
</TABLE>
<TABLE>
<CAPTION>
MINIMUM MORTGAGE RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MINIMUM NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------- -------- ------------------ -----------------
<S> <C> <C> <C>
5.000 - 5.499......................................... 1 $ 278,585.01 0.10%
6.000 - 6.499......................................... 1 195,812.99 0.07
6.500 - 6.999......................................... 25 3,751,020.76 1.31
7.000 - 7.499......................................... 23 2,772,594.69 0.97
7.500 - 7.999......................................... 120 14,431,363.21 5.04
8.000 - 8.499......................................... 90 11,180,313.08 3.90
8.500 - 8.999......................................... 312 38,505,918.46 13.44
9.000 - 9.499......................................... 267 34,278,062.10 11.96
9.500 - 9.999......................................... 668 78,628,614.94 27.44
10.000 - 10.499......................................... 378 41,971,224.55 14.65
10.500 - 10.999......................................... 363 34,769,361.36 12.13
11.000 - 11.499......................................... 106 11,547,059.77 4.03
11.500 - 11.999......................................... 115 7,321,607.32 2.55
12.000 - 12.499......................................... 41 2,437,369.54 0.85
12.500 - 12.999......................................... 54 2,838,786.66 0.99
13.000 - 13.499......................................... 14 717,461.39 0.25
13.500 - 13.999......................................... 14 597,444.05 0.21
14.000 - 14.499......................................... 8 250,960.93 0.09
14.500 - 14.999......................................... 4 68,109.94 0.02
16.000 - 16.499......................................... 1 19,360.69 0.01
----- -------------- ------
Total.............................................. 2,605 $286,561,031.44 100.00%
===== ============== =======
</TABLE>
S-31
<PAGE>
<TABLE>
<CAPTION>
GROSS MARGINS OF THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------- -------- ---------------- ----------------
<S> <C> <C> <C>
3.000 - 3.249........................................... 2 $ 385,569.07 0.13%
3.250 - 3.499........................................... 1 144,168.88 0.05
3.500 - 3.749........................................... 54 5,457,191.03 1.90
3.750 - 3.999........................................... 103 10,087,801.14 3.52
4.000 - 4.249........................................... 101 9,527,854.79 3.32
4.250 - 4.499........................................... 86 8,449,863.84 2.95
4.500 - 4.749........................................... 69 7,529,625.90 2.63
4.750 - 4.999........................................... 118 14,660,795.82 5.12
5.000 - 5.249........................................... 149 16,650,514.83 5.81
5.250 - 5.499........................................... 206 24,820,833.31 8.66
5.500 - 5.749........................................... 191 22,415,907.83 7.82
5.750 - 5.999........................................... 308 41,531,110.33 14.49
6.000 - 6.249........................................... 372 39,774,196.64 13.88
6.250 - 6.499........................................... 217 23,452,926.43 8.18
6.500 - 6.749........................................... 216 23,821,878.94 8.31
6.750 - 6.999........................................... 205 21,915,714.50 7.65
7.000 - 7.249........................................... 106 7,440,926.70 2.60
7.250 - 7.499........................................... 69 5,775,215.61 2.02
7.500 - 7.749........................................... 12 993,396.97 0.35
7.750 - 7.999........................................... 10 837,305.51 0.29
8.000 - 8.249........................................... 5 462,994.64 0.16
8.250 - 8.499........................................... 2 141,752.44 0.05
8.500 - 8.749........................................... 1 95,935.64 0.03
8.750 - 8.999........................................... 2 187,550.65 0.07
----- -------------- ------
Total.............................................. 2,605 $286,561,031.44 100.00%
===== ============== ======
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN-TO-VALUE RATIO (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------------- -------- ---------------- ----------------
<S> <C> <C> <C>
Less than or equal to 25.00............................. 23 $ 908,098.43 0.24%
25.01 - 30.00........................................... 12 547,035.93 0.14
30.01 - 35.00........................................... 29 1,608,033.68 0.42
35.01 - 40.00........................................... 31 1,569,555.19 0.41
40.01 - 45.00........................................... 53 2,888,922.90 0.76
45.01 - 50.00........................................... 60 3,922,222.96 1.03
50.01 - 55.00........................................... 89 6,060,756.14 1.59
55.01 - 60.00........................................... 149 9,995,662.87 2.62
60.01 - 65.00........................................... 236 19,159,810.72 5.03
65.01 - 70.00........................................... 355 28,749,837.34 7.55
70.01 - 75.00........................................... 706 70,137,172.43 18.42
75.01 - 80.00........................................... 1,123 122,892,822.20 32.27
80.01 - 85.00........................................... 553 66,548,826.11 17.47
85.01 - 90.00........................................... 343 45,352,915.27 11.91
90.01 - 95.00........................................... 4 512,292.02 0.13
----- ------------- ------
Total.............................................. 3,766 $380,853,964.19 100.00%
===== ============== ======
</TABLE>
S-32
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------- -------- ---------------- ----------------
<S> <C> <C> <C>
Alabama................................................. 32 $ 1,808,285.88 0.47%
Arizona................................................. 126 9,784,031.79 2.57
Arkansas................................................ 1 101,470.78 0.03
California.............................................. 790 100,447,505.15 26.37
Colorado................................................ 328 40,493,997.02 10.63
Connecticut............................................. 94 12,179,239.66 3.20
Delaware................................................ 6 659,439.76 0.17
District of Columbia.................................... 13 2,254,469.73 0.59
Florida................................................. 184 13,941,256.02 3.66
Georgia................................................. 170 17,271,638.03 4.53
Hawaii.................................................. 36 6,294,822.11 1.65
Idaho................................................... 35 2,633,519.92 0.69
Illinois................................................ 143 14,807,373.24 3.89
Indiana................................................. 42 2,540,422.08 0.67
Iowa.................................................... 19 1,043,451.94 0.27
Kansas.................................................. 21 1,172,616.47 0.31
Kentucky................................................ 5 240,448.25 0.06
Louisiana............................................... 57 2,795,226.67 0.73
Maine................................................... 10 642,816.55 0.17
Maryland................................................ 45 6,829,710.69 1.79
Massachusetts........................................... 111 13,990,040.82 3.67
Michigan................................................ 139 9,482,475.18 2.49
Minnesota............................................... 78 6,863,744.02 1.80
Mississippi............................................. 3 99,939.58 0.03
Missouri................................................ 93 4,916,288.40 1.29
Montana................................................. 6 409,047.56 0.11
Nebraska................................................ 6 392,240.91 0.10
Nevada.................................................. 27 2,722,875.08 0.71
New Hampshire........................................... 12 870,815.86 0.23
New Jersey.............................................. 71 9,852,925.01 2.59
New Mexico.............................................. 37 3,651,164.92 0.96
New York................................................ 95 9,784,213.18 2.57
North Carolina.......................................... 36 2,799,676.02 0.74
Ohio.................................................... 74 4,544,203.61 1.19
Oklahoma................................................ 35 1,802,090.53 0.47
Oregon.................................................. 85 8,245,557.39 2.17
Pennsylvania............................................ 117 6,891,836.38 1.81
Rhode Island............................................ 30 2,836,938.76 0.74
South Carolina.......................................... 44 3,350,069.71 0.88
South Dakota............................................ 2 98,186.90 0.03
Tennessee............................................... 65 5,563,875.20 1.46
Texas................................................... 161 11,827,407.17 3.11
Utah.................................................... 124 15,317,277.73 4.02
Virginia................................................ 40 5,272,145.17 1.38
Washington.............................................. 104 10,427,656.88 2.74
West Virginia........................................... 2 75,410.69 0.02
Wisconsin............................................... 1 53,523.20 0.01
Wyoming................................................. 11 770,596.59 0.20
----- -------------- ------
Total.............................................. 3,766 $380,853,964.19 100.00%
===== ============== ======
</TABLE>
S-33
<PAGE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------- -------- ---------------- ----------------
<S> <C> <C> <C>
Single Family........................................... 3,195 $324,772,412.44 85.27%
Two- to Four-Family..................................... 201 19,494,901.60 5.12
Condominium............................................. 173 15,601,790.43 4.10
Town House.............................................. 4 244,645.09 0.06
Planned Unit Development................................ 128 16,751,775.65 4.40
Manufactured Housing.................................... 65 3,988,438.98 1.05
----- ------------- ------
Total.............................................. 3,766 $380,853,964.19 100.00%
===== ============== ======
</TABLE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY OCCUPANCY STATUS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------- -------- ---------------- ----------------
<S> <C> <C> <C>
Owner-Occupied.......................................... 3,365 $355,547,607.14 93.36%
Non Owner Occupied...................................... 401 25,306,357.05 6.64
----- -------------- ------
Total.............................................. 3,766 $380,853,964.19 100.00%
===== ============== ======
</TABLE>
The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
<TABLE>
<CAPTION>
LOAN PURPOSE OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------ -------- ---------------- ----------------
<S> <C> <C> <C>
Purchase................................................ 1,003 $113,888,800.59 29.90%
Equity-out Refinance.................................... 1,756 162,251,084.67 42.60
Rate-term Refinance..................................... 1,007 104,714,078.93 27.49
----- -------------- -------
Total.............................................. 3,766 $380,853,964.19 100.00%
===== ============== ======
</TABLE>
S-34
<PAGE>
<TABLE>
<CAPTION>
LOAN PROGRAMS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PROGRAM OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------ -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Full Documentation Program(1)........................... 2,649 $265,388,021.27 69.68%
Limited Documentation Program(2)........................ 324 36,539,432.51 9.59
Stated Income Documentation Program(3).................. 793 78,926,510.41 20.72
------ --------------- ------
Total.............................................. 3,766 $380,853,964.19 100.00%
===== ============== ======
</TABLE>
(1) With respect to the Fixed Rate Ameriquest Mortgage Loans and the Long Beach
Mortgage Loans, "Full Documentation" under the underwriting guidelines
relating thereto. With respect to the Adjustable Rate Ameriquest Mortgage
Loans, "Full Documentation", "QuickCredit" or "INSTA Credit" under the
underwriting guidelines relating thereto. With respect to the National
Mortgage Loans, "Full App" under the underwriting guidelines relating
thereto.
(2) With respect to the Fixed Rate Ameriquest Mortgage Loans and the Long Beach
Mortgage Loans, "Fast Trac" under the underwriting guidelines relating
thereto. With respect to the Adjustable Rate Ameriquest Mortgage Loans,
"Fast Track", "QuickCredit Fast Trac" or "INSTA Credit Fast Trac" under the
underwriting guidelines relating thereto. With respect to the National
Mortgage Loans, "Fast App" under the underwriting guidelines relating
thereto.
(3) With respect to the Fixed Rate Ameriquest Mortgage Loans and the Long Beach
Mortgage Loans, "Stated Income" under the underwriting guidelines relating
thereto. With respect to the Adjustable Rate Ameriquest Mortgage Loans,
"Stated Income" or "INSTA Credit" under the underwriting guidelines
relating thereto. With respect to the National Mortgage Loans, "Stated
Income Applications" under the underwriting guidelines relating thereto.
<TABLE>
<CAPTION>
RISK CATEGORIES OF THE FIXED RATE AMERIQUEST MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------- -------- ---------------- ----------------
<S> <C> <C> <C>
AA...................................................... 11 1,317,108.07 20.03%
A....................................................... 21 $2,652,519.83 40.34
B....................................................... 12 1,237,150.84 18.81
C....................................................... 11 1,102,830.41 16.77
D....................................................... 5 265,823.57 4.04
-- ------------- ------
Total.............................................. 60 $6,575,432.72 100.00%
== ============ =======
</TABLE>
<TABLE>
<CAPTION>
RISK CATEGORIES OF THE ADJUSTABLE RATE AMERIQUEST MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------- -------- ---------------- ----------------
<S> <C> <C> <C>
A-...................................................... 714 $ 69,762,245.47 56.03%
B+...................................................... 176 16,737,798.93 13.44
B....................................................... 148 12,158,453.41 9.77
B-...................................................... 142 11,114,874.23 8.93
C....................................................... 151 11,243,711.28 9.03
C-...................................................... 56 3,483,588.58 2.80
----- -------------- --------
Total.............................................. 1,387 $124,500,671.90 100.00%
===== ============== =======
</TABLE>
S-35
<PAGE>
<TABLE>
<CAPTION>
RISK CATEGORIES OF THE LONG BEACH MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------- -------- ---------------- ----------------
<S> <C> <C> <C>
A-...................................................... 608 $56,341,196.36 64.23%
B....................................................... 134 9,773,486.86 11.14
B-...................................................... 147 11,051,526.60 12.60
C....................................................... 153 7,370,483.92 8.40
C-...................................................... 1 50,208.82 0.06
D....................................................... 58 3,130,597.47 3.57
----- ------------- ------
Total.............................................. 1,101 $87,717,500.03 100.00%
===== ============= ======
</TABLE>
<TABLE>
<CAPTION>
RISK CATEGORIES OF THE NATIONAL MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------- -------- ---------------- ----------------
<S> <C> <C> <C>
A....................................................... 584 $ 83,142,748.47 51.30%
A-...................................................... 318 42,323,944.92 26.12%
B....................................................... 203 25,014,395.15 15.44%
C....................................................... 89 9,741,450.99 6.01%
D....................................................... 24 1,837,820.01 1.13%
----- ------------- ------
Total.............................................. 1,218 $162,060,359.54 100.00%
===== ============== =======
</TABLE>
S-36
<PAGE>
<TABLE>
<CAPTION>
NEXT ADJUSTMENT DATES FOR THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MONTH OF NEXT ADJUSTMENT DATE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------------------- -------- ---------------- ----------------
<S> <C> <C> <C>
September 1998.......................................... 254 $ 22,787,507.94 7.95%
October 1998............................................ 390 35,655,376.44 12.44
November 1998........................................... 320 28,432,289.35 9.92
December 1998........................................... 328 30,953,211.03 10.80
January 1999............................................ 136 15,697,485.62 5.48
February 1999........................................... 73 11,139,776.35 3.89
March 1999.............................................. 28 5,454,654.32 1.90
April 1999.............................................. 2 506,750.00 0.18
September 1999.......................................... 1 81,002.62 0.03
November 1999........................................... 1 87,568.56 0.03
January 2000............................................ 1 73,514.33 0.03
February 2000........................................... 1 141,658.73 0.05
March 2000.............................................. 4 607,289.53 0.21
April 2000.............................................. 23 3,160,058.64 1.10
May 2000................................................ 48 6,932,995.28 2.42
June 2000............................................... 177 21,177,788.91 7.39
July 2000............................................... 242 29,646,127.04 10.35
August 2000............................................. 224 29,324,823.33 10.23
September 2000.......................................... 104 12,793,401.00 4.46
October 2000............................................ 16 1,637,895.00 0.57
February 2001........................................... 1 76,848.70 0.03
March 2001.............................................. 1 186,122.30 0.06
April 2001.............................................. 3 136,494.08 0.05
May 2001................................................ 7 895,171.50 0.31
June 2001............................................... 41 5,701,786.53 1.99
July 2001............................................... 52 6,677,601.45 2.33
August 2001............................................. 70 9,398,407.36 3.28
September 2001.......................................... 45 5,944,625.50 2.07
October 2001............................................ 12 1,252,800.00 0.44
----- -------------- ------
Total................................................... 2,605 $286,561,031.44 100.00%
===== ============== ======
</TABLE>
THE INDEX
As of any Adjustment Date, the Index applicable to the determination of the
Mortgage Rate on each Mortgage Loan will be the average of the interbank offered
rates for six-month United States dollar deposits in the London market as
published in THE WALL STREET JOURNAL and as of a date as specified in the
related Mortgage Note. In the event that the Index becomes unavailable or
otherwise unpublished, each Servicer will select a comparable alternative index
over which it has no direct control and which is readily verifiable.
S-37
<PAGE>
The table below sets forth historical average rates of six-month LIBOR for
the months indicated as made available from FNMA, which rates may differ from
the rates of the Index, which is six-month LIBOR as published in THE WALL STREET
JOURNAL as described above. The table does not purport to be representative of
the subsequent rates of the Index which will be used to determine the Mortgage
Rate on each Mortgage Loan.
<TABLE>
<CAPTION>
YEAR
----
MONTH 1998 1997 1996 1995 1994 1993 1992
- ----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
January........................................... 5.75% 5.71% 5.34% 6.69% 3.39% 3.44% 4.25%
February.......................................... 5.78 5.68 5.29 6.44 4.00 3.33 4.38
March............................................. 5.80 5.96 5.52 6.44 4.25 3.38 4.55
April............................................. 5.87 6.08 5.42 6.31 4.63 3.31 4.27
May............................................... 5.81 6.01 5.64 6.06 5.00 3.44 4.25
June.............................................. 5.87 5.94 5.84 5.88 5.25 3.56 4.13
July.............................................. 5.82 5.83 5.92 5.88 5.33 3.56 3.63
August............................................ 5.86 5.74 5.94 5.33 3.44 3.63
September......................................... 5.85 5.75 5.99 5.69 3.38 3.31
October........................................... 5.80 5.58 5.95 6.00 3.50 3.64
November.......................................... 6.04 5.55 5.74 6.44 3.52 3.89
December.......................................... 6.01 5.62 5.56 7.00 3.50 3.64
</TABLE>
UNDERWRITING STANDARDS; REPRESENTATIONS
The Mortgage Loans will be acquired by the Depositor on the Closing Date
from the Wilshire SPE, who will have acquired the Mortgage Loans on the Closing
Date from the Seller. The Seller in turn will have acquired the Mortgage Loans
on the Closing Date from Salomon Brothers Realty Corp. Salomon Brothers Realty
Corp., an affiliate of the Depositor and the Underwriter, will have acquired the
Mortgage Loans directly or indirectly from the Originators. Investors should
note that, in the case of the Adjustable Rate Ameriquest Mortgage Loans, Salomon
Brothers Realty Corp. will have acquired such Mortgage Loans on the Closing Date
in connection with the termination on the Closing Date of the trust funds
underlying two series of mortgage pass-through certificates previously issued by
the Depositor, which trust funds hold the Adjustable Rate Ameriquest Mortgage
Loans as of the date of this Prospectus Supplement. Such previously issued
mortgage pass-through certificates were entitled (i) Salomon Brothers Mortgage
Securities VII, Inc., Asset-Backed Floating Rate Certificates, Series 1996-LB3,
and (ii) Salomon Brothers Mortgage Securities VII, Inc., Asset-Backed Floating
Rate Certificates, Series 1997-LB1. Salomon Brothers Realty Corp. will have
acquired the remainder of the Mortgage Loans in whole loan purchases directly
from Ameriquest, Long Beach and National Mortgage.
The information set forth below with regard to each Originator's
underwriting standards has been provided to the Depositor or compiled from
information provided to the Depositor by such Originator. With respect to the
information regarding each Originator's underwriting standards, none of the
Issuer, the other Originators, the Depositor, the Master Servicer, the Seller,
the Wilshire SPE, the Owner Trustee, the Indenture Trustee or any of their
respective affiliates has made or will make any representation as to the
accuracy or completeness of such information.
AMERIQUEST'S UNDERWRITING PROGRAMS
FIXED RATE AMERIQUEST MORTGAGE LOANS
Approximately 1.73% of the Mortgage Loans, by aggregate principal balance
as of the Cut-off Date (the "Fixed Rate Ameriquest Mortgage Loans"), were
originated generally in accordance with the following guidelines established by
Ameriquest Mortgage Company ("Ameriquest") and currently in effect with respect
to the Ameriquest residential loan programs described below.
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The Fixed Rate Ameriquest Mortgage Loans were originated generally in
accordance with guidelines (the "Ameriquest Underwriting Guidelines")
established by Ameriquest under the "Full Documentation", "Fast Trac
Documentation" or "Stated Income" residential loan programs (the
"Ameriquest Underwriting Programs"). The Ameriquest Underwriting Guidelines
are primarily intended to evaluate the value and adequacy of the mortgaged
property as collateral and are also intended to consider the applicant's
credit standing and repayment ability. On a case-by-case basis, Ameriquest
may determine that, based upon compensating factors, a prospective
applicant not strictly qualifying under the underwriting risk category
guidelines described below warrants an underwriting exception. Compensating
factors may include, but are not limited to, low loan-to-value ratio, low
debt-to-income ratio, good credit history, stable employment and time in
residence at the applicant's current address. It is expected that a
substantial number of the Fixed Rate Ameriquest Mortgage Loans to be
included in the Mortgage Pool will represent such underwriting exceptions.
All of mortgage loans originated in the Ameriquest Underwriting
Programs are based on loan application packages submitted through
Ameriquest's branches. Each prospective applicant completes an application
which includes information with respect to the applicant's liabilities,
income, credit history and employment history, as well as certain other
personal information. Ameriquest obtains a credit report on each applicant
from a credit reporting company. The report typically contains information
relating to such matters as credit history with local and national
merchants and lenders, installment debt payment and any record of default,
bankruptcy, repossession, suits or judgments. The applicant must generally
provide to Ameriquest a letter explaining all late payments on mortgage
debt and, generally, consumer (I.E. non-mortgage) debt.
Under the Ameriquest Underwriting Programs, during the underwriting
process, Ameriquest reviews and verifies the loan applicant's sources of
income (except under the Stated Income and Fast Trac Documentation
residential loan programs) and calculates the amount of income from all
such sources indicated on the loan application, reviews the credit history
of the applicant and calculates the debt-to-income ratio to determine the
applicant's ability to repay the loan, and reviews the mortgaged property
for compliance with the Ameriquest Underwriting Guidelines. The Ameriquest
Underwriting Guidelines are applied in accordance with a procedure which
complies with applicable federal and state laws and regulations and
requires (i) an appraisal of the mortgaged property which conforms to FHLMC
and FNMA standards and (ii) a review of such appraisal, which review may be
conducted by a representative of Ameriquest or a fee appraiser and,
depending upon the original principal balance and loan-to-value ratio of
the mortgaged property, may include a desk review of the original appraisal
or a drive-by review appraisal of the mortgaged property. The Ameriquest
Underwriting Guidelines permit loans with loan-to-value ratios at
origination of up to 85%. The maximum allowable loan-to-value ratio varies
based upon the income documentation, property type, creditworthiness, debt
service-to-income ratio of the applicant and the overall risks associated
with the loan decision. Under the residential loan programs, the maximum
combined loan-to-value ratio, including any second deeds of trust
subordinate to Ameriquest's first deed of trust, is generally 90%.
AMERIQUEST UNDERWRITING PROGRAMS (INCOME DOCUMENTATION TYPES)
FULL DOCUMENTATION. The Full Documentation residential loan program is
generally based upon current year to date income documentation as well as
previous years' income documentation (I.E. tax returns and/or W-2 forms).
The documentation required is specific to the applicant's sources of
income. The applicant's employment and/or business licenses are generally
verified.
FAST TRAC DOCUMENTATION. The Fast Trac Documentation residential loan
program is generally based on bank statements from the past twelve months
supported by additional documentation provided by the applicant or current
year to date documentation. The applicant's employment
and/or business licenses are generally verified.
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STATED INCOME. The Stated Income residential loan program requires the
applicant's employment and income sources to be stated on the application.
The applicant's income as stated must be reasonable for the related
occupation in the loan underwriter's discretion. However, the applicant's
income as stated on the application is not independently verified. Verbal
verification of employment is generally obtained for salaried applicants.
PROPERTY REQUIREMENTS
Properties that are to secure mortgage loans are appraised by
qualified independent appraisers who are approved by Ameriquest's chief
appraiser. In most cases, below-average properties (including properties
requiring major deferred maintenance) are not acceptable as security for
mortgage loans in the Ameriquest Underwriting Programs. Each appraisal
includes a market data analysis based on recent sales of comparable homes
in the area and, where deemed appropriate, replacement cost analysis based
on the current cost of constructing a similar home. Every independent
appraisal is reviewed by a representative of Ameriquest or a fee appraiser
before the loan is funded.
Ameriquest requires that all mortgage loans have title insurance.
Ameriquest also requires that fire and extended coverage casualty insurance
be maintained on the secured property in an amount equal to the lesser of
the principal balance of the mortgage loan or the replacement cost of the
property, whichever is less.
AMERIQUEST UNDERWRITING GUIDELINES
The Ameriquest Underwriting Guidelines are less stringent than the
standards generally acceptable to FNMA and FHLMC with regard to the
applicant's credit standing and repayment ability. Applicants who qualify
under the Ameriquest Underwriting Programs generally have payment histories
and debt ratios which would not satisfy FNMA and FHLMC underwriting
guidelines and may have a record of major derogatory credit items such as
outstanding judgments or prior bankruptcies. The Ameriquest Underwriting
Guidelines establish the maximum permitted loan-to-value ratio for each
loan type based upon these and other risk factors.
RISK CATEGORIES
Under the Ameriquest Underwriting Programs, various risk categories
are used to grade the likelihood that the mortgagor will satisfy the
repayment conditions of the mortgage loan. These risk categories establish
the maximum permitted loan-to-value ratio and loan amount, given the
occupancy status of the mortgaged property and the mortgagor's credit
history and debt ratio. In general, higher credit risk mortgage loans are
graded in categories which permit higher debt ratios and more (or more
recent) major derogatory credit items such as outstanding judgments or
prior bankruptcies; however, the Ameriquest Underwriting Programs establish
lower maximum loan-to-value ratios and lower maximum loan amounts for loans
graded in such categories.
The Ameriquest Underwriting Guidelines have the following categories
and criteria for grading the potential likelihood that an applicant will
satisfy the repayment obligations of a mortgage loan:
CREDIT GRADE: "AA". Under the "AA" credit grade, the applicant
generally must have a minimum FICO score of 620 and no late payments within
the last 12 months is permitted on an existing mortgage loan. No
bankruptcy, discharge, or notice of default filings may have occurred
during the preceding two years. Generally, the debt service-to-income ratio
must be equal to or less than 42%. A maximum loan-to-value ratio of 85% is
permitted for purchase money and/or refinance transactions.
CREDIT GRADE: "A". Under the "A" credit grade, the applicant generally
must have a minimum FICO score of 550 and a maximum of three 30-day late
payments within the last 12 months is permitted on an existing mortgage
loan. No bankruptcy, discharge, or notice of default filings may have
occurred during the preceding two years. Generally, the debt
service-to-income ratio must be
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equal to or less than 50%. A maximum loan-to-value ratio of 80% is
permitted for purchase money and/or refinance transactions.
CREDIT GRADE: "B". Under the "B" credit grade, the applicant generally
must have a minimum FICO score of 520 and a maximum of one 60-day late
payment within the last 12 months is permitted on an existing mortgage
loan. No bankruptcy, discharge, or notice of default filings may have
occurred during the preceding year. Generally, the debt service-to-income
ratio must be equal to or less than 55%. A maximum loan-to-value ratio of
75% is permitted for purchase money and/or refinance transactions.
CREDIT GRADE: "C". Under the "C" credit grade, a maximum of one 90-day
late payment within the last 12 months is permitted on an existing mortgage
loan. The applicant must not currently be in bankruptcy or foreclosure.
Generally, the debt service-to-income ratio must be equal to or less than
55%. A maximum loan-to-value ratio of 70% is permitted for purchase money
and/or refinance transactions.
CREDIT GRADE: "D". Under the "D" credit grade, the applicant's
derogatory consumer and mortgage credit history may be waived if a
reasonable explanation for the problem is provided. The problem that caused
the derogatory items to occur must no longer exist or must be resolved
through the loan transaction. Generally, the debt-to-service income ratio
must be equal to or less than 55% to 60%. A maximum loan-to-value ratio of
60% is permitted for purchase money and/or refinance transactions.
ADJUSTABLE RATE AMERIQUEST MORTGAGE LOANS
Approximately 32.69% of the Mortgage Loans, by aggregate principal balance
as of the Cut-off Date (the "Adjustable Rate Ameriquest Mortgage Loans"), were
originated generally in accordance with the following guidelines established by
Ameriquest and in effect with respect to the Ameriquest residential loan
programs described below at the time of the origination of the Adjustable Rate
Ameriquest Mortgage Loans. As of the date of this Prospectus Supplement, the
Adjustable Rate Ameriquest Mortgage Loans are contained in the trust funds
underlying two series of mortgage pass-through certificates previously issued by
the Depositor. Such previously issued mortgage pass-through certificates were
(i) Salomon Brothers Mortgage Securities VII, Inc., Asset-Backed Floating Rate
Certificates, Series 1996-LB3, which were issued on November 25, 1996, and (ii)
Salomon Brothers Mortgage Securities VII, Inc., Asset-Backed Floating Rate
Certificates, Series 1997-LB1, which were issued on January 27, 1997. On the
Closing Date for the Notes, each such prior securitization will be terminated
and the Adjustable Rate Ameriquest Mortgage Loans will be placed in the Trust
Estate as described herein.
At the time of the origination of the Adjustable Rate Ameriquest Mortgage
Loans, Ameriquest was known as Long Beach Mortgage Company. See "The Servicing
Agreements--Originators and Servicers--Ameriquest Mortgage Company" herein. In
the following discussion of the underwriting guidelines that were applicable to
the origination of the Adjustable Rate Ameriquest Mortgage Loans, Ameriquest is
referred to by its former name, "Long Beach". Although the following discussion
is written in the present tense, the underwriting guidelines described are not
currently applicable to residential mortgage loan originations by Ameriquest.
The guidelines described below relate only to the Adjustable Rate Ameriquest
Mortgage Loans.
The Adjustable Rate Ameriquest Mortgage Loans were originated
generally in accordance with guidelines (the "Long Beach Guidelines")
established by Long Beach's underwriting department (or that of Long
Beach's predecessor in interest, Long Beach Bank, F.S.B.) under Long
Beach's "Full Documentation", "Fast Trac", "QuickCredit", "QuickCredit Fast
Trac", "Stated Income", "INSTA Credit" or "INSTA Credit Fast Trac"
residential loan programs (the "Long Beach Programs"). The Long Beach
Guidelines are primarily intended to evaluate the value and adequacy of the
mortgaged property as collateral and are also intended to consider the
mortgagor's credit standing and repayment ability. On a case-by-case basis
and only with the approval of two or more senior
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lending officers, Long Beach may determine that, based upon compensating
factors, a prospective mortgagor not strictly qualifying under the
underwriting risk category guidelines described below warrants an
underwriting exception. Compensating factors may include, but are not
limited to, low loan-to-value ratio, low debt-to-income ratio, good credit
history, stable employment and time in residence at the applicant's current
address. It is expected that a substantial number of the Adjustable Rate
Ameriquest Mortgage Loans to be included in the Mortgage Pool will
represent such underwriting exceptions.
Under the Long Beach Programs, the underwriting department of Long
Beach or of the applicable originator for Long Beach reviews and verifies
the loan applicant's sources of income (except under the Stated Income and
Fast Trac programs), calculates the amount of income from all such sources
indicated on the loan application, reviews the credit history of the
applicant and calculates the debt-to-income ratio to determine the
applicant's ability to repay the loan, and reviews the mortgaged property
for compliance with the Long Beach Guidelines. The Long Beach Guidelines
are applied in accordance with a procedure which complies with applicable
federal and state laws and regulations and requires (i) an appraisal of the
mortgaged property which conforms to FHLMC and FNMA standards and (ii) a
review of such appraisal, which review may be conducted by a Long Beach
staff appraiser or representative and, depending upon the original
principal balance and loan-to-value ratio of the mortgaged property, may
include a desk review of the original appraisal or a drive-by review
appraisal of the mortgaged property. The Long Beach Guidelines permit
single-family loans with loan-to-value ratios at origination of up to 90%
(generally 75%, 55% and 50% under the Stated Income, INSTA Credit and INSTA
Credit Fast Trac programs, respectively), depending on the type and use of
the property, the creditworthiness of the mortgagor and the debt-to-income
ratio. Under the Full Documentation program, the maximum combined
loan-to-value ratio for purchase money mortgage loans, including any second
deeds of trust subordinate to Long Beach's first deed of trust, is 90%.
All of the mortgage loans originated in the Long Beach Programs are
based on loan application packages submitted through mortgage brokerage
companies or at Long Beach's retail branches or are purchased from approved
originators pursuant to the Long Beach Guidelines described herein. Loan
application packages submitted through mortgage brokerage companies,
containing in each case relevant credit, property and underwriting
information on the loan request, are compiled by the applicable mortgage
brokerage company and submitted to Long Beach for approval and funding. The
mortgage brokerage companies receive a portion of the loan origination fee
charged to the mortgagor at the time the loan is made. No single mortgage
brokerage company accounts for more than 5%, measured by outstanding
principal balance, of the single-family mortgage loans originated by Long
Beach.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit
history and employment history, as well as certain other personal
information. Long Beach obtains a credit report on each applicant from a
credit reporting company. The applicant must generally provide to Long
Beach or the originator a letter explaining all late payments on mortgage
debt and, generally, consumer (I.E., non-mortgage) debt. The report
typically contains information relating to such matters as credit history
with local and national merchants and lenders, installment debt payments
and any record of defaults, bankruptcy, repossession, suits or judgments.
Under the Full Documentation program, self-employed individuals are
generally required to submit their two most recent federal income tax
returns. As part of its quality control system, Long Beach reverifies
information with respect to the foregoing matters that has been provided by
the mortgage brokerage company prior to funding a loan and periodically
audits files based on a random sample of closed loans. In the course of its
pre-funding audit, Long Beach reverifies the income of each mortgagor or,
for a self-employed individual, reviews the income documentation obtained
pursuant to the Long Beach Guidelines (except under
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the Stated Income program). Long Beach generally verifies the source of
funds for the down payment.
Mortgaged properties that are to secure mortgage loans underwritten
under the Long Beach Programs are appraised by qualified independent
appraisers who are approved by Long Beach's internal chief appraiser. In
most cases, below-average properties (including properties requiring major
deferred maintenance) are not acceptable as security for Long Beach
mortgage loans in the Long Beach Programs. Each appraisal includes a market
data analysis based on recent sales of comparable homes in the area and,
where deemed appropriate, replacement cost analysis based on the current
cost of constructing a similar home. Every independent appraisal is
reviewed by a Long Beach staff appraiser or representative before the loan
is funded.
The Long Beach Guidelines are less stringent than the standards
generally acceptable to FNMA and FHLMC with regard to the mortgagor's
credit standing and repayment ability. Mortgagors who qualify under the
Long Beach Programs generally have payment histories and debt ratios which
would not satisfy FNMA and FHLMC underwriting guidelines and may have a
record of major derogatory credit items such as outstanding judgments or
prior bankruptcies. The Long Beach Guidelines establish the maximum
permitted loan-to-value ratio for each loan type based upon these and other
risk factors.
The QuickCredit and QuickCredit Fast Trac residential loan programs
are alternative risk grading programs whereby the various risk categories
are assigned in a manner similar to that used for the Full Documentation
and Fast Trac loan programs except that consumer credit history is not used
to determine the appropriate risk grading. As in the Full Documentation and
Fast Trac residential loan programs, the QuickCredit and QuickCredit Fast
Trac residential loan programs use consumer credit to determine
debt-to-income ratios. Maximum loan-to-value ratios and maximum loan
amounts are generally lower under the QuickCredit and QuickCredit Fast Trac
residential loan programs than those permitted under the Full Documentation
or Fast Trac residential loan programs, respectively. In general, the
QuickCredit residential loan program is similar to the Full Documentation
residential loan program except that the QuickCredit residential loan
program does not consider consumer credit history, requires lower maximum
loan-to-value ratios and requires lower maximum loan amounts. In most other
respects, the requirements of the QuickCredit and the QuickCredit Fast Trac
residential loan programs correspond to the requirements of the Full
Documentation and Fast Trac residential loan programs, respectively.
Under the Stated Income residential loan program, the mortgagor's
employment and income sources must be stated on the mortgagor's
application. The mortgagor's income as stated must be reasonable for the
related occupation and such determination as to reasonableness is subject
to the loan underwriter's discretion. However, the mortgagor's income as
stated on the application is not independently verified. Verification of
employment is required for salaried mortgagors only. Maximum loan-to-value
ratios are generally lower under the Stated Income residential loan program
than those permitted under the Full Documentation residential loan program.
Except as otherwise stated above, the same mortgage credit, consumer credit
and collateral property underwriting guidelines that apply to the Stated
Income residential loan program apply to the Full Documentation residential
loan program.
Under the INSTA Credit and INSTA Credit Fast Trac residential loan
programs, the mortgagor's derogatory consumer and mortgage credit history
may be waived if a reasonable explanation for the problem is given, and the
problem which caused the derogatory items to occur no longer exists. Any
bankruptcy must be discharged or dismissed prior to approval. The maximum
loan-to-value ratios for the INSTA Credit and the INSTA Credit Fast Trac
programs are generally 55% and 50%, respectively, and the maximum
debt-to-income ratios are generally 60% and 55%, respectively.
Long Beach requires that all mortgage loans in the Long Beach Programs
have title insurance and be secured by liens on real property. Long Beach
also requires that fire and
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extended coverage casualty insurance be maintained on the secured property
in an amount at least equal to the principal balance of the related
single-family loan or the replacement cost of the
property, whichever is less.
RISK CATEGORIES
Under the Long Beach Programs, various risk categories are used to
grade the likelihood that the mortgagor will satisfy the repayment
conditions of the mortgage loan. These risk categories establish the
maximum permitted loan-to-value ratio and loan amount, given the occupancy
status of the mortgaged property and the mortgagor's credit history and
debt ratio. In general, higher credit risk mortgage loans are graded in
categories which permit higher debt ratios and more (or more recent) major
derogatory credit items such as outstanding judgments or prior
bankruptcies; however, the Long Beach Programs establish lower maximum
loan-to-value ratios and maximum loan amounts for loans graded in such
categories.
The Long Beach Guidelines have the following categories and criteria
for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan:
"AMBASSADOR"; CREDIT GRADE: "A". Under the "A" risk category, the
applicant must have generally repaid installment of revolving debt
according to its terms and demonstrated steady employment over the last
five years. A maximum of one 30-day late payment, and no 60-day late
payments, within the last 12 months is permitted on an existing mortgage
loan. Certain non-consumer credit, collections, or judgments may be
disregarded on a case-by-case basis. Any and all payments 60 days or more
late within the past 12 months may not represent more than 25% of the
credit reported during that period. No collection accounts or charge-offs
may remain open after the funding of the loan. No bankruptcy, discharge or
notice of default filings may have occurred during the preceding three
years. The mortgaged property must be in at least average condition.
Mortgage loans originated under the "Ambassador" program must be
owner-occupied. A maximum Loan to-Value Ratio of 85% is permitted for a
purchase and/or refinance mortgage loan on a single family property, and a
maximum Loan-to-Value Ratio of 75% is permitted on a mortgaged property
consisting of two-to-four units and condominium properties. The debt
service-to-income ratio generally ranges from 45% or less to 55% or less
based on the mortgagor's net disposable income.
"PROGRAM I"; CREDIT GRADE: "A-". Under the "A-" risk category, the
applicant generally must have repaid installment of revolving debt
according to its terms and have demonstrated steady employment over the
last two years. A maximum of one 30-day late payment, and no 60-day late
payments, within the last 12 months is permitted on an existing mortgage
loan. Certain non-consumer credit, collections, or judgments may be
disregarded on a case-by-case basis. Any and all payments 60 days or more
late within the past 12 months may not represent more than 25% of the
credit reported during that period. Minor derogatory items are permitted on
a case-by-case basis as to non-mortgage credit when the majority of the
consumer credit is deemed good. No bankruptcy, discharge or notice of
default filings may have occurred during the preceding three years. The
mortgaged property must be in at least average condition. A maximum
Loan-to-Value Ratio of 85% is permitted for a purchase money and/or
refinance mortgage loan on a single family property, and a maximum
Loan-to-Value Ratio of 75% is permitted on a mortgaged property consisting
of two-to-four units and condominium properties. A maximum Loan-to-Value
Ratio of 70% is permitted for non-owner occupied purchase money and
refinance loans on single family and condominium properties, and a maximum
Loan-to-Value Ratio of 65% is permitted for a mortgage loan on a non-owner
occupied mortgaged property consisting of two units or second home
properties. Generally, the debt service-to-income ratio must be 47%, but
this may be allowed to be increased to 55% based on the mortgagor's net
disposable income.
"PROGRAM II"; CREDIT GRADE: "B+". Under the "B+" risk category, the
applicant must have generally repaid installment of revolving debt
according to its terms and have demonstrated steady
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employment over the last two years. A maximum of two 30-day late payments,
and no 60-day late payments, within the last 12 months is permitted on an
existing mortgage loan. Certain non-consumer credit, collections, or
judgments may be disregarded on a case-by-case basis. Any and all payments
60 days or more late within the past 12 months may not represent more than
35% of the credit reported during that period. One to three minor
derogatory items that are 90 days or more late are permitted on a
case-by-case basis as to non-mortgage credit when the majority of the
consumer credit is deemed good. No bankruptcy, discharge or notice of
default filings may have occurred during the preceding three years. The
mortgaged property must be in at least average condition. A maximum
Loan-to-Value Ratio of 80% is permitted for a purchase money and/or
refinance mortgage loan on a single family property, and a maximum
Loan-to-Value Ratio of 75% is permitted on a mortgaged property consisting
of two-to-four units and condominium properties. A maximum Loan-to-Value
Ratio of 70% is permitted for non-owner occupied purchase money and
refinance mortgage loans on single family and condominium properties and a
maximum Loan-to-Value Ratio of 65% is permitted for non-owner occupied
purchase money and refinance mortgage loans on mortgaged properties
consisting of two units or second homes properties. Generally, the debt
service-to-income ratio must be 50% or less, but this may be increased to
55% based on the mortgagor's net disposable income.
"PROGRAM III"; CREDIT GRADE: "B". Under the "B" risk category, the
applicant must have generally repaid installment of revolving debt
according to its terms and have demonstrated steady employment over the
last two years. A maximum of four 30-day late payments within the last 12
months is acceptable on an existing mortgage loan. Certain non-consumer
credit, collections, or judgments may be disregarded on a case-by-case
basis. One to four minor derogatory items that are late 90 days or more are
permitted on a case-by-case basis as to non-mortgage credit when the
majority of the consumer credit is deemed good. Any and all payments 60
days or more late within the past 12 months may not represent more than 50%
of the credit reported during that period. No bankruptcy, discharge or
notice of default filings may have occurred during the preceding two years.
The mortgaged property must be in at least average condition. A maximum
Loan-to-Value Ratio of 80% is permitted for a purchase money and/or
refinance mortgage loan on a single family property, and a maximum
Loan-to-Value Ratio of 75% is permitted on mortgaged properties consisting
of two-to-four units and condominiums. For non-owner occupied purchase
money and refinance properties, the maximum Loan-to-Value Ratio is 70% for
single family and condominium properties, and 65% for non-owner occupied
mortgaged properties consisting of two units or second homes. Generally,
the debt service-to-income ratio must be 50% or less but this may be
increased to 55% based on the mortgagor's net disposable income.
"PROGRAM IV"; CREDIT GRADE: "B-". Under the "B-" risk category, the
applicant must have generally repaid installment and revolving debt
according to its terms and have demonstrated steady employment over the
last two years. A maximum of one 60-day late payment within the last 12
months, and a maximum of at most 30 days late at time of application is
permitted on an existing mortgage loan. Certain non-consumer credit,
collections, or judgments may be disregarded on a case-by-case basis.
Payments 60 days or more late within the last 12 months may not represent
more than 50% of the credit items reported during that period. No
bankruptcy, discharge or notice of default filings may have occurred within
the preceding two years. The mortgaged property must be in at least average
condition. A maximum Loan-to-Value Ratio of 75% is permitted for a purchase
money and/or refinance mortgage loan on an owner-occupied property. For
non-owner occupied purchase and refinance properties, the maximum
Loan-to-Value Ratio is 65% for single family and second home properties.
Generally, the debt service-to-income ratio must not exceed 55%.
"PROGRAM V"; CREDIT GRADE: "C". Under the "C" risk category, the
applicant may have experienced significant credit problems in the past. A
maximum of two 60-day and one 90-day late payments, or three 60-day late
payments and no 90-day late payments, within the last 12 months
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is permitted on an existing mortgage loan. An existing mortgage loan is not
required to be current at the time the application is submitted. Consumer
credit derogatory items will be considered on a case-by-case basis. No
bankruptcy, discharge or notice of default filings may have occurred during
the preceding twelve months. The mortgaged property must be in at least
average condition. A maximum Loan-to-Value Ratio of 75% is permitted for a
purchase money and refinance mortgage loan on an owner-occupied property.
For non-owner occupied purchase money and refinance properties, the maximum
Loan-to-Value Ratio is 60% for single family and second home properties.
Generally, the debt service-to-income ratio must not exceed 55%; however,
55%-60% will be considered on a case-by-case basis.
"PROGRAM VI"; CREDIT GRADE: "C-". Under the "C-" risk category, the
applicant may have experienced significant credit problems in the past. A
maximum of two 60-day and one 90-day late payments, or three 60-day late
payments and no 90-day late payments within the last 12 months is permitted
on an existing mortgage loan. On a case-by-case basis, the applicant may
have a notice of default/foreclosure within the last 24 months with a good
explanation. The applicant may not currently be in bankruptcy; however, the
applicant may have had a bankruptcy with a good explanation and proof of
dismissal/discharge. Consumer derogatory items will be considered on a
case-by-case basis. Long Beach underwriters must be satisfied that the
problem that caused the "C-" credit no longer exists and that there is a
reasonable expectation that the applicant will repay the mortgage loan
according to the terms and conditions agreed upon. The mortgaged property
must be in at least average condition. A maximum Loan-to-Value Ratio of 70%
is permitted for a purchase money mortgage loan, and a maximum
Loan-to-Value Ratio of 65% is permitted for a refinance of an
owner-occupied single family property. On a case-by-case basis, the maximum
Loan-to-Value Ratio permitted for a non-owner occupied purchase money and
refinance mortgage loan is 50%. Generally, the debt service-to-income ratio
must not exceed 55%; however, 55% to 60% will be considered on a
case-by-case basis.
LONG BEACH UNDERWRITING PROGRAMS
Approximately 23.03% of the Mortgage Loans, by aggregate principal balance
as of the Cut-off Date (the "Long Beach Mortgage Loans"), were originated
generally in accordance with the following guidelines established by Long Beach
Mortgage Company ("Long Beach") with respect to the Long
Beach residential loan programs described below.
The Long Beach Mortgage Loans were originated generally in accordance
with guidelines (the "Long Beach Underwriting Guidelines") established by
Long Beach under the "Full Documentation", "Fast Trac" or "Stated Income"
residential loan programs (the "Long Beach Underwriting Programs"). The
Long Beach Underwriting Guidelines are primarily intended to evaluate the
value and adequacy of the mortgaged property as collateral and are also
intended to consider the mortgagor's credit standing and repayment ability.
On a case-by-case basis and only with the approval of two or more senior
lending officers, Long Beach may determine that, based upon compensating
factors, a prospective mortgagor not strictly qualifying under the
underwriting risk category guidelines described below warrants an
underwriting exception. Compensating factors may include, but are not
limited to, low loan-to-value ratio, low debt-to-income ratio, good credit
history, stable employment and time in residence at the applicant's current
address. It is expected that a substantial number of the Long Beach
Mortgage Loans to be included in the Mortgage Pool will represent such
underwriting exceptions.
Under the Long Beach Underwriting Programs, during the underwriting
process, Long Beach or the originator for Long Beach reviews and verifies
the loan applicant's sources of income (except under the Stated Income and
Fast Trac residential loan programs), calculates the amount of income from
all such sources indicated on the loan application, reviews the credit
history of the applicant and calculates the debt-to-income ratio to
determine the applicant's ability to repay the loan, and reviews the
mortgaged property for compliance with the Long Beach Underwriting
Guidelines. The
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Long Beach Underwriting Guidelines are applied in accordance with a
procedure which complies with applicable federal and state laws and
regulations and requires (i) an appraisal of the mortgaged property which
generally conforms to FHLMC and FNMA standards and (ii) a review of such
appraisal, which review may be conducted by a representative of Long Beach
or a staff appraiser and, depending upon the original principal balance and
loan-to-value ratio of the mortgaged property, may include a desk review of
the original appraisal or a drive-by review appraisal of the mortgaged
property. The Long Beach Underwriting Guidelines permit loans with
loan-to-value ratios at origination of up to 90%. The maximum allowable
loan-to-value ratio varies based upon the income documentation, property
type, creditworthiness, debt service-to-income ratio of the mortgagor and
the overall risks associated with the loan decision. Under the residential
loan programs, the maximum combined loan-to-value ratio, including any
second deeds of trust subordinate to Long Beach's first deed of trust, is
generally 100% for owner occupied mortgaged properties and 90% for
non-owner occupied mortgaged properties.
All of the mortgage loans originated in the Long Beach Underwriting
Programs are based on loan application packages submitted through mortgage
brokerage companies or Long Beach's retail branches, or are purchased from
approved originators pursuant to the Long Beach Underwriting Guidelines
described herein. Loan application packages submitted through mortgage
brokerage companies, containing in each case relevant credit, property and
underwriting information on the loan request, are compiled by the
applicable mortgage brokerage company and submitted to Long Beach for
approval and funding. The mortgage brokerage companies receive a portion of
the loan origination fee charged to the mortgagor at the time the loan is
made. No single mortgage brokerage company accounts for more than 5%,
measured by outstanding principal balance, of the single-family mortgage
loans originated by Long Beach.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit
history and employment history, as well as certain other personal
information. Long Beach obtains a credit report on each applicant from a
credit reporting company. The applicant must generally provide to Long
Beach or the originator for Long Beach a letter explaining all late
payments on mortgage debt and, generally, consumer (I.E., non-mortgage)
debt. The report typically contains information relating to such matters as
credit history with local and national merchants and lenders, installment
debt payments and any record of defaults, bankruptcy, repossession, suits
or judgments. Under the Full Documentation residential loan program,
self-employed individuals are generally required to submit their most
recent federal income tax return. As part of its quality control system,
Long Beach reverifies information with respect to the foregoing matters
that has been provided by the mortgage brokerage company prior to funding a
loan and periodically audits files based on a random sample of closed
loans. In the course of its pre-funding audit, Long Beach reverifies the
income of each mortgagor or, for a self-employed individual, reviews the
income documentation obtained pursuant to the Long Beach Underwriting
Guidelines (except under the Stated Income program). Long Beach generally
verifies the source of funds for the down payment.
Mortgaged properties that are to secure mortgage loans underwritten
under the Long Beach Underwriting Programs are appraised by qualified
independent appraisers who are approved by Long Beach's internal chief
appraiser. In most cases, below-average properties (including properties
requiring major deferred maintenance) are not acceptable as security for
mortgage loans in the Long Beach Underwriting Programs. Each appraisal
includes a market data analysis based on recent sales of comparable homes
in the area and, where deemed appropriate, replacement cost analysis based
on the current cost of constructing a similar home. Every independent
appraisal is reviewed by a representative of Long Beach or a staff
appraiser before the loan is funded.
The Long Beach Underwriting Guidelines are less stringent than the
standards generally acceptable to FNMA and FHLMC with regard to the
mortgagor's credit standing and repayment
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ability. Mortgagors who qualify under the Long Beach Underwriting Programs
generally have payment histories and debt ratios which would not satisfy
FNMA and FHLMC underwriting guidelines and may have a record of major
derogatory credit items such as outstanding judgments or prior
bankruptcies. The Long Beach Underwriting Guidelines establish the maximum
permitted loan-to-value ratio for each loan type based upon these and other
risk factors.
Under the Stated Income residential loan program, the mortgagor's
employment and income sources must be stated on the mortgagor's
application. The mortgagor's income as stated must be reasonable for the
related occupation and such determination as to reasonableness is subject
to the loan underwriter's discretion. However, the mortgagor's income as
stated on the application is not independently verified. Verification of
employment is required for salaried mortgagors only. Maximum loan-to-value
ratios are generally lower under the Stated Income residential loan program
than those permitted under the Full Documentation residential loan program.
Except as otherwise stated above, the same mortgage credit, consumer credit
and collateral property underwriting guidelines that apply to the Full
Documentation residential loan program apply to the Stated Income
residential loan program.
Long Beach requires that all mortgage loans in the Long Beach
Underwriting Programs have title insurance and be secured by liens on real
property. Long Beach also requires that fire and extended coverage casualty
insurance be maintained on the secured property in an amount at least equal
to the principal balance of the related single-family loan or the
replacement cost of the property, whichever is less.
RISK CATEGORIES
Under the Long Beach Underwriting Programs, various risk categories
are used to grade the likelihood that the mortgagor will satisfy the
repayment conditions of the mortgage loan. These risk categories establish
the maximum permitted loan-to-value ratio and loan amount, given the
occupancy status of the mortgaged property and the mortgagor's credit
history and debt ratio. In general, higher credit risk mortgage loans are
graded in categories which permit higher debt ratios and more (or more
recent) major derogatory credit items such as outstanding judgments or
prior bankruptcies; however, the Long Beach Underwriting Programs establish
lower maximum loan-to-value ratios and maximum loan amounts for loans
graded in such categories.
The Long Beach Underwriting Guidelines have the following categories
and criteria for grading the potential likelihood that an applicant will
satisfy the repayment obligations of a mortgage
loan:
CREDIT GRADE: "A-". Under the "A-" risk category, the applicant
generally must have repaid installment or revolving debt according to its
terms and have demonstrated steady employment over the last two years. A
maximum of two 30-day late payments and no 60-day late payments within the
last 12 months is permitted on an existing mortgage loan. Certain
non-consumer credit, collections or judgments may be disregarded on a
case-by-case basis. Any and all payments 60 days or more late within the
past 12 months may not represent more than 25% of the credit reported
during that period. Minor derogatory items are permitted on a case-by-case
basis as to non-mortgage credit when the majority of the consumer credit is
deemed good. No bankruptcy filings may have occurred during the preceding
two years and no discharge or notice of default filings may have occurred
during the preceding three years. The mortgaged property must be in at
least average condition. A maximum loan-to-value ratio of 90% is permitted
for owner occupied purchase money and/or refinance mortgage loans on single
family and condominium properties, and a maximum loan-to-value ratio of 80%
is permitted on an owner occupied mortgaged property consisting of
two-to-four units or second homes. A maximum loan-to-value ratio of 80% is
permitted for non-owner occupied purchase money and/or refinance mortgage
loans on single family and condominium properties, and a maximum
loan-to-value ratio of 70% is permitted on a non-owner occupied mortgaged
property consisting of two-to-four units. Generally, the debt
service-to-income
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ratio must be 47%, but this may be allowed to be increased to 55% based on
the mortgagor's net disposable income and if the loan-to-value ratio is
less than or equal to 85%.
CREDIT GRADE: "B". Under the "B" risk category, the applicant must
have generally repaid installment or revolving debt according to its terms
and have demonstrated steady employment over the last two years. A maximum
of three 30-day late payments within the last 12 months is acceptable on an
existing mortgage loan. Certain non-consumer credit, collections or
judgments may be disregarded on a case-by-case basis. One to four minor
derogatory items that are late 90 days or more are permitted on a
case-by-case basis as to non-mortgage credit when the majority of the
consumer credit is deemed good. Any and all payments 60 days or more late
within the past 12 months may not represent more than 35% of the credit
reported during that period. No bankruptcy filings may have occurred during
the preceding two years and no discharge or notice of default filings may
have occurred during the preceding three years. The mortgaged property must
be in at least average condition. A maximum loan-to-value ratio of 85% is
permitted for owner occupied purchase money and/or refinance mortgage loans
on single family and condominium properties, and a maximum loan-to-value
ratio of 80% is permitted on an owner occupied mortgaged property
consisting of two-to-four units or second homes. A maximum loan-to-value
ratio of 80% is permitted for non-owner occupied purchase money and/or
refinance mortgage loans on single family and condominium properties, and a
maximum loan-to-value ratio of 70% is permitted on a non-owner occupied
mortgaged property consisting of two-to-four units or second homes.
Generally, the debt service-to-income ratio must be 50% or less but this
may be increased to 55% based on the mortgagor's net disposable income
and/or loan-to-value ratio.
CREDIT GRADE: "B-". Under the "B-" risk category, the applicant must
have generally repaid installment or revolving debt according to its terms
and have demonstrated steady employment over the last two years. A maximum
of one 60-day late payment within the last 12 months, and no payments
delinquent more than 30 days at the time of application is permitted on an
existing mortgage loan. Certain non-consumer credit, collections or
judgments may be disregarded on a case-by-case basis. Payments 60 days or
more late within the last 12 months may not represent more than 50% of the
credit items reported during that period. No bankruptcy filings may have
occurred during the preceding eighteen months and no discharge or notice of
default filings may have occurred during the preceding two years. The
mortgaged property must be in at least average condition. A maximum
loan-to-value ratio of 80% is permitted for owner occupied purchase money
and/or refinance mortgage loans on single family and condominium
properties, and a maximum loan-to-value ratio of 75% is permitted on an
owner occupied mortgaged property consisting of two-to-four units or second
homes. A maximum loan-to-value ratio of 75% is permitted for non-owner
occupied purchase money and/or refinance mortgage loans on single family
and condominium properties, and a maximum loan-to-value ratio of 65% is
permitted on a non-owner occupied mortgaged property consisting of
two-to-four units or second homes. Generally, the debt service-to-income
ratio must not exceed 55%.
CREDIT GRADE: "C". Under the "C" risk category, the applicant may have
experienced significant credit problems in the past. A maximum of two
60-day and one 90-day late payments, or three 60-day late payments and no
90-day late payments, within the last 12 months is permitted on an existing
mortgage loan. An existing mortgage loan is not required to be current at
the time the application is submitted. Consumer credit derogatory items
will be considered on a case-by-case basis. No bankruptcy, discharge or
notice of default filings may have occurred during the preceding twelve
months. The mortgaged property must be in at least average condition. A
maximum loan-to-value ratio of 75% is permitted for owner occupied purchase
money and/or refinance mortgage loans on single family and condominium
properties, and a maximum loan-to-value ratio of 70% is permitted on an
owner occupied mortgaged property consisting of two-to-four units or second
homes. A maximum loan-to-value ratio of 70% is permitted for non-owner
occupied purchase money and/or refinance mortgage loans on single family
and condominium properties,
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and a maximum loan-to-value ratio of 60% is permitted on a non-owner
occupied mortgaged property consisting of two-to-four units or second
homes. Generally, the debt service-to-income ratio must not exceed 55%;
however, a debt service-to-income ratio of 55% to 60% will be considered on
a case-by-case basis.
CREDIT GRADE: "C-" OR "D". Under the "C-" or "D" risk categories, the
applicant may have experienced significant credit problems in the past. The
applicant may be in bankruptcy, have a notice of default or foreclosure
with a good explanation and must provide proof that the problem no longer
exists. The mortgaged property must be in at least average condition. A
maximum loan-to-value ratio of 70% is permitted for owner occupied purchase
money and/or refinance mortgage loans on single family and condominium
properties, and a maximum loan-to-value ratio of 65% is permitted on an
owner occupied mortgaged property consisting of two-to-four units or second
homes. A maximum loan-to-value ratio of 65% is permitted for non-owner
occupied purchase money and/or refinance mortgage loans on single family
and condominium properties, and a maximum loan-to-value ratio of 55% is
permitted on a non-owner occupied mortgaged property consisting of
two-to-four units or second homes. Generally, the debt service-to-income
ratio must not exceed 55%; however, a debt service-to-income ratio of 55%
to 60% will be considered on a case-by-case basis.
NATIONAL MORTGAGE UNDERWRITING PROGRAMS
Approximately 42.55% of the Mortgage Loans, by aggregate principal balance
as of the Cut-off Date (the "National Mortgage Loans"), were originated
generally in accordance with the following guidelines established by National
Mortgage Corporation ("National Mortgage") with respect to National Mortgage's
residential mortgage loan originations described below.
The National Mortgage Loans were underwritten in accordance with
National Mortgage's underwriting standards (the "National Mortgage
Standards"), which are designed to permit mortgage lending to borrowers
whose creditworthiness and repayment ability do not satisfy the more
stringent underwriting requirements used as standards for FNMA and FHLMC.
National Mortgage has established risk categories by which it could
aggregate acceptable loans into groupings considered to have progressively
greater risk characteristics. A more detailed description of those National
Mortgage-assigned risk categories applicable to the National Mortgage Loans
is set forth below.
National Mortgage's underwriting of the National Mortgage Loans
generally consisted of analyzing the following as standards applicable to
the National Mortgage Loans: the creditworthiness of a mortgagor, the
income sufficiency of a mortgagor's projected family income relative to the
mortgage payment and to other fixed obligations (including in certain
instances rental income from investment property), and the adequacy of the
mortgaged property (expressed in terms of Loan-to-Value Ratio), to serve as
the collateral for a mortgage loan.
Generally, each mortgagor would have been required to complete an
application designed to provide to the original lender pertinent credit
information concerning the mortgagor. As part of the description of the
mortgagor's financial condition, each mortgagor furnished information
(which may have been supplied solely in such application) with respect to
its assets, liabilities, income, credit history, employment history and
personal information, and furnished an authorization to apply for a credit
report which summarized the borrower's credit history with local merchants
and lenders and any record of past or present bankruptcy or foreclosure
proceedings. The mortgagor may have also been required to authorize
verifications of deposits at financial institutions where the mortgagor had
demand or savings accounts. In the case of investment properties, income
derived from the mortgaged property may have been considered for
underwriting purposes. With respect to mortgaged property consisting of
vacation or second homes, generally no income derived from the property was
considered for underwriting purposes.
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Based on the data provided in the application, certain verifications
(which are not required with respect to "Stated Income Applications," as
described below), and the appraisal or other valuation of the mortgaged
property, a determination was made by National Mortgage that the
mortgagor's monthly income would be sufficient to enable the mortgagor to
meet its monthly obligations on the mortgage loan and other expenses
related to the property (such as property taxes, utility costs, standard
hazard insurance and other fixed obligations other than housing expenses).
In certain circumstances, National Mortgage may also have considered the
amount of liquid assets available to the mortgagor after origination.
Prospective mortgagors may submit loan applications under one of three
programs, which differ from each other with respect to the requirements for
the verification of the income of the mortgagor and the source of funds
required to be deposited by the applicant in order to close the loan.
Certain of the National Mortgage Loans have been originated under "limited
documentation" programs that require less documentation and verification
than do traditional "full documentation" programs. Generally, under such a
program, minimal investigation into a mortgagor's credit history and income
profile would have been undertaken by the originator and the underwriting
for such mortgage loans will place a greater emphasis on the value of the
mortgaged property. Under the "Full App" program, mortgagors are generally
required to submit documentation verifying at least two years of employment
history. Under the "Fast App" program, applicants must have a proven
one-year employment history verified by appropriate documentation. Under
the "Stated Income Application" program, no verification of the applicant's
income is required; rather, the applicant may be qualified based on monthly
income as stated in the mortgage loan application, if that income is
supported by the general information included in the loan application
package. Verification of the source of funds (if any) to be deposited by
the applicant in order to close the loan is required under both the Full
App and Fast App programs.
As used in this section, "Loan-to-Value Ratio" shall generally mean
that ratio, expressed as a percentage, borne by (a) the principal amount of
the National Mortgage Loan at origination over (b) (i) the lesser of the
sales price or the appraised value of the related mortgaged property at
origination, or (ii) in the case of a National Mortgage Loan made to
refinance a previous loan, the appraised value determined at origination of
the new National Mortgage Loan. In connection with the amendment to the
underwriting guidelines in April 1998, the computation of the
"Loan-to-Value Ratio" was further expanded. The denominator of the formula
was expanded in the case of a mortgaged property that is leased, to the
lesser of the acquisition price adjusted for rent credits or appraised
value determined at origination.
The adequacy of a mortgaged property as security for repayment of the
related mortgage loan generally has been determined by an appraisal in
accordance with preestablished appraisal guidelines for appraisals
established by National Mortgage. Appraisers were typically independent
appraisers selected in accordance with the National Mortgage Standards. The
appraisal procedure guidelines generally required the appraiser or an agent
on its behalf to inspect the property personally and to verify whether the
property was in good condition and that construction, if new, had been
substantially completed. The appraisal would have considered a market data
analysis of recent sales of comparable properties and, when deemed
applicable, an analysis, based on income generated from the property or
replacement cost analysis based on the current cost of constructing or
purchasing a similar property. In certain instances, the Loan-to-Value
Ratio or Combined Loan-to-Value Ratio may have been based on the appraised
value as indicated on a review appraisal conducted by National Mortgage.
Pursuant to the National Mortgage Standards, each National Mortgage
Loan was assigned a risk grade and categorized in a "Loan Class,"
denominated by a letter. National Mortgage's risk classification system is
designed to assess the likelihood that each borrower will satisfy the
repayment obligations associated with the related mortgage loan and to
establish the maximum
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permissible Loan-to-Value Ratio for the mortgage loan. Time frames referred
to below (e.g., "within the last 12 months") are measured from the time of
underwriting of a mortgagor's credit.
LOAN CLASS A: For a National Mortgage Loan to have been assigned by
National Mortgage to Loan Class A, the prospective mortgagor must have
repaid installment debt with no more than two 30-day late payments within
the last 12 months, and must have repaid all revolving debt with no more
than three 30-day late payments within the last 12 months. A rolling 30-day
late payment is considered a single 30-day late payment. A maximum of one
30-day late payment, and no 60-day or 90-day late payments, within the last
12 months is acceptable on an existing mortgage loan, and any existing
mortgage loan must be current at the time of the application. Minor
derogatory items are allowed as to non-mortgage credit (provided, open
collections and charge-offs in excess of $200 must be paid down to zero at
closing unless they are three years old or older and not reflected in the
title report or are medical related). No Chapter 7 bankruptcies with
respect to the mortgagor may have been discharged during the previous two
years, and no Chapter 13 bankruptcy filings may have been made by the
mortgagor during the previous three years. No foreclosures may have been
filed within the last three years with respect to real property owned by
the mortgagor or no foreclosure sales with respect to mortgagor property
may have been conducted within the last two years. The mortgaged property
must be in average to good condition. A maximum Loan-to-Value Ratio of 90%
is permitted for a mortgage loan secured by a single family owner-occupied
property (or 85% for a mortgage loan originated under a "Fast App" program
and 80% for a mortgage loan originated under a "Stated Income" application
program). A maximum Loan-to-Value Ratio of 75% (or 70% for mortgage loans
originated under the "Fast App" program and 65% for mortgage loans
originated under the "Stated Income" application program) is permitted for
a mortgage loan secured by a non-owner occupied property. The maximum
permissible Loan-to-Value Ratio is lower for mortgage loans with initial
principal amounts in excess of $350,000 for loans secured by owner-occupied
properties (or lower dollar amounts for loans secured by non-owner-occupied
properties), and for mortgage loans made in connection with a mortgage
refinancing in which the mortgagor borrows more than is needed to refinance
his old mortgage loan. The mortgagor's debt service-to- income ratio
generally is 45% or less. In the case of adjustable rate mortgage loans,
this ratio will be calculated including the prospective mortgage loan debt,
based on the initial rate on the mortgage loan plus 1% per annum unless the
initial rate would not be subject to change for an extended period.
LOAN CLASS A-: For a National Mortgage Loan to have been assigned by
National Mortgage to Loan Class A-, the prospective mortgagor is required
to have repaid all previous or existing installment debt with no more than
three 30-day late payments and one 60-day late payment within the last 12
months and must have repaid all previous or existing revolving debt with no
more than four 30-day late payments and one 60-day late payment in the last
12 months. A maximum of two 30-day late payments, and no 60-day or 90-day
late payments, within the last 12 months is acceptable on an existing
mortgage loan, and any existing mortgage loan must be current at the time
of the application. As to non-mortgage credit, some prior defaults may have
occurred (provided, open collections and charge-offs in excess of $200 must
be paid down to zero at closing unless they are three years old or older
and not reflected in the title report or are medical related). No Chapter 7
bankruptcies with respect to the mortgagor may have been discharged during
the two years, and no Chapter 13 bankruptcy filings may have been made by
the mortgagor during the previous three years. No foreclosures may have
been filed within the last three years with respect to real property owned
by the mortgagor or no foreclosure sales with respect to the mortgagor
property may have been conducted within the last two years. The mortgaged
property must be in average to good condition. A maximum Loan-to-Value
Ratio of 85% (or 80% for a mortgage loan originated under a "Fast App"
program and 75% for a mortgage loan originated under a "Stated Income"
application program) is permitted for a mortgage loan secured by an
owner-occupied property. A maximum Loan-to-Value Ratio of 75% (or 70% for
mortgage loans originated under a "Fast App" program and 65% for mortgage
loans originated under a Stated Income Application
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program) is permitted for a mortgage loan secured by a non-owner-occupied
property. The maximum permissible Loan-to-Value Ratio is lower for mortgage
loans with initial principal amounts in excess of $350,000 for loans
secured by owner-occupied properties (or lower dollar amounts for loans
secured by non-owner-occupied properties), and for mortgage loans made in
connection with a mortgagor refinancing in which the mortgagor borrows more
than is needed to refinance his old mortgage loan. The debt
service-to-income ratio generally is 50% or less. In the case of adjustable
rate mortgage loans, the ratio will be calculated including the prospective
mortgage loan debt, based on an initial rate on the mortgage loan plus 1%
per annum unless the initial rate would not be subject to change for an
extended period.
LOAN CLASS B: For a National Mortgage Loan to have been assigned by
National Mortgage to Loan Class B, the prospective mortgagor may not have
paid all previous or existing installment or revolving debt according to
its terms and may have some charge-offs. The mortgagor may have no more
than five 30-day late payments, two 60-day late payments and one 90-day
late payment in the last 12 months with respect to installment credit
obligations, and no more than six 30-day late payments, two 60-day late
payments and one 90-day late payment in the last 12 months with respect to
revolving credit obligations. A maximum of four 30-day late payments, and
one 60-day but no 90-day late payments, within the last 12 months is
acceptable on an existing mortgage loan. As to non-mortgage credit, some
prior defaults may have occurred (provided, open collections and
charge-offs must be paid down to an amount not in excess of $500 at closing
unless they are three years old or older and not reflected in the title
report or are medical related). No Chapter 7 bankruptcies with respect to
the mortgagor may have been discharged during the two years, and no Chapter
13 bankruptcy filings may have been made by the mortgagor during the
previous two years. No foreclosures may have been filed within the last two
years with respect to real property owned by the mortgagor. A maximum
Loan-to-Value Ratio of 80% (or 75% for a mortgage loan originated under a
"Fast App" program and 70% for a mortgage loan originated under a "Stated
Income" application program) is permitted for a mortgage loan secured by an
owner-occupied property. A maximum Loan-to-Value Ratio of 70% (or 65% for
mortgage loans originated under a "Fast App" program and 60% for mortgage
loans originated under a "Stated Income" application program) is permitted
for a mortgage loan secured by a non-owner-occupied property. The maximum
permissible Loan-to-Value Ratio is lower for mortgage loans with initial
principal amounts in excess of $350,000 for loans secured by owner-occupied
properties (or lower dollar amounts for loans secured by non-owner-occupied
properties), and for mortgage loans made in connection with a mortgagor
refinancing in which the mortgagor borrows more than is needed to refinance
his old mortgage loan. The debt service-to-income ratio generally is 50% or
less. In the case of adjustable rate mortgage loans, this ratio will be
likely calculated including the prospective mortgage loan debt, based on an
initial rate on the mortgage loan plus 1% per annum unless the initial rate
would not be subject to change for an extended period.
LOAN CLASS C: For a National Mortgage Loan to have been assigned by
National Mortgage to Loan Class C, the prospective mortgagor may have
experienced significant credit problems in the past. The mortgagor may have
had no more than four 60-day late payments and two 90-day late payment in
the last 12 months with respect to installment credit obligations, and no
more than five 60-day late payments and two 90-day late payment in the last
12 months with respect to revolving credit obligations. As to mortgage
credit, the mortgagor may have had a history of being generally 30 days
delinquent, and a maximum of one 60-day late payment and one 90-day late
payment within the last 12 months is acceptable on an existing mortgage
loan. As to non-mortgage credit significant prior defaults may have
occurred (provided, open collections and charge-offs must be paid down to
an amount not in excess of $1,500 at closing unless they are three years
old or older and not reflected in the title report or are medical related).
No bankruptcies may have been filed or discharged during the 12-month
period prior to the date the mortgage loan was made. No foreclosures may
have been filed within the last year with respect to real property owned by
the mortgagor. The mortgaged property must be in average to good condition.
A maximum Loan-to-
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<PAGE>
Value Ratio of 75% (or 70% for a mortgage loan originated under a "Fast
App" program and 65% for a mortgage loan originated under a "Stated Income"
application program) is permitted for a mortgage loan secured by an
owner-occupied property. A maximum Loan-to-Value Ratio of 65% (or 60% for
mortgage loans originated under a "Fast App" program and 55% for mortgage
loans originated under a "Stated Income" application program) is permitted
for a mortgage loan secured by a non-owner-occupied property. The maximum
permissible Loan-to-Value Ratio is lower for mortgage loans with initial
principal amounts in excess of $350,000 for loans secured by owner-occupied
properties (or lower dollar amounts for loans secured by non-owner-occupied
properties), and for mortgage loans made in connection with a mortgagor
refinancing in which the mortgagor borrows more than is needed to refinance
his old mortgage loan. The debt service-to-income ratio generally is 55% or
less. In the case of adjustable rate mortgage loans, this ratio will be
calculated including the prospective mortgage loan debt, based on an
initial rate on the mortgage plus 1% per annum unless the initial rate
would not be subject to change for an extended period.
LOAN CLASS D: For a National Mortgage Loan to have been assigned by
National Mortgage to Loan Class D, the prospective mortgagor will have
experienced substantial credit problems in the past and generally will have
overall poor credit. As to mortgage credit, the mortgagor may have had a
history of being generally 30 to 60 days delinquent, and a maximum of two
90-day late payments within the last 12 months is acceptable on an existing
mortgage loan. The prospective mortgagor's credit history is poor and a
notice of default on an existing mortgage loan may have been filed against
the mortgagor. As to non-mortgage credit, significant prior defaults may
have occurred (provided, open collections and charge-offs must be paid down
to an amount not in excess of $2,500 at closing unless they are three years
old or older and not reflected in the title report or are medical related).
A bankruptcy filing by the mortgagor is permitted if it is discharged at
closing. Also, on a case-by-case basis, National Mortgage may make a loan
on a mortgage that takes a mortgagor out of foreclosure. National Mortgage
will make a mortgage loan to a borrower to take him out of bankruptcy or
foreclosure only if it improves the borrower's financial situation. The
mortgaged property must be in average to good condition. A maximum
Loan-to-Value Ratio of 65% for mortgage loans originated under a full
documentation program (or 60% in the case of a mortgage loan originated
under a "Fast App" program) is permitted for a mortgage loan secured by an
owner-occupied property. A maximum Loan-to-Value Ratio of 60% for mortgage
loans originated under a full documentation program (or 55% in the case of
a mortgage loan originated under a "Fast App" program) is permitted for a
mortgage loan secured by a non-owner occupied property. Loan Class D
borrowers may not use the "Stated Income" application program. The maximum
permissible Loan-to-Value Ratio is lower for mortgage loans with initial
principal amounts in excess of $350,000 for loans secured by owner-occupied
properties (or lower dollar amounts for loans secured by non-owner-occupied
properties), and for mortgage loans made in connection with a mortgagor
refinancing in which the mortgagor borrows more than is needed to refinance
his old mortgage loan. The debt service-to income ratio generally is 60% or
less. In the case of adjustable rate mortgage loans, this ratio will be
calculated including the prospective mortgage loan debt, based on the
initial rate on the mortgage loan plus 1% per annum unless the initial rate
would not be subject to change for an extended period.
National Mortgage's Standards applicable to the National Mortgage
Loans include the foregoing categories and characteristics as guidelines
only. On a case-by-case basis, National Mortgage may have determined in the
course of its underwriting process that a prospective mortgagor warrants a
Loan-to-Value Ratio upgrade based on compensating factors. For example, a
borrower may be able to get a loan in a particular Loan Class with a
Loan-to-Value Ratio 5% higher than the ratio that would otherwise be
permitted for such Loan Class if certain compensating factors exist.
S-54
<PAGE>
REPRESENTATIONS
The Seller will make representations and warranties as of the Closing Date
with respect to the Mortgage Loans, and will be obligated to repurchase any such
Mortgage Loan in respect of which a material breach of the representations and
warranties it has made has occurred (other than those breaches which have been
cured). For a discussion of the representations and warranties made and the
repurchase obligation, see "Mortgage Loan Program--Representations by or on
behalf of the Seller; Repurchases" in the Prospectus.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted as of 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 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 Notes
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 Notes are issued,
although the range of Mortgage Rates and maturities and certain other
characteristics of the Mortgage Loans may vary.
YIELD ON THE NOTES
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Notes, the aggregate amount of
payments on the Notes and the yield to maturity of the Notes will be related to
the rate and timing of payments of principal on the Mortgage Loans. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of such Mortgage Loans and by the rate of principal
prepayments thereon (including for this purpose, payments resulting from
refinancings, liquidations of the Mortgage Loans due to defaults, casualties,
condemnations and repurchases, whether optional or required, by the Depositor,
the Seller or the majority holder of the Equity Certificates, as the case may
be). The Mortgage Loans generally may be prepaid by the mortgagors at any time;
however, as described under "The Mortgage Pool" herein, with respect to
approximately 69.32% of the Mortgage Loans, by aggregate principal balance as of
the Cut-off Date, a prepayment may subject the related mortgagor to a Prepayment
Charge. Prepayment Charge obligations generally expire by their terms after a
limited period specified in the related Mortgage Note. The weighted average
month of origination of the Mortgage Loans with Prepayment Charges is November
1997.
Prepayments, liquidations and repurchases of the Mortgage Loans will result
in payments in respect of principal to the holders of the class or classes of
Notes then entitled to receive such payments that otherwise would be distributed
over the remaining terms of the Mortgage Loans. See "Maturity and Prepayment
Considerations" in the Prospectus. Since the rates of payment of principal on
the Mortgage Loans will depend on future events and a variety of factors (as
described more fully herein and in the Prospectus under "Yield Considerations"
and "Maturity and Prepayment Considerations"), no assurance can be given as to
such rate or the rate of principal prepayments. The extent to which the yield to
maturity of any class of Notes may vary from the anticipated yield will depend
upon the degree to which such Notes are purchased at a discount or premium and
the degree to which the timing of payments thereon is sensitive to prepayments
on the Mortgage Loans. Further, an investor should consider, in the case of any
such Note purchased at a discount, the risk that a slower than anticipated rate
of principal payments on the Mortgage Loans could result in an actual yield to
such investor that is lower
S-55
<PAGE>
than the anticipated yield and, in the case of any such Note purchased at a
premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield to such investor that is lower than the
anticipated yield. In general, the earlier a prepayment of principal is made on
the Mortgage Loans, the greater the effect on the yield to maturity of the
Notes. As a result, the effect on an investor's yield of principal payments
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of such Notes would not be
fully offset by a subsequent like reduction (or increase) in the rate of
principal payments.
It is highly unlikely that the Mortgage Loans will prepay at any constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate. Moreover, the timing of prepayments on the Mortgage Loans may
significantly affect the actual yield to maturity on the Notes, even if the
average rate of principal payments experienced over time is consistent with an
investor's expectation.
The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment (and refinancing) would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans would be expected to decrease. Other factors affecting prepayment of
mortgage loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. In addition, in the case of the Adjustable Rate Mortgage Loans in the
Mortgage Pool, the existence of the applicable Periodic Rate Cap, Maximum
Mortgage Rate and Minimum Mortgage Rate may affect the likelihood of prepayments
resulting from refinancings. There can be no certainty as to the rate of
prepayments on the Mortgage Loans during any period or over the life of the
Notes. See "Yield Considerations" and "Maturity and Prepayment Considerations"
in the Prospectus.
Because principal payments are paid to certain classes of Notes before
other such classes, holders of classes of Notes having a later priority of
payment bear a greater risk of losses (because such Notes will represent an
increasing percentage of the Trust Estate during the period prior to the
commencement of payments of principal thereon) than holders of classes having
earlier priorities for payment of principal. As described under "Description of
the Notes--Principal Payments on the Notes" herein, prior to the Stepdown Date
(as defined herein), all principal payments on the Mortgage Loans will be
allocated to the Class A Notes. Thereafter, as further described herein, subject
to certain delinquency triggers described herein, all principal payments on the
Mortgage Loans will be allocated among all classes of the Notes then outstanding
as described under "Description of the Notes--Principal Payments on the Notes"
herein.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years. In addition, default rates may be higher for
mortgage loans used to refinance an existing mortgage loan. In the event of a
mortgagor's default on a Mortgage Loan, there can be no assurance that recourse
will be available beyond the specific Mortgaged Property pledged as security for
repayment. See "The Mortgage Pool--Underwriting Standards; Representations"
herein.
SPECIAL YIELD CONSIDERATIONS
The Note Interest Rate for each class of the Notes adjusts monthly based on
One-Month LIBOR as described under "Description of the Notes--Calculation of
One-Month LIBOR" herein, subject to the Maximum Note Interest Rate and the
Available Interest Rate. However, the Mortgage Rates on the Fixed Rate Mortgage
Loans are fixed and will not vary with any index, and the Mortgage Rates on the
Adjustable Rate Mortgage Loans adjust semi-annually (after an initial fixed rate
period in the case of Delayed First Adjustment Mortgage Loans) based on the
Index (which may not move in tandem with One-Month LIBOR), subject to periodic
and lifetime limitations as described herein. Investors should note that
approximately 31.47% of the Mortgage Loans are two year Delayed First Adjustment
Mortgage Loans, approximately 7.95% of the Mortgage Loans are three year Delayed
First Adjustment Loans and
S-56
<PAGE>
approximately 24.76% of the Mortgage Loans are Fixed Rate Mortgage Loans, in
each case by aggregate principal balance as of the Cut-off Date. The weighted
average month of origination of the two year Delayed First Adjustment Mortgage
Loans is April 1998, and the weighted average month of origination of the three
year Delayed First Adjustment Mortgage Loans is July 1998. Because of the
application of the Maximum Note Interest Rate and the Available Interest Rate,
increases in the Note Interest Rate on the Notes may be limited for extended
periods or indefinitely in a rising interest rate environment. The interest due
on the Mortgage Loans during any Due Period may not equal the amount of interest
that would accrue at One-Month LIBOR plus the applicable spread on the Notes
during the related Interest Accrual Period. In addition, the Index and One-Month
LIBOR may respond differently to economic and market factors. Thus, it is
possible, for example, that if both One-Month LIBOR and the Index rise during
the same period, One-Month LIBOR may rise more rapidly than the Index or may
rise higher than the Index, potentially resulting in Interest Carry Forward
Amounts with respect to one or more classes of Notes. As a result of the
foregoing as well as other factors such as the prepayment behavior of the
Mortgage Pool, relative increases in One-Month LIBOR or relative decreases in
the weighted average of the Mortgage Rates on the Mortgage Loans (i) could cause
the Current Interest Payment Amount generated by the Mortgage Pool to be less
than the aggregate of the Interest Payment Amounts that would otherwise be
payable on the Notes, leading one or more classes of Notes to incur Interest
Carry Forward Amounts, or (ii) could cause the Maximum Note Interest Rate to
apply to one or more classes of Notes.
Because the Mortgage Rate for each Adjustable Rate Mortgage Loan will be
adjusted, subject to periodic and lifetime limitations, to equal the sum of the
Index and the related Gross Margin, such rates could be higher than prevailing
market interest rates, possibly resulting in an increase in the rate of
prepayments on the Adjustable Rate Mortgage Loans after their adjustments.
As described under "Description of the Notes--Allocation of Losses;
Subordination", amounts otherwise distributable to holders of the Subordinate
Notes may be made available to protect the holders of the Class A Notes against
interruptions in payments due to certain mortgagor delinquencies, to the extent
not covered by P&I Advances. Such delinquencies may affect the yield to
investors on such classes of Subordinate Notes and, even if subsequently cured,
will affect the timing of the receipt of payments by the holders of such classes
of Subordinate Notes. In addition, a larger than expected rate of delinquencies
or losses will affect the rate of principal payments on each class of
Subordinate Notes. See "Description of the Notes--Principal Payments on the
Notes" herein.
WEIGHTED AVERAGE LIVES
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of each class
of Notes will be influenced by the rate at which principal on the Mortgage Loans
is paid, which may be in the form of scheduled payments or prepayments
(including repurchases and prepayments of principal by the borrower as well as
amounts received by virtue of condemnation, insurance or foreclosure with
respect to the Mortgage Loans), and the timing thereof.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") assumes a prepayment rate for the Mortgage Loans of 28%
CPR. The Constant Prepayment Rate model ("CPR") assumes that the outstanding
principal balance of a pool of mortgage loans prepays at a specified constant
annual rate or CPR. In generating monthly cash flows, this rate is converted to
an equivalent constant monthly rate. To assume 28% CPR or any other CPR
percentage is to assume that the stated percentage of the outstanding principal
balance of the pool is prepaid over the course of a year. No representation is
made that the Mortgage Loans will prepay at 28% CPR or any other rate.
The tables following the next paragraph indicate the percentage of the
initial Note Balance of the Notes that would be outstanding after each of the
dates shown at various percentages of the
S-57
<PAGE>
Prepayment Assumption and the corresponding weighted average lives of such
Notes. The tables are based on the following assumptions (the "Modeling
Assumptions"): (i) the Mortgage Pool consists of 16 Mortgage Loans with the
characteristics set forth below, (ii) payments on such Notes are received, in
cash, on the 25th day of each month, commencing in October 1998, (iii) the
Mortgage Loans prepay at the percentages of the Prepayment Assumption indicated,
(iv) no defaults or delinquencies occur in the payment by mortgagors of
principal and interest on the Mortgage Loans, (v) none of the majority holder of
the Equity Certificates, the Seller, the Master Servicer, the Servicers or any
other person purchases from the Trust Estate any Mortgage Loan or redeems the
Notes pursuant to any obligation or option under the Indenture, the Servicing
Agreements or any other agreement except as indicated in footnote two in the
tables below, and no partial early redemption of the Notes occurs with respect
to the 1996-LB3 Mortgage Loans, (vi) scheduled monthly payments on the Mortgage
Loans are received on the first day of each month commencing in October 1998,
and are computed prior to giving effect to any prepayments received in the prior
month, (vii) prepayments representing payment in full of individual Mortgage
Loans are received on the last day of each month commencing in September 1998,
and include 30 days' interest thereon, (viii) the scheduled monthly payment for
each Mortgage Loan is calculated based on its principal balance, Mortgage Rate,
original term to stated maturity and remaining term to stated maturity such that
the Mortgage Loan will amortize in amounts sufficient to repay the remaining
principal balance of such Mortgage Loan by its remaining term to stated
maturity, (ix) the Notes are purchased on September 30, 1998, (x) the Index
remains constant at 5.406% per annum and the Mortgage Rate on each Adjustable
Rate Mortgage Loan is adjusted on the next Adjustment Date (and on subsequent
Adjustment Dates, if necessary) to equal the Index plus the applicable Gross
Margin, subject to the applicable Periodic Rate Cap, (xi) One-Month LIBOR
remains constant at 5.591% per annum, (xii) the monthly payment on each
Adjustable Rate Mortgage Loan is adjusted on the Due Date immediately following
the next Adjustment Date (and on subsequent Adjustment Dates, if necessary) to
equal a fully amortizing monthly payment as described in clause (viii) above and
(xiii) the Master Servicing Fee Rate is as set forth in the Assumed Mortgage
Loan Characteristics table below and the Master Servicing Fee is payable
monthly, the Servicing Fee Rate for each Servicer is equal to 0.50% per annum
and the Servicing Fees are payable monthly, and the Indenture Trustee Fee Rate
is equal to 0.0035% per annum and the Indenture Trustee Fee is paid monthly.
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
PRINCIPAL ORIGINAL REMAINING MASTER
BALANCE TERM TO TO TERM TO NEXT MAXIMUM MINIMUM PERIODIC SERVICING PREPAY
AS OF THE MORTGAGE MATURITY MATURITY ADJUSTMENT GROS MORTGAGE MORTGAGE RATE FEE RATE PENALTY
CUT-OFF DATE RATE (%) (MONTHS) (MONTHS) DATE MARGIN (%) RATE (%) RATE (%) CAP (%) (%) (YES/NO)
------------ -------- -------- -------- ---- ---------- -------- -------- ------- --- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$57,071,340.36 10.8890 353 329 10/98 5.354 16.167 9.697 1.457 0.26 No
67,429,331.54 10.8720 348 326 12/98 5.543 15.575 9.537 1.199 0.05 No
78,975.90 13.5550 120 114 N/A N/A N/A N/A N/A 0.05 No
1,954,323.03 10.4790 180 174 N/A N/A N/A N/A N/A 0.05 No
522,859.32 11.0420 240 235 N/A N/A N/A N/A N/A 0.05 No
19,845,246.10 10.6750 360 354 N/A N/A N/A N/A N/A 0.05 No
199,848.43 10.5490 120 114 N/A N/A N/A N/A N/A 0.05 Yes
4,744,746.77 9.8088 180 174 N/A N/A N/A N/A N/A 0.05 Yes
1,129,200.59 9.6062 240 234 N/A N/A N/A N/A N/A 0.05 Yes
65,817,732.61 9.9565 360 354 N/A N/A N/A N/A N/A 0.05 Yes
28,150,944.39 10.0370 360 358 07/00 5.934 16.056 10.016 1.010 0.05 No
1,345,605.02 10.2430 360 358 07/01 6.404 16.553 10.243 1.155 0.05 No
16,475,828.94 9.2831 360 359 02/99 5.646 15.297 9.280 1.000 0.05 No
77,513,178.58 9.9238 359 357 07/00 5.960 15.951 9.909 1.013 0.05 Yes
28,924,252.40 9.5984 360 359 08/01 5.932 15.887 9.587 1.144 0.05 Yes
9,650,550.21 9.4439 360 358 01/99 5.781 15.444 9.444 1.000 0.05 Yes
</TABLE>
S-58
<PAGE>
There will be discrepancies between the characteristics of the actual Mortgage
Loans and the characteristics assumed in preparing the tables. Any such
discrepancy may have an effect upon the percentages of the initial Note Balance
outstanding (and the weighted average lives) of the Notes set forth in the
tables. In addition, since the actual Mortgage Loans included in the Mortgage
Pool will have characteristics that differ from those assumed in preparing the
tables set forth below and since it is not likely the level of the Index or
One-Month LIBOR will remain constant as assumed, the Notes may mature earlier or
later than indicated by the tables. In addition, as described under "Description
of the Notes--Principal Payments on the Notes" herein, the occurrence of the
Stepdown Date or a Trigger Event (each as defined herein) will have the effect
of accelerating or decelerating the amortization of the Notes, affecting the
weighted average lives of the Notes. Based on the foregoing assumptions, the
tables indicate the weighted average lives of the Notes and set forth the
percentages of the initial Note Balance of such Notes that would be outstanding
after each of the Payment Dates shown, at various percentages of the Prepayment
Assumption. Neither the prepayment model used herein nor any other prepayment
model or assumption purports to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the Mortgage Loans included in the Mortgage Pool.
Variations in the prepayment experience and the balance of the Mortgage Loans
that prepay may increase or decrease the percentages of initial Note Balances
(and weighted average lives) shown in the following tables. Such variations may
occur even if the average prepayment experience of all the Mortgage Loans equals
any of the specified percentages of the Prepayment Assumption.
S-59
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL NOTE BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A NOTES CLASS M-1 NOTES
------------- ---------------
PAYMENT DATE 0% 15% 28% 35% 45% 0% 15% 8% 35% 45%
- ------------ -- --- --- --- --- -- --- -- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date.......... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
September 25, 1999 99 81 65 56 44 100 100 100 100 100
September 25, 2000 98 65 40 28 14 100 100 100 100 100
September 25, 2001 97 51 22 10 0 100 100 100 100 66
September 25, 2002 96 39 20 10 0 100 100 52 73 66
September 25, 2003 95 33 14 9 0 100 85 37 22 54
September 25, 2004 94 28 10 6 0 100 72 27 14 27
September 25, 2005 93 23 7 4 0 100 60 19 9 10
September 25, 2006 91 19 5 2 0 100 51 13 5 0
September 25, 2007 89 16 4 1 0 100 42 10 0 0
September 25, 2008 88 14 3 1 0 100 35 7 0 0
September 25, 2009 86 11 2 0 0 100 30 2 0 0
September 25, 2010 83 9 1 0 0 100 25 0 0 0
September 25, 2011 81 8 1 0 0 100 20 0 0 0
September 25, 2012 78 6 0 0 0 100 17 0 0 0
September 25, 2013 75 5 0 0 0 100 14 0 0 0
September 25, 2014 71 4 0 0 0 100 11 0 0 0
September 25, 2015 68 4 0 0 0 100 9 0 0 0
September 25, 2016 64 3 0 0 0 100 8 0 0 0
September 25, 2017 59 2 0 0 0 100 6 0 0 0
September 25, 2018 54 2 0 0 0 100 2 0 0 0
September 25, 2019 49 1 0 0 0 100 0 0 0 0
September 25, 2020 43 1 0 0 0 100 0 0 0 0
September 25, 2021 37 0 0 0 0 95 0 0 0 0
September 25, 2022 32 0 0 0 0 83 0 0 0 0
September 25, 2023 27 0 0 0 0 69 0 0 0 0
September 25, 2024 21 0 0 0 0 54 0 0 0 0
September 25, 2025 14 0 0 0 0 37 0 0 0 0
September 25, 2026 9 0 0 0 0 23 0 0 0 0
September 25, 2027 4 0 0 0 0 10 0 0 0 0
September 25, 2028 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years(1)......... 19.47 4.79 2.45 1.77 1.05 26.23 9.39 5.21 4.77 4.91
Weighted Average
Life in Years(2)......... 19.25 4.02 2.01 1.46 1.04 25.66 7.50 4.15 3.65 2.57
</TABLE>
<TABLE>
<CAPTION>
CLASS M-2 NOTES CLASS M-3 NOTES
--------------- ---------------
0% 15% 28% 35% 45% 0% 15% 28% 35% 45%
-- --- --- --- --- -- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date.......... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
September 25, 1999 100 100 100 100 100 100 100 100 100 100
September 25, 2000 100 100 100 100 100 100 100 100 100 100
September 25, 2001 100 100 100 100 100 100 100 100 100 100
September 25, 2002 100 100 52 35 71 100 100 52 32 10
September 25, 2003 100 85 37 22 9 100 85 36 16 0
September 25, 2004 100 72 27 14 0 100 72 22 6 0
September 25, 2005 100 60 19 8 0 100 60 12 0 0
September 25, 2006 100 51 13 0 0 100 51 4 0 0
September 25, 2007 100 42 9 0 0 100 42 0 0 0
September 25, 2008 100 35 1 0 0 100 33 0 0 0
September 25, 2009 100 30 0 0 0 100 25 0 0 0
September 25, 2010 100 25 0 0 0 100 19 0 0 0
September 25, 2011 100 20 0 0 0 100 14 0 0 0
September 25, 2012 100 17 0 0 0 100 9 0 0 0
September 25, 2013 100 14 0 0 0 100 5 0 0 0
September 25, 2014 100 11 0 0 0 100 2 0 0 0
September 25, 2015 100 8 0 0 0 100 0 0 0 0
September 25, 2016 100 3 0 0 0 100 0 0 0 0
September 25, 2017 100 0 0 0 0 100 0 0 0 0
September 25, 2018 100 0 0 0 0 100 0 0 0 0
September 25, 2019 100 0 0 0 0 100 0 0 0 0
September 25, 2020 100 0 0 0 0 100 0 0 0 0
September 25, 2021 95 0 0 0 0 95 0 0 0 0
September 25, 2022 83 0 0 0 0 83 0 0 0 0
September 25, 2023 69 0 0 0 0 69 0 0 0 0
September 25, 2024 54 0 0 0 0 54 0 0 0 0
September 25, 2025 37 0 0 0 0 35 0 0 0 0
September 25, 2026 23 0 0 0 0 17 0 0 0 0
September 25, 2027 10 0 0 0 0 0 0 0 0 0
September 25, 2028 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years(1)......... 26.21 9.26 5.03 4.34 4.32 26.07 8.69 4.66 3.92 3.55
Weighted Average
Life in Years(2)......... 25.66 7.51 4.06 3.59 2.57 25.66 7.50 4.01 3.43 2.57
</TABLE>
- -----------------
(1) The weighted average life of a Note is determined by (a) multiplying
the amount of each payment of principal by the number of years from the
date of issuance of the Note to the related Payment Date, (b) adding
the results and (c) dividing the sum by the initial Note Balance of the
Notes.
(2) Calculated pursuant to footnote one but assumes the majority holder of
the Equity Certificates exercises its option to redeem the Notes when
the aggregate Note Balance has been reduced to less than 20% of the
initial aggregate Note Balance. See "The Indenture and Owner Trust
Agreement--Redemption" herein.
<PAGE>
There is no assurance that prepayments of the Mortgage Loans will conform
to any of the levels of the Prepayment Assumption indicated in the tables above,
or to any other level, or that the actual weighted average lives of the Notes
will conform to any of the weighted average lives set forth in the tables above.
Furthermore, the information contained in the tables with respect to the
weighted average lives of the Notes is not necessarily indicative of the
weighted average lives that might be calculated or projected under different or
varying prepayment or Index level assumptions.
The characteristics of the Mortgage Loans will differ from those assumed in
preparing the tables above. In addition, it is unlikely that any Mortgage Loan
will prepay at any constant percentage until maturity, that all of the Mortgage
Loans will prepay at the same rate or that the level of the Index will remain
constant or at any level for any period of time. The timing of changes in the
rate of prepayments may significantly affect the actual yield to maturity to
investors, even if the average rate of principal prepayments and the level of
the Index is consistent with the expectations of investors.
YIELD SENSITIVITY OF THE SUBORDINATE NOTES
If on any Payment Date, the Overcollateralized Amount and the Note Balances
of the Class M-3 Notes and the Class M-2 Notes have been reduced to zero, the
yield to maturity on the Class M-1 Notes will become extremely sensitive to
losses on the Mortgage Loans (and the timing thereof) that are covered by
subordination, because the entire amount of any Realized Losses (to the extent
not covered by Net Monthly Excess Cashflow) will be allocated to the Class M-1
Notes. If on any Payment Date, the Overcollateralized Amount and the Note
Balance of the Class M-3 Notes have been reduced to zero, the yield to maturity
on the Class M-2 Notes will become extremely sensitive to losses on the Mortgage
Loans (and the timing thereof) that are covered by subordination, because the
entire amount of any Realized Losses (to the extent not covered by Net Monthly
Excess Cashflow) will be allocated to the Class M-2 Notes. If on any Payment
Date, the Overcollateralized Amount has been reduced to zero, the yield to
maturity on the Class M-3 Notes will become extremely sensitive to losses on the
Mortgage Loans (and the timing thereof) that are covered by subordination,
because the entire amount of any Realized Losses (to the extent not covered by
Net Monthly Excess Cashflow) will be allocated to the Class M-3 Notes. Once
Realized Losses have been allocated to the Subordinate Notes, such Realized
Losses will not be reinstated thereafter. However, Allocated Realized Loss
Amounts may be paid to the holders of such classes of Notes, after certain
distributions to the holders of the Class A Notes and Subordinate Notes with
lower numerical class designations, but before the Equity Certificates are
entitled to any distributions. See "Description of the
Notes--Overcollateralization Provisions" herein.
Investors in the Subordinate Notes should fully consider the risk that
Realized Losses on the Mortgage Loans could result in the failure of such
investors to fully recover their investments. For additional considerations
relating to the yield on the Subordinate Notes, see "Yield Considerations" and
"Maturity and Prepayment Considerations" in the Prospectus.
DESCRIPTION OF THE NOTES
GENERAL
Wilshire REIT Trust Series 1998-1, Asset-Backed Floating Rate Notes, Series
1998-11 (the "Notes") will consist of four classes of notes, designated as (i)
the Class A Notes and (ii) the Class M-1 Notes, the Class M-2 Notes and the
Class M-3 Notes (collectively, the "Subordinate Notes"). The Notes will be
issued by Wilshire REIT Trust Series 1998-1 (the "Issuer") pursuant to an
indenture, dated as of September 1, 1998 (the "Indenture"), between the Issuer
and the Indenture Trustee. Only the Notes are offered hereby. Trust
Certificates, Series 1998-1 (the "Equity Certificates") will be issued pursuant
to a trust agreement, dated as of September 1, 1998 (the "Owner Trust
Agreement"), between the Depositor and the Owner Trustee, and will represent the
beneficial ownership interest in the Issuer.
The
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Equity Certificates are not being offered hereby and will be delivered on the
Closing Date to the Wilshire SPE, as partial consideration for the conveyance of
the Mortgage Loans by Wilshire SPE to the
Depositor.
The Notes represent non-recourse debt obligations of the Issuer secured by
a trust estate (the "Trust Estate"), which consists primarily of a segregated
pool (the "Mortgage Pool") of conventional, one- to four-family, adjustable-rate
and fixed-rate first lien mortgage loans (the "Mortgage Loans") having an
aggregate principal balance as of September 1, 1998 (the "Cut-off Date") of
approximately $380,853,964, subject to a permitted variance as described herein
under "The Mortgage Pool". Proceeds of the Trust Estate will be the sole source
of payments on the Notes. The Issuer is not expected to have any significant
assets other than the Trust Estate pledged as collateral to secure the Notes.
The Class A Notes, the Class M-1 Notes, the Class M-2 Notes and the Class
M-3 Notes will have an aggregate initial Note Balance of approximately
$309,824,000, approximately $26,280,000, approximately $16,186,000 and
approximately $21,889,000, respectively, in each case subject to a permitted
variance of plus or minus 5%. The Note Interest Rates on the Notes are
adjustable, subject to the Maximum Note Interest Rate and the Available Interest
Rate, and will be calculated for each Payment Date as described under "--Note
Interest Rate" herein. The "Final Maturity Date" of the Notes is the Payment
Date occurring in October 2028.
The Notes will be issued, maintained and transferred on the book-entry
records of DTC and its Participants in minimum denominations of $10,000 and
integral multiples of $1.00 in excess thereof.
The Notes will initially be represented by one or more global notes
registered in the name of the nominee of DTC (together with any successor
clearing agency selected by the Depositor, the "Clearing Agency"), except as
provided below. The Depositor has been informed by DTC that DTC's nominee will
be CEDE & Co. ("CEDE"). No person acquiring an interest in any class of the
Notes (a "Note Owner") will be entitled to receive a note representing such
person's interest, except as set forth below under "--Definitive Notes". Unless
and until Definitive Notes are issued under the limited circumstances described
herein, all references to actions by Noteholders with respect to the Notes shall
refer to actions taken by DTC upon instructions from its Participants (as
defined below), and all references herein to payments, notices, reports and
statements to Noteholders with respect to the Notes shall refer to payments,
notices, reports and statements to DTC or CEDE, as the registered holder of the
Notes, for payment to Note Owners in accordance with DTC procedures. See
"--Registration" and "--Definitive Notes" herein.
Any Definitive Notes will be transferable and exchangeable at the offices
of the Indenture Trustee. No service charge will be imposed for any registration
of transfer or exchange, but the Indenture Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in
connection therewith.
All payments to holders of the Notes, other than the final payment on any
class of Notes, will be made by or on behalf of the Indenture Trustee to the
persons in whose names such Notes are registered at the close of business on
each Record Date. The "Record Date" for each Payment Date (i) with respect to
the Notes (other than any Definitive Notes) will be the close of business on the
business day immediately preceding such Payment Date or (ii) with respect to the
Definitive Notes will be the close of business on the last business day of the
month preceding the month in which such Payment Date occurs. Such payments will
be made either (a) by check mailed to the address of each such Noteholder as it
appears in the Note Register or (b) upon written request to the Indenture
Trustee at least five business days prior to the relevant Record Date by any
holder of Notes having an aggregate initial Note Balance that is in excess of
the lesser of (i) $5,000,000 or (ii) two-thirds of the initial aggregate Note
Balance of such class of Notes, by wire transfer in immediately available funds
to the account of such Noteholder specified in the request. The final payment on
any class of Notes will be made in like manner, but only upon presentment and
surrender of such Notes at the corporate trust
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office of the Indenture Trustee or such other location specified in the notice
to Noteholders of such final payment.
REGISTRATION
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and to facilitate the
clearance and settlement of securities transactions between Participants through
electronic book entries, thereby eliminating the need for physical movement of
notes. Participants include securities brokers and dealers (including Salomon
Smith Barney Inc.), banks, trust companies and clearing corporations. Indirect
access to the DTC system is also available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Note Owners that are not Participants or Indirect Participants but desire
to purchase, sell or otherwise transfer ownership of, or other interests in, the
Notes may do so only through Participants and Indirect Participants. In
addition, Note Owners will receive all payments of principal of and interest on
the Notes from the Indenture Trustee through DTC and DTC Participants. The
Indenture Trustee will forward payments to DTC in same day funds and DTC will
forward such payments to Participants in next day funds settled through the New
York Clearing House. Each Participant will be responsible for disbursing such
payments to Indirect Participants or to Note Owners. Unless and until Definitive
Notes are issued, it is anticipated that the only holder of the Notes will be
CEDE, as nominee of DTC. Note Owners will not be recognized by the Indenture
Trustee as Noteholders, as such term is used in the Indenture, and Note Owners
will be permitted to exercise the rights of Noteholders only indirectly through
DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Notes among Participants and to receive and transmit payments of principal of,
and interest on, the Notes. Participants and Indirect Participants with which
Note Owners have accounts with respect to the Notes similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Note Owners. Accordingly, although Note Owners will not possess
Definitive Notes, the Rules provide a mechanism by which Note Owners through
their Participants and Indirect Participants will receive payments and will be
able to transfer their interest.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and on behalf of certain banks, the ability of a
Note Owner to pledge Notes to persons or entities that do not participate in the
DTC system, or to otherwise act with respect to such Notes, may be limited due
to the absence of physical notes for the Notes. In addition, under a book-entry
format, Note Owners may experience delays in their receipt of payments since
payment will be made by the Indenture Trustee to CEDE, as nominee for DTC.
Under the Rules, DTC will take action permitted to be taken by a Noteholder
under the Indenture only at the direction of one or more Participants to whose
DTC account the Notes are credited. Cedel or the Euroclear Operator (as defined
herein), as the case may be, will take any other action permitted to be taken by
a Noteholder under the Indenture on behalf of a Cedel Participant (as defined
herein) or Euroclear Participant (as defined herein) only in accordance with its
relevant rules and procedures and subject to the ability of the Relevant
Depositary (as defined herein) to effect such actions on its behalf through DTC.
Additionally, under the Rules, DTC will take such actions with respect to
specified Voting Rights only at the direction of and on behalf of Participants
whose holdings of Notes evidence such specified Voting Rights. DTC may take
conflicting actions with respect to Voting Rights to the
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extent that Participants whose holdings of Notes evidence such Voting Rights,
authorize divergent action.
The Issuer, the Originators, the Depositor, the Master Servicer, the
Seller, the Wilshire SPE, the Owner Trustee, the Indenture Trustee and their
respective affiliates will have no liability for any actions taken by DTC or its
nominee or Cedel or Euroclear, including, without limitation, actions for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Notes held by CEDE, as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
DEFINITIVE NOTES
Definitive Notes will be issued to Note Owners or their nominees, rather
than to DTC or its nominee, only if (i) the Depositor advises the Indenture
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as Clearing Agency with respect to the Notes and the
Depositor is unable to locate a qualified successor, (ii) the Depositor, at its
option, advises the Indenture Trustee in writing that it elects to terminate the
book-entry system through DTC, or (iii) after the occurrence of an Event of
Default (as defined herein), Note Owners representing in the aggregate not less
than 51% of the Voting Rights of the Notes advise the Indenture Trustee and DTC
through Participants, in writing, that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the Note Owners' best
interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Indenture Trustee is required to notify all Note Owners through
Participants of the availability of Definitive Notes. Upon surrender by DTC of
the definitive notes representing the Notes and receipt of instructions for re-
registration, the Indenture Trustee will reissue the Notes as Definitive Notes
issued in the respective principal amounts owned by individual Note Owners, and
thereafter the Indenture Trustee will recognize the holders of such Definitive
Notes as Noteholders under the Indenture. Such Definitive Notes will be issued
in minimum denominations of $10,000, except that any beneficial ownership
represented by a Note in an amount less than $10,000 immediately prior to the
issuance of a Definitive Note shall be issued in a minimum denomination equal to
the amount represented by such Note.
BOOK-ENTRY FACILITIES
Note Owners may elect to hold their interests in the Notes through DTC in
the United States or through Cedel or Euroclear in Europe, if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. The Notes of each class will be issued in one or
more notes which equal the aggregate Note Balance of such class and will
initially be registered in the name of Cede, the nominee of DTC. Cedel and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in Cedel's and Euroclear's names on the books of
their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank will act as depositary for Cedel and Chase will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries").
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear
Participants or Cedel Participants on such business day. Cash received in Cedel
or Euroclear as a result of sales of securities by or through a Cedel
Participant or Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant Cedel or
Euroclear cash account only as of the business day following settlement in DTC.
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Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and
operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of notes. Transactions may be settled in Cedel in any of 28 currencies,
including United States dollars. Cedel provides to its Cedel Participants, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing. Cedel
interfaces with domestic markets in several countries. As a professional
depository, Cedel is subject to regulation by the Luxembourg Monetary Institute.
Cedel participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Indirect access to Cedel
is also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Cedel
Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
notes and any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 32 currencies, including United States
dollars. Euroclear includes various other services, including securities lending
and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and
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Conditions govern transfers of securities and cash within Euroclear, withdrawals
of securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific notes to specific securities clearance
accounts. The Euroclear Operator acts under the Terms and Conditions only on
behalf of Euroclear Participants, and has no record of or relationship with
persons holding through Euroclear Participants.
Payments with respect to Notes held through Cedel or Euroclear will be
credited to the cash accounts of Cedel Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such payments will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Notes among participants of DTC, Cedel and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time. See Annex I
hereto.
NOTE INTEREST RATES
The Note Interest Rate on the Class A Notes will be a rate per annum equal
to the lesser of (i) One- Month LIBOR plus 0.32%, in the case of each Payment
Date through and including the Payment Date on which the aggregate Note Balance
is reduced to less than 20% of the aggregate initial Note Balance, or One-Month
LIBOR plus 0.64%, in the case of any Payment Date thereafter, (ii) the Available
Interest Rate for such Payment Date and (iii) 13.75% per annum (the "Maximum
Note Interest Rate").
The Note Interest Rate on the Class M-1 Notes will be a rate per annum
equal to the lesser of (i) One-Month LIBOR plus 0.60%, in the case of each
Payment Date through and including the Payment Date on which the aggregate Note
Balance is reduced to less than 20% of the aggregate initial Note Balance, or
One-Month LIBOR plus 0.90%, in the case of any Payment Date thereafter, (ii) the
Available Interest Rate for such Payment Date and (iii) the Maximum Note
Interest Rate.
The Note Interest Rate on the Class M-2 Notes will be a rate per annum
equal to the lesser of (i) One-Month LIBOR plus 0.80%, in the case of each
Payment Date through and including the Payment Date on which the aggregate Note
Balance is reduced to less than 20% of the aggregate initial Note Balance, or
One-Month LIBOR plus 1.20%, in the case of any Payment Date thereafter, (ii) the
Available Interest Rate for such Payment Date and (iii) the Maximum Note
Interest Rate.
The Note Interest Rate on the Class M-3 Notes will be a rate per annum
equal to the lesser of (i) One-Month LIBOR plus 1.85%, in the case of each
Payment Date through and including the Payment Date on which the aggregate Note
Balance is reduced to less than 20% of the aggregate initial Note Balance, or
One-Month LIBOR plus 2.775%, in the case of any Payment Date thereafter, (ii)
the Available Interest Rate for such Payment Date and (iii) the Maximum Note
Interest Rate.
See "--Calculation of One-Month LIBOR" herein.
With respect to any class of Notes and any Payment Date, the lesser of the
rate described for such class in clause (i) above and the Maximum Note Interest
Rate is referred to herein as the "Note Accrual Rate" or such class and such
Payment Date. The "Available Interest Rate" for any Payment Date is a rate per
annum equal to the fraction, expressed as a percentage, the numerator of which
is (i) the Current Interest Payment Amount for such Payment Date, and the
denominator of which is (ii) the aggregate Note Balance of the Notes immediately
prior to such Payment Date multiplied by the actual number of days elapsed in
the related Interest Accrual Period and divided by 360.
The Note Interest Rate and the Note Accrual Rate for the Notes for the
current related Interest Accrual Period, to the extent it has been determined,
and for the immediately preceding Interest Accrual Period may be obtained by
telephoning the Indenture Trustee at (410) 884-2090.
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INTEREST PAYMENTS ON THE NOTES
To the extent of the Current Interest Payment Amount, in the priorities set
forth below, the holders of each class of Notes will be entitled to receive on
each Payment Date interest payments in an amount equal to the Interest Payment
Amount for such class. On each Payment Date, the Current Interest Payment Amount
will be distributed in the following order of priority:
FIRST, to the holders of the Class A Notes, the Interest Payment Amount for
such Notes;
SECOND, to the extent of the Current Interest Payment Amount remaining
after payment of the Interest Payment Amount for the Class A Notes, to the
holders of the Class M-1 Notes, the Interest Payment Amount for such Notes;
THIRD, to the extent of the Current Interest Payment Amount remaining after
payment of the Interest Payment Amounts for the Class A Notes and the Class
M-1 Notes, to the holders of the Class M-2 Notes, the Interest Payment
Amount for such Notes; and
FOURTH, to the extent of the Current Interest Payment Amount remaining
after payment of the Interest Payment Amounts for the Class A Notes, the
Class M-1 Notes and the Class M-2 Notes, to the holders of the Class M-3
Notes, the Interest Payment Amount for such Notes.
The "Current Interest Payment Amount" for any Payment Date is an amount
equal to interest collections or advances on the Mortgage Loans during the
related Due Period (net of the Master Servicing Fee, the Servicing Fees and the
Indenture Trustee Fee).
The "Interest Payment Amount" for the Notes of any class on any Payment
Date is equal to interest accrued during the related Interest Accrual Period on
the Note Balance of such Notes immediately prior to such Payment Date at the
then-applicable Note Interest Rate for such class.
With respect to any Payment Date, to the extent that the aggregate of the
Interest Payment Amounts for the Notes is limited by the Current Interest
Payment Amount for the related Due Period, the holders of certain classes of
Notes may receive an Interest Payment Amount calculated at the Available
Interest Rate rather than at the applicable Note Accrual Rate for such classes
and such Payment Date. With respect to any class of Notes and any Payment Date,
any shortfall in payment of interest represented by the excess, if any, of the
Interest Payment Amount that would be payable on such class at the applicable
Note Accrual Rate over the Interest Payment Amount actually paid on such class
at the Available Interest Rate, together with any such shortfall in payment of
interest remaining unpaid from previous Payment Dates plus interest accrued
thereon at the related Note Accrual Rate, is referred to as an "Interest Carry
Forward Amount". The Interest Carry Forward Amount, if any, for any class of the
Notes for any Payment Date is payable to the extent of available funds remaining
after certain other payments on the Notes on such Payment Date, but before any
payments on the Equity Certificates on such Payment Date. See
"--Overcollateralization Provisions" herein.
The "Interest Accrual Period" for any Payment Date is the period commencing
on the Payment Date of the month immediately preceding the month in which such
Payment Date occurs (or, in the case of the first period, commencing on the
Closing Date) and ending on the day preceding such Payment Date. All payments of
interest on the Notes will be based on a 360-day year and the actual number of
days in the applicable Interest Accrual Period.
The Note Balance of a Note outstanding at any time represents the then
maximum amount that the holder thereof is entitled to receive as payments
allocable to principal from the cash flow on the Mortgage Loans and the other
assets in the Trust Estate. The "Note Balance" of any class of Notes as of any
date of determination is equal to the initial Note Balance thereof reduced by
the aggregate of (a) all amounts allocable to principal previously distributed
with respect to such Note and (b) any reductions in the Note Balance thereof
deemed to have occurred in connection with allocations of Realized Losses in the
manner described herein.
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CALCULATION OF ONE-MONTH LIBOR
With respect to each Interest Accrual Period, on the second business
day preceding such Interest Accrual Period, (each such date, an "Interest
Determination Date"), the Indenture Trustee will determine One-Month LIBOR for
the next Interest Accrual Period. "One Month LIBOR" means, as of any Interest
Determination Date, the London interbank offered rate for one-month U.S. dollar
deposits which appears on Telerate Page 3750 (as defined herein) as of 11:00
a.m. (London time) on such date. If such rate does not appear on Telerate Page
3750, the rate for that day will be determined on the basis of the offered rates
of the Reference Banks (as defined herein) for one-month U.S. dollar deposits,
as of 11:00 a.m. (London time) on such Interest Determination Date. The
Indenture Trustee will request the principal London office of each of the
Reference Banks to provide a quotation of its rate. If on such Interest
Determination Date two or more Reference Banks provide such offered quotations,
One-Month LIBOR for the related Interest Accrual Period shall be the arithmetic
mean of such offered quotations (rounded upwards if necessary to the nearest
whole multiple of 0.0625%). If on such Interest Determination Date fewer than
two Reference Banks provide such offered quotations, One-Month LIBOR for the
related Interest Accrual Period shall be the higher of (x) One-Month LIBOR as
determined on the previous Interest Determination Date and (y) the Reserve
Interest Rate (as defined herein).
As used in this section, "business day" means a day on which banks are open
for dealing in foreign currency and exchange in London and New York City;
"Telerate Page 3750" means the display page currently so designated on the Dow
Jones Telerate Capital Markets Report (or such other page as may replace that
page on that service for the purpose of displaying comparable rates or prices);
"Reference Banks" means leading banks selected by the Indenture Trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market (i) with an established place of business in London, (ii) which have been
designated as such by the Indenture Trustee and (iii) not controlling,
controlled by, or under common control with, the Depositor or the Issuer; and
"Reserve Interest Rate" shall be the rate per annum that the Indenture Trustee
determines to be either (i) the arithmetic mean (rounded upwards if necessary to
the nearest whole multiple of 0.0625%) of the one-month U.S. dollar lending
rates which New York City banks selected by the Indenture Trustee are quoting on
the relevant Interest Determination Date to the principal London offices of
leading banks in the London interbank market or, (ii) in the event that the
Indenture Trustee can determine no such arithmetic mean, the lowest one-month
U.S. dollar lending rate which New York City banks selected by the Indenture
Trustee are quoting on such Interest Determination Date to leading European
banks.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Indenture Trustee and the Indenture Trustee's calculation of the rate of
interest applicable to the Notes for the related Interest Accrual Period shall
(in the absence of manifest error) be final and binding.
PRINCIPAL PAYMENTS ON THE NOTES
On each Payment Date, the Principal Payment Amount will be distributed to
the holders of the Notes then entitled to payments of principal. The "Principal
Payment Amount" for any Payment Date, other than the Final Maturity Date and the
Payment Date immediately following the acceleration of the Notes due to an Event
of Default, will be the lesser of:
(a) the excess of the Available Payment Amount over the aggregate of
the Interest Payment Amounts for the Notes; and
(b) THE SUM OF:
(i) the principal portion of all scheduled monthly payments on
the Mortgage Loans due during the related Due Period, whether or
not received on or prior to the related
Determination Date;
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(ii) the principal portion of all proceeds received during the
related Prepayment Period in respect of the repurchase of a
Mortgage Loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) as contemplated in the
Servicing Agreements;
(iii) the principal portion of all other unscheduled
collections, including insurance proceeds, liquidation proceeds
and all full and partial principal prepayments, received during
the related Prepayment Period, to the extent applied as recoveries
of principal on the Mortgage Loans;
(iv) the principal portion of any Realized Losses incurred or
deemed to have been incurred on any Mortgage Loans in the calendar
month preceding such Payment Date to the extent covered by Net
Monthly Excess Cashflow (as defined herein) for such Payment Date;
and
(v) the amount of any Overcollateralization Increase Amount
(as defined herein) for such Payment Date;
MINUS
(vi) the amount of any Overcollateralization Reduction Amount
(as defined herein) for such Payment Date.
The "Principal Payment Amount" for the Final Maturity Date or the Payment Date
immediately following the acceleration of the Notes due to an Event of Default
will equal the amount necessary to reduce the Note Balance of any Notes
outstanding to zero. In no event will the Principal Payment Amount with respect
to any Payment Date be (x) less than zero or (y) greater than the
then-outstanding aggregate Note Balance of the Notes. The Principal Payment
Amount for the first Payment Date will include approximately $6,627,953
collected by the Servicers in respect of prepayments on the Mortgage Loans
during the September 1998 Prepayment Period.
On each Payment Date (a) prior to the Stepdown Date or (b) on which a
Trigger Event is in effect, the Principal Payment Amount shall be distributed:
first, to the Class A Notes, until the Note Balance thereof has been reduced to
zero; second, to the Class M-1 Notes, until the Note Balance thereof has been
reduced to zero; third, to the Class M-2 Notes, until the Note Balance thereof
has been reduced to zero; and fourth, to the Class M-3 Notes, until the Note
Balance thereof has been reduced to zero.
On each Payment Date (a) on or after the Stepdown Date and (b) on which a
Trigger Event is not in effect, the holders of the Class A Notes and the
Subordinate Notes shall be entitled to receive payments in respect of principal
to the extent of the Principal Payment Amount in the following amounts
and order of priority:
FIRST, the lesser of (x) the Principal Payment Amount and (y) the Class A
Principal Payment Amount, shall be distributed to the holders of the Class
A Notes, until the Note Balance thereof has been reduced to zero;
SECOND, the lesser of (x) the excess of (i) the Principal Payment Amount
over (ii) the amount distributed to the holders of the Class A Notes
pursuant to clause FIRST above and (y) the Class M-1 Principal Payment
Amount, shall be distributed to the holders of the Class M-1 Notes, until
the Note Balance thereof has been reduced to zero;
THIRD, the lesser of (x) the excess of (i) the Principal Payment Amount
over (ii) the sum of the amounts distributed to the holders of the Class A
Notes pursuant to clause FIRST above and to the holders of the Class M-1
Notes pursuant to clause SECOND above and (y) the Class M-2 Principal
Payment Amount, shall be distributed to the holders of the Class M-2 Notes,
until the Note Balance thereof has been reduced to zero; and
FOURTH, the lesser of (x) the excess of (i) the Principal Payment Amount
over (ii) the sum of the amounts distributed to the holders of the Class A
Notes pursuant to clause FIRST above, to the holders of the Class M-1 Notes
pursuant to clause SECOND above and to the holders of the Class
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M-2 Notes pursuant to clause THIRD above and (y) the Class M-3 Principal
Payment Amount, shall be distributed to the holders of the Class M-3 Notes,
until the Note Balance thereof has been reduced to zero.
On the Final Maturity Date or the Payment Date immediately following the
acceleration of the Notes due to any Event of Default principal will be payable
on each class of Notes in an amount equal to the Note Balance thereof on such
Payment Date. On the Final Maturity Date or the Payment Date immediately
following the acceleration of the Notes due to any Event of Default, amounts in
respect of accrued interest, Interest Carry Forward Amounts and Allocated
Realized Loss Amounts will also be payable on each class of Notes in the
priorities set forth in the Indenture. There can be no assurance, however, that
sufficient funds will be available on any such date to retire the Note Balances
and pay such other amounts.
The allocation of payments in respect of principal to the Class A Notes on
each Payment Date (a) prior to the Stepdown Date or (b) on which a Trigger Event
has occurred, will have the effect of accelerating the amortization of the Class
A Notes while, in the absence of Realized Losses, increasing the respective
percentage interest in the principal balance of the Mortgage Loans evidenced by
the Subordinate Notes and the Overcollateralized Amount. Increasing the
respective percentage interest in the Trust Estate of the Subordinate Notes and
the Overcollateralized Amount relative to that of the Class A Notes is intended
to preserve the availability of the subordination provided by the Subordinate
Notes and the Overcollateralized Amount.
The "Available Payment Amount" for any Payment Date is equal to the sum,
net of amounts reimbursable therefrom to the Master Servicer, the Servicers, the
Indenture Trustee or the Owner Trustee, of (i) the aggregate amount of scheduled
monthly payments on the Mortgage Loans due on the related Due Date and received
on or prior to the related Determination Date, after deduction of the Master
Servicing Fee, the Servicing Fees and the Indenture Trustee Fee, (ii) certain
unscheduled payments in respect of the Mortgage Loans, including prepayments,
insurance proceeds, liquidation proceeds and proceeds from repurchases of and
substitutions for the Mortgage Loans occurring during the preceding calendar
month and (iii) all P&I Advances with respect to the Mortgage Loans received for
such Payment Date. The holders of the Equity Certificates will be entitled to
all Prepayment Charges received on the Mortgage Loans and such amounts will not
be available for distribution on the Notes.
The "Class A Principal Payment Amount" for any Payment Date on or after the
Stepdown Date and on which a Trigger Event is not in effect, is an amount equal
to the excess of (x) the Note Balance of the Class A Notes immediately prior to
such Payment Date over (y) the lesser of (A) the product of (i) 62.70% and (ii)
the aggregate principal balance of the Mortgage Loans as of the last day of the
related Due Period and (B) the aggregate principal balance of the Mortgage Loans
as of the last day of the related Due Period minus $2,856,405.
The "Class M-1 Principal Payment Amount" for any Payment Date on or after
the Stepdown Date and on which a Trigger Event is not in effect, is an amount
equal to the excess of (x) the sum of (i) the Note Balance of the Class A Notes
(after taking into account the payment of the Class A Principal Payment Amount
on such Payment Date) and (ii) the Note Balance of the Class M-1 Notes
immediately prior to such Payment Date over (y) the lesser of (A) the product of
(i) 76.50% and (ii) the aggregate principal balance of the Mortgage Loans as of
the last day of the related Due Period and (B) the aggregate principal balance
of the Mortgage Loans as of the last day of the related Due Period minus
$2,856,405.
The "Class M-2 Principal Payment Amount" for any Payment Date on or after
the Stepdown Date and on which a Trigger Event is not in effect, is an amount
equal to the excess of (x) the sum of (i) the Note Balance of the Class A Notes
(after taking into account the payment of the Class A Principal Payment Amount
on such Payment Date), (ii) the Note Balance of the Class M-1 Notes (after
taking into account the payment of the Class M-1 Principal Payment Amount on
such Payment Date) and (iii) the Note Balance of the Class M-2 Notes immediately
prior to such Payment Date over (y) the lesser of (A)
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the product of (i) 85.00% and (ii) the aggregate principal balance of the
Mortgage Loans as of the last day of the related Due Period and (B) the
aggregate principal balance of the Mortgage Loans as of the last day of the
related Due Period minus $2,856,405.
The "Class M-3 Principal Payment Amount" for any Payment Date on or after
the Stepdown Date and on which a Trigger Event is not in effect, is an amount
equal to the excess of (x) the sum of (i) the Note Balance of the Class A Notes
(after taking into account the payment of the Class A Principal Payment Amount
on such Payment Date), (ii) the Note Balance of the Class M-1 Notes (after
taking into account the payment of the Class M-1 Principal Payment Amount on
such Payment Date), (iii) the Note Balance of the Class M-2 Notes (after taking
into account the payment of the Class M-2 Principal Payment Amount on such date)
and (iv) the Note Balance of the Class M-3 Notes immediately prior to such
Payment Date over (y) the lesser of (A) the product of (i) 96.50% and (ii) the
aggregate principal balance of the Mortgage Loans as of the last day of the
related Due Period and (B) the aggregate principal balance of the Mortgage Loans
as of the last day of the related Due Period minus $2,856,405.
The "Stepdown Date" for any Payment Date is the later to occur of (x) the
Payment Date occurring in October 2001 and (y) the first Payment Date on which
the Credit Enhancement Percentage (calculated for this purpose only after taking
into account payments of principal on the Mortgage Loans, but prior to any
payment of the Principal Payment Amount to the Notes then entitled to payments
of principal on such Payment Date) is greater than or equal to 37.30%.
With respect to any Payment Date, a "Trigger Event" is in effect if the
percentage obtained by dividing (x) the principal amount of Mortgage Loans
delinquent 60 days or more by (y) the aggregate principal balance of the
Mortgage Loans, in each case, as of the last day of the previous calendar month,
exceeds the lesser of (i) 35.00% of the Credit Enhancement Percentage and (ii)
13.055%.
The "Credit Enhancement Percentage" for any Payment Date is the percentage
obtained by dividing (x) the sum of the Overcollateralized Amount and the
aggregate Note Balance of the Subordinate Notes by (y) the aggregate principal
balance of the Mortgage Loans, calculated after taking into account payments of
principal on the Mortgage Loans and payment of the Principal Payment Amount to
the Notes on such Payment Date.
CREDIT ENHANCEMENT
The Credit Enhancement provided for the benefit of the holders of the Notes
consists of subordination, as described below, and overcollateralization, as
described under "--Overcollateralization Provisions" herein.
The rights of the holders of the Subordinate Notes and the Equity
Certificates to receive payments will be subordinated, to the extent described
herein, to the rights of the holders of the Class A Notes. This subordination is
intended to enhance the likelihood of regular receipt by the holders of the
Class A Notes of the full amount of interest and principal to which they are
entitled and to afford such holders protection against Realized Losses.
The protection afforded to the holders of the Class A Notes by means of the
subordination of the Subordinate Notes and the Equity Certificates will be
accomplished by (i) the preferential right of the holders of the Class A Notes
to receive on any Payment Date, prior to payment on the Subordinate Notes and
the Equity Certificates, payments in respect of interest and principal, subject
to available funds, and (ii) if necessary, the right of the holders of the Class
A Notes to receive future payments of amounts that would otherwise be payable to
the holders of the Subordinate Notes and the Equity Certificates.
In addition, the rights of the holders of Subordinate Notes with lower
numerical class designations will be senior to the rights of holders of
Subordinate Notes with higher numerical class designations, and the rights of
the holders of all of the Subordinate Notes to receive payments in respect of
the Mortgage Loans will be senior to the rights of the holders of the Equity
Certificates, in each case to the extent
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described herein. This subordination is intended to enhance the likelihood of
regular receipt by the holders of Subordinate Notes with lower numerical class
designations relative to the holders of Subordinate Notes with higher numerical
class designations (and by the holders of all of the Subordinate Notes relative
to the holders of the Equity Certificates) of the full amount of interest and
principal to which they are entitled and to afford such holders protection
against Realized Losses, as described under "--Allocation of Realized Losses"
herein.
OVERCOLLATERALIZATION PROVISIONS
The weighted average Mortgage Rate for the Mortgage Loans (adjusted to
reflect the Master Servicing Fee, the Servicing Fees and the Indenture Trustee
Fee payable from interest received or advanced on the Mortgage Loans) is
generally expected to be higher than the weighted average of the Note Interest
Rates on the Notes, thus generating excess interest collections which, in the
absence of Realized Losses, will not be necessary to fund interest payments on
the Notes. The Indenture requires that, on each Payment Date, the Net Monthly
Excess Cashflow, if any, be applied on such Payment Date as an accelerated
payment of principal on class or classes of Notes then entitled to receive
payments in respect of principal, but only to the limited extent hereafter
described. The "Net Monthly Excess Cashflow" for any Payment Date is equal to
the sum of (a) any Overcollateralization Reduction Amount and (b) the excess of
(x) the Available Payment Amount for such Payment Date over (y) the sum for such
Payment Date of the aggregate of the Interest Payment Amounts payable to the
holders of the Notes and the sum of the amounts described in clauses (b)(i)
through (iii) of the definition of Principal Payment Amount.
With respect to any Payment Date, any Net Monthly Excess Cashflow (or, in
the case of clause FIRST below, the Net Monthly Excess Cashflow exclusive of any
Overcollateralization Reduction Amount) shall be paid as follows:
FIRST, to the holders of the class or classes of Notes then entitled to
receive payments in respect of principal, in an amount equal to the
principal portion of any Realized Losses incurred or deemed
to have been incurred on the Mortgage Loans;
SECOND, to the holders of the class or classes of Notes then entitled to
receive payments in respect of principal, in an amount equal to the
Overcollateralization Increase Amount;
THIRD, to the holders of the Class A Notes, in an amount equal to the
Interest Carry Forward Amount for such Notes;
FOURTH, to the holders of the Class M-1 Notes, in an amount equal to the
Interest Carry Forward Amount for such Notes;
FIFTH, to the holders of the Class M-1 Notes, in an amount equal to the
Allocated Realized Loss Amount for such Notes;
SIXTH, to the holders of the Class M-2 Notes, in an amount equal to the
Interest Carry Forward Amount for such Notes;
SEVENTH, to the holders of the Class M-2 Notes, in an amount equal to the
Allocated Realized Loss Amount for such Notes;
EIGHTH, to the holders of the Class M-3 Notes, in an amount equal to the
Interest Carry Forward Amount for such Notes;
NINTH, to the holders of the Class M-3 Notes, in an amount equal to the
Allocated Realized Loss Amount for such Notes; and
TENTH, to the holders of the Equity Certificates as provided in the
Indenture.
With respect to any Payment Date, the excess, if any, of (a) the aggregate
principal balance of the Mortgage Loans immediately following such Payment Date
over (b) the Note Balance of the Notes, after
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taking into account the payment of the amounts described in clauses (b)(i)
through (iv) of the definition of Principal Payment Amount on such Payment Date,
is the "Overcollateralized Amount" for the Notes as of such Payment Date. As of
the Closing Date, the aggregate principal balance of the Mortgage Loans as of
the Cut-off Date will exceed the aggregate Note Balance of the Notes by an
amount equal to approximately $6,664,964. Such amount represents approximately
1.75% of the aggregate principal balance of the Mortgage Loans as of the Cut-off
Date, which is the initial amount of overcollateralization required to be
provided by the Mortgage Pool under the Indenture. Under the Indenture, the
Overcollateralized Amount is required to be maintained at the "Required
Overcollateralized Amount". In the event that Realized Losses are incurred on
the Mortgage Loans, such Realized Losses may result in an overcollateralization
deficiency since such Realized Losses will reduce the principal balance of the
Mortgage Loans without a corresponding reduction to the aggregate Note Balance
of the Notes. In such event, the Indenture requires the payment from Net Monthly
Excess Cashflow, subject to available funds, of an amount equal to any such
overcollateralization deficiency, which shall constitute a principal payment on
the Notes in reduction of the Note Balances thereof. This has the effect of
accelerating the amortization of the Notes relative to the amortization of the
Mortgage Loans, and of increasing the Overcollateralized Amount. With respect to
the Notes and any Payment Date, any amount of Net Monthly Excess Cashflow
actually applied as an accelerated payment of principal to the extent the
Required Overcollateralized Amount exceeds the Overcollateralized Amount as of
such Payment Date is the "Overcollateralization Increase Amount".
On and after the Stepdown Date and provided that a Trigger Event is not in
effect, the Required Overcollateralized Amount may be permitted to decrease
("step down") below the initial $6,664,964 level to a level equal to
approximately 3.50% of the then current aggregate outstanding principal balance
of the Mortgage Loans (after giving effect to principal payments to be
distributed on such Payment Date), subject to a floor of $2,856,405. In the
event that the Required Overcollateralized Amount is permitted to step down on
any Payment Date, the Indenture provides that a portion of the principal which
would otherwise be distributed to the holders of the Notes on such Payment Date
shall be distributed to the holders of the Equity Certificates, subject to the
priorities set forth above. With respect to each such Payment Date, the
Principal Payment Amount will be reduced by the amount by which the
Overcollateralized Amount exceeds the Required Overcollateralized Amount (the
"Overcollateralization Reduction Amount") after taking into account all other
payments to be made on such Payment Date, which amount shall be distributed as
Net Monthly Excess Cashflow pursuant to the priorities set forth above. This has
the effect of decelerating the amortization of the Notes relative to the
amortization of the Mortgage Loans, and of reducing the Overcollateralized
Amount. However, if on any Payment Date a Trigger Event is in effect, the
Required Overcollateralized Amount will not be permitted to step down on such
Payment Date.
ALLOCATION OF LOSSES; SUBORDINATION
With respect to any defaulted Mortgage Loan that is finally liquidated
through foreclosure sale, disposition of the related Mortgaged Property (if
acquired by deed in lieu of foreclosure) or otherwise, the amount of loss
realized, if any, will equal the portion of the unpaid principal balance
remaining, if any, plus interest thereon through the last day of the month in
which such Mortgage Loan was finally liquidated, after application of all
amounts recovered (net of amounts reimbursable to the Servicers for P&I
Advances, servicing advances and Servicing Fees) towards interest and principal
owing on the Mortgage Loan. Such amount of loss realized and any Bankruptcy
Losses are referred to herein as "Realized Losses".
Any Realized Loss on the Mortgage Loans will be allocated on any Payment
Date, first, to Net Monthly Excess Cashflow, second, to the Overcollateralized
Amount, third, to the Class M-3 Notes, fourth, to the Class M-2 Notes, and
fifth, to the Class M-1 Notes. With respect to any class of Subordinate Notes
and any Payment Date, the sum of (i) any such Realized Loss allocated to such
class of Subordinate Notes on such Payment Date and (ii) any Allocated Realized
Loss Amount for such
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class remaining unpaid from previous Payment Dates plus accrued interest thereon
at the Note Accrual Rate for such class is referred to as an "Allocated Realized
Loss Amount". The Indenture does not permit the allocation of Realized Losses to
the Class A Notes. Investors in the Class A Notes should note that although
Realized Losses cannot be allocated to the such Notes, under certain loss
scenarios there will not be enough principal and interest collected on the
Mortgage Loans to pay the Class A Notes all interest and principal amounts to
which they are then entitled.
Once Realized Losses have been allocated to the Subordinate Notes, such
Realized Losses will not be reinstated thereafter. However, Allocated Realized
Loss Amounts may be paid to the holders of such classes of Notes, after certain
distributions to the holders of the Class A Notes and Subordinate Notes with
lower numerical class designations, but before the Equity Certificates are
entitled to any distributions.
Any allocation of a Realized Loss to a Note will be made by reducing the
Note Balance thereof by the amount so allocated on the Payment Date in the month
following the calendar month in which such Realized Loss was incurred.
Notwithstanding anything to the contrary described herein, in no event will the
Note Balance of any Note be reduced more than once in respect of any particular
amount both (i) allocable to such Notes in respect of Realized Losses and (ii)
payable as principal to the holder of such Notes from Net Monthly Excess
Cashflow.
A "Bankruptcy Loss" is a Deficient Valuation or a Debt Service Reduction.
With respect to any Mortgage Loan, a "Deficient Valuation" is a valuation by a
court of competent jurisdiction of the Mortgaged Property in an amount less than
the then outstanding indebtedness under the Mortgage Loan, which valuation
results from a proceeding initiated under the United States Bankruptcy Code. A
"Debt Service Reduction" is any reduction in the amount which a mortgagor is
obligated to pay on a monthly basis with respect to a Mortgage Loan as a result
of any proceeding initiated under the United States Bankruptcy Code, other than
a reduction attributable to a Deficient Valuation.
P&I ADVANCES
Subject to the following limitations, each Servicer will be obligated to
advance or cause to be advanced on or before each Payment Date its own funds, or
funds in the Certificate Account that are not included in the Available Payment
Amount for such Payment Date, in an amount equal to the aggregate of all
payments of principal and interest, net of the related Servicing Fee, that were
due during the related Due Period on the Mortgage Loans serviced by such
Servicer and that were delinquent on the related Determination Date, plus
certain amounts representing assumed payments not covered by any current net
income on the Mortgaged Properties acquired by foreclosure or deed in lieu of
foreclosure (any such advance, a "P&I Advance").
P&I Advances are required to be made only to the extent they are deemed by
the related Servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making such P&I Advances is to
maintain a regular cash flow to the Noteholders, rather than to guarantee or
insure against losses. The Servicers will not be required to make any P&I
Advances with respect to reductions in the amount of the monthly payments on the
Mortgage Loans due to bankruptcy proceedings or the application of the Relief
Act.
All P&I Advances will be reimbursable to the related Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which such unreimbursed P&I Advance was made. In addition, any P&I
Advances previously made in respect of any Mortgage Loan that are deemed by the
related Servicer to be nonrecoverable from related late collections, insurance
proceeds or liquidation proceeds may be reimbursed to the related Servicer out
of any funds in the Certificate Account prior to the payments on the Notes. In
the event that any Servicer fails in its obligation to make any required
advance, the Master Servicer will be obligated to make such advance, and in the
event that the Master Servicer fails in its obligation to make such advance, the
Indenture
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Trustee will be obligated to make such advance, in each such case to the extent
required in the related Servicing Agreement.
THE ISSUER
Wilshire REIT Trust Series 1998-1 is a business trust formed under the laws
of the State of Delaware pursuant to the Owner Trust Agreement, dated as of
September 1, 1998, between the Depositor and the Owner Trustee for the
transactions described in this Prospectus Supplement. The Owner 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 and holding the Mortgage Loans and the
proceeds therefrom, (ii) issuing the Notes and the Equity Certificates, (iii)
making payments on the Notes and the Equity 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 Issuer is not
expected to have any significant assets other than the Trust Estate pledged as
collateral to secure the Notes. The assets of the Issuer will consist of the
Mortgage Loans pledged to secure the Notes. The Issuer's principal offices are
in Wilmington, Delaware, in care of Wilmington Trust Company, as Owner Trustee.
THE SELLER
Wilshire Real Estate Investment Trust Inc. (the "Seller"), in its capacity
as mortgage loan seller, will sell the Mortgage Loans to the Wilshire SPE
pursuant to a Mortgage Loan Purchase Agreement, dated as of September 1, 1998,
between the Seller and the Wilshire SPE.
THE WILSHIRE SPE
Wilshire REIT 1998-1, Inc. (the "Wilshire SPE"), a special purpose entity
that is an affiliate of the Issuer and the Seller, will convey the Mortgage
Loans to the Depositor pursuant to an Ownership Transfer Agreement, dated as of
September 1, 1998, between the Wilshire SPE and the Depositor.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Owner Trust
Agreement. The Owner Trustee is a Delaware banking corporation and its principal
offices are located in Wilmington, Delaware.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Noteholders under
the Owner Trust Agreement under any circumstances, except for the Owner
Trustee's own misconduct, gross negligence, bad faith or grossly negligent
failure to act or in the case of the inaccuracy of certain representations made
by the Owner Trustee in the Owner 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 Owner Trust Agreement.
The principal compensation to be paid to the Owner Trustee in respect of
its obligations under the Owner Trust Agreement will have been paid by or on
behalf of the Issuer on or prior to the Closing Date.
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THE INDENTURE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association, will act as Indenture Trustee for the Notes pursuant to the
Indenture. The Indenture Trustee's offices for notices under the Indenture are
located at Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479-0070,
Attention: Corporate Trust Services and its telephone number is (612) 667-1117.
The principal compensation to be paid to the Indenture Trustee in respect
of its obligations under the Indenture (the "Indenture Trustee Fee") will be
equal to (i) accrued interest at 0.0035% per annum (the "Indenture Trustee Fee
Rate") on the Scheduled Principal Balance of each Mortgage Loan, payable
monthly, and (ii) any interest or other income earned on funds held in the
Certificate Account (to the extent not payable as compensation to the related
Servicer) as provided in the Indenture. The "Scheduled Principal Balance" of any
Mortgage Loan as of any date of determination is equal to the principal balance
thereof as of the Cut-off Date (after application of all scheduled principal
payments due on or before the Cut-off Date, whether or not received), reduced by
(x) the principal portion of all monthly payments due on or before the date of
determination, whether or not received, (y) all amounts allocable to unscheduled
principal that were received prior to the calendar month in which the date of
determination occurs, and (z) any Bankruptcy Loss occurring out of a Deficient
Valuation that was incurred prior to the calendar month in which the date of
determination occurs.
The Indenture will provide that the Indenture Trustee may withdraw funds
from the Certificate Account (i) to reimburse itself for all reasonable
out-of-pocket expenses incurred or made by it, including costs of collection and
including reasonable compensation and expenses, disbursements and advances of
its agents, counsel, accountants and experts and (ii) to reimburse the Owner
Trustee for all reasonable out-of pocket expenses incurred or made by the Owner
Trustee for all services rendered by the Owner Trustee it in the Owner Trustee's
execution of the trust created under the Owner Trust Agreement and in the
exercise and performance of any of the Owner Trustee's powers and duties under
the Owner Trust Agreement. Under the Indenture, the Issuer (from the assets of
the Trust Estate) shall indemnify the Indenture Trustee against any and all
loss, liability or expense (including reasonable attorneys' fees) incurred by
the Indenture Trustee in connection with the administration of the Trust Estate
and the performance of the Indenture Trustee's duties hereunder. The Issuer is
not required, however, to reimburse any expense or indemnify against any loss,
liability or expense incurred by the Indenture Trustee through the Indenture
Trustee's own willful misconduct, negligence or bad faith.
THE SERVICING AGREEMENTS
The following summary describes certain terms of the Servicing Agreements,
dated as of September 1, 1998 (the "Servicing Agreements"), among the Issuer,
the Indenture Trustee, the Master Servicer and the related 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 Agreements. Whenever particular
sections or defined terms of the Servicing Agreements are referred to, such
sections or defined terms are thereby incorporated herein by reference. The
Depositor will provide to a prospective or actual Noteholder without charge, on
written request, a copy (without exhibits) of the Servicing Agreements. Requests
should be addressed to the Secretary, Salomon Brothers Mortgage Securities VII,
Inc., Seven World Trade Center, New York, New York 10048.
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ORIGINATORS AND SERVICERS
AMERIQUEST MORTGAGE COMPANY
The information set forth in the following paragraphs has been provided by
Ameriquest Mortgage Company. None of the Issuer, the other Originators, the
Depositor, the Master Servicer, the Seller, the Wilshire SPE, the Owner Trustee,
the Indenture Trustee or any of their respective affiliates has made or will
make any representation as to the accuracy or completeness of such information.
Ameriquest, a Delaware corporation, is a specialty finance company engaged
in the business of originating, purchasing and selling sub-prime mortgage loans
secured by one- to four-family residences. Ameriquest's mortgage business was
begun in 1988 by Long Beach Savings and Loan Association (later known as Long
Beach Bank, F.S.B., together, the "Bank"). To gain greater operating flexibility
and improve its ability to compete against other financial services companies,
in October 1994, the Bank ceased operations, voluntarily surrendered its federal
thrift charter and transferred its mortgage banking business to a new Delaware
corporation called Long Beach Mortgage Company ("Old Long Beach").
In May 1997, Old Long Beach completed a reorganization (the
"Reorganization") of its business operations by transferring to its wholly-owned
subsidiary Long Beach Financial Corporation ("LBFC") the assets and personnel
related to Old Long Beach's broker-sourced mortgage lending and loan sales
operations. The assets received from Old Long Beach by LBFC were transferred to
a wholly-owned subsidiary of LBFC which was named "Long Beach Mortgage Company".
As part of the Reorganization, Old Long Beach changed its name to "Ameriquest
Mortgage Company". Immediately following the Reorganization, Ameriquest sold all
of the outstanding shares of Common Stock of LBFC in an underwritten public
offering (the "Offering"). As a result of the Reorganization and Offering,
Ameriquest commenced operations under its new name and the new Long Beach
Mortgage Company commenced operations as an independent company with the assets
and personnel that were previously operating as the broker-sourced mortgage
lending and loan sales divisions of Old Long Beach.
Pursuant to the related Servicing Agreement, Ameriquest will serve as
servicer for the Mortgage Loans sold indirectly by it to the Depositor (in such
capacity, with respect to such Mortgage Loans, the "Servicer"). Ameriquest is
approved as a seller/servicer for FNMA and FHLMC and as a non- supervised
mortgagee by the U.S. Department of Housing and Urban Development. As of June
30, 1998, Ameriquest had 190 offices, consisting of 37 loan origination centers
located in California and 153 loan origination centers located throughout the
rest of the United States.
LENDING ACTIVITIES AND LOAN SALES. Ameriquest currently originates real
estate loans through its network of retail offices and loan origination centers.
Ameriquest also participates in secondary market activities by originating and
selling mortgage loans while continuing to service the majority of the loans
sold. In other cases Ameriquest's whole loan sale agreements provide for the
transfer of servicing rights.
Ameriquest's primary lending activity is funding loans to enable mortgagors
to purchase or refinance residential real property, which loans are secured by
first or second liens on the related real property. Ameriquest's single-family
real estate loans are predominantly "conventional" mortgage loans, meaning that
they are not insured by the Federal Housing Administration or partially
guaranteed by the U.S. Department of Veterans Affairs.
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The following table summarizes Ameriquest's (including that of the Bank and
Old Long Beach, but excluding that of Long Beach Mortgage Company after the
Reorganization) one- to four-family residential mortgage loan origination and
sales activity for the periods shown below. Sales activity may include sales of
mortgage loans purchased by Ameriquest from other loan originators.
<TABLE>
<CAPTION>
SIX-MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Originations......... $1,062,593 $1,112,890 $2,043,671 $2,457,434 $1,564,950
Sales................ $1,081,841 $1,108,162 $2,072,517 $2,507,262 $1,579,437
</TABLE>
LOAN SERVICING. Ameriquest services all of the mortgage loans it originates
which are retained in its portfolio and continues to service at least a majority
of the loans that have been sold to investors. Servicing includes collecting and
remitting loan payments, accounting for principal and interest, contacting
delinquent mortgagors, and supervising foreclosure in the event of unremedied
defaults. Ameriquest's servicing activities are audited periodically by
applicable regulatory authorities. Certain financial records of Ameriquest
relating to its loan servicing activities are reviewed annually as part of the
audit of Ameriquest's financial statements conducted by its independent
accountants.
COLLECTION PROCEDURES; DELINQUENCY AND LOSS EXPERIENCE. When a mortgagor
fails to make a required payment on a residential mortgage loan, Ameriquest
attempts to cause the deficiency to be cured by corresponding or making
telephone contact with the mortgagor. Pursuant to Ameriquest's customary
procedures for residential mortgage loans serviced by it for its own account,
Ameriquest generally mails a notice of intent to foreclose to the mortgagor
after the loan has become 31 days past due (two payments due but not received)
and, within one month thereafter, if the loan remains delinquent, typically
institutes appropriate legal action to foreclose on the property securing the
loan. If foreclosed, the property is sold at a public or private sale.
Ameriquest, in its capacity as servicer, typically enters a bid based upon an
analysis of the property value, estimated marketing and carrying costs and
presence of junior liens, which may be equal to or less than the full amount
owed. In the event the property is acquired at the foreclosure sale by
Ameriquest, as servicer, it is placed on the market for sale through local real
estate brokers experienced in the sale of similar properties. When the
foreclosure of a property results in a loss, Ameriquest may, if practical and
permitted by applicable laws, pursue legal action against the borrowers for
recovery of such deficiency.
AMERIQUEST RESIDENTIAL LOAN SERVICING PORTFOLIO
The following table sets forth the delinquency and loss experience at the
dates indicated for residential (one- to four-family and multifamily) loans
serviced by Ameriquest that were originated or purchased by Ameriquest
(including loans originated or purchased by the Bank and Old Long Beach, but
excluding loans originated or purchased by Long Beach Mortgage Company after the
Reorganization):
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<TABLE>
<CAPTION>
AT
JUNE
AT DECEMBER 31, 30,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
----------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal $2,721,665 $2,790,704 $3,622,400 $4,556,331 $4,589,597
Balance..........................
Number of Loans.................... 24,669 26,766 36,564 49,124 51,439
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance............... $20,923 $35,503 $54,719 $87,054 $69,550
Number of Loans................. 195 327 557 931 796
Delinquency as a Percentage
of Total Outstanding
Principal
Balance....................... 0.77% 1.27% 1.51% 1.91% 1.52%
Delinquency as a Percentage
of Number of Loans............ 0.79% 1.22% 1.52% 1.90% 1.55%
61-90 Days
Principal Balance............... $24,013 $25,237 $36,565 $41,875 $43,949
Number of Loans................. 193 253 382 436 466
Delinquency as a Percentage
of Total Outstanding
Principal Balance............. 0.88% 0.90% 1.01% 0.92% 0.96%
Delinquency as a Percentage
of Number of Loans............ 0.78% 0.95% 1.04% 0.89% 0.91%
91 Days or More
Principal Balance............... $97,202 $109,703 $152,537 $208,761 $232,310
Number of Loans................. 771 977 1,531 2,120 2,532
Delinquency as a Percentage
of Total Outstanding
Principal Balance............. 3.57% 3.93% 4.21% 4.58% 5.06%
Delinquency as a Percentage
of Number of Loans............ 3.13% 3.65% 4.19% 4.32% 4.92%
Total Delinquencies:
Principal Balance............... $142,138 $170,444 $243,822 $337,690 $345,809
Number of Loans................. 1,159 1,557 2,470 3,487 3,794
Delinquency as a Percentage
of Total Outstanding
Principal Balance............. 5.22% 6.11% 6.73% 7.41% 7.53%
Delinquency as a Percentage
of Number of Loans............ 4.70% 5.82% 6.76% 7.10% 7.38%
FORECLOSURES PENDING(1)
Principal Balance............... $111,514 $132,679 $165,525 $206,740 $224,000
Number of Loans................. 955 1,200 1,591 2,070 2,311
Foreclosures Pending as a
Percentage of Total
Outstanding Principal
Balance....................... 4.10% 4.75% 4.57% 4.54% 4.88%
Foreclosures Pending as
a Percentage of Number of
Loans........................... 3.87% 4.48% 4.35% 4.21% 4.49%
NET LOAN LOSSES for the
Period(2)......................... $51,296 $37,914 $38,915 $38,182 $31,487
NET LOAN LOSSES as a
Percentage of Total Outstanding
Principal Balance................. 1.88% 1.36% 1.07% 0.84% 0.69%
</TABLE>
(1) Includes mortgage loans which are in foreclosure but as to which title to
the mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set forth
above.
(2) Net Loan Losses is calculated for loans conveyed to REMIC trust funds as
the aggregate of the net loan loss for all such loans liquidated during the
period indicated. The net loan loss for any such loan is equal to the
difference between (a) the principal balance plus accrued interest through
the date of liquidation plus all liquidation expenses related to such loan
and (b) all amounts received in connection with the liquidation of such
loan. The majority of residential loans serviced by Ameriquest have been
conveyed to REMIC trust funds.
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<PAGE>
As of June 30, 1998, 731 one- to four-family residential properties
relating to loans in Ameriquest's total servicing portfolio had been acquired
through foreclosure or deed in lieu of foreclosure and were not liquidated, 726
of which properties relate to the Full Documentation and Fast Trac residential
mortgage loan servicing portfolio.
There can be no assurance that the delinquency and loss experience of the
Mortgage Loans will correspond to the loss experience of Ameriquest's mortgage
portfolio set forth in the foregoing table. The statistics shown above represent
the delinquency and loss experience for Ameriquest's total servicing portfolio
only for the years presented, whereas the aggregate delinquency and loss
experience on the Mortgage Loans will depend on the results obtained over the
life of the Trust Estate. Ameriquest's portfolio includes mortgage loans with
payment and other characteristics which are not representative of the payment
and other characteristics of the Mortgage Loans. A substantial number of the
Mortgage Loans may also have been originated based on Ameriquest Guidelines that
are less stringent than those generally applicable to the servicing portfolio
reflected in the foregoing table. If the residential real estate market should
experience an overall decline in property values, the actual rates of
delinquencies, foreclosures and losses could be higher than those previously
experienced by Ameriquest. In addition, adverse economic conditions (which may
or may not affect real property values) may affect the timely payment by
mortgagors of scheduled payments of principal and interest on the Mortgage Loans
and, accordingly, the actual rates of delinquencies, foreclosures and losses
with respect to the Mortgage Loans.
The delinquency and loss experience percentages set forth above in the
immediately preceding table are calculated on the basis of the total mortgage
loans serviced as of the end of the periods indicated. However, because the
total outstanding principal balance of residential loans serviced by Ameriquest
has increased from $2,721,665 at December 31, 1994 to $4,589,597 at June 30,
1998, the total outstanding principal balance of residential loans serviced as
of the end of any indicated period includes many loans that will not have been
outstanding long enough to give rise to some or all of the indicated periods of
delinquency. In the absence of such substantial and continual additions of newly
originated loans to the total amount of loans serviced, the percentages
indicated above would be higher and could be substantially higher. The actual
delinquency percentages with respect to the Mortgage Loans may be expected to be
substantially higher than the delinquency percentages indicated above because
the composition of the Mortgage Loans will not change. If the residential real
estate market should experience an overall decline in property values, the
actual rates of delinquencies and foreclosures could be higher than those
previously experienced by Ameriquest.
LONG BEACH MORTGAGE COMPANY
The information set forth in the following paragraphs has been provided by
Long Beach Mortgage Company. None of the Issuer, the other Originators, the
Depositor, the Master Servicer, the Seller, the Wilshire SPE, the Owner Trustee,
the Indenture Trustee or any of their respective affiliates has made or will
make any representation as to the accuracy or completeness of such information.
Long Beach Mortgage Company, a Delaware corporation ("Long Beach"), is a
specialty finance company engaged in the business of originating, purchasing and
selling sub-prime mortgage loans secured by one- to four-family residences. Long
Beach began originating sub-prime mortgage loans in 1988 as a division of Long
Beach Bank, F.S.B. To gain greater operating flexibility and improve its ability
to compete against other financial services companies, in October 1994, Long
Beach Bank, F.S.B. ceased operations, voluntarily surrendered its federal thrift
charter and transferred its mortgage banking business to a new Delaware
corporation called Long Beach Mortgage Company ("Old Long Beach").
In May 1997, Old Long Beach completed a reorganization (the
"Reorganization") of its business operations by transferring to its wholly-owned
subsidiary, Long Beach Financial Corporation ("LBFC"), the assets and personnel
related to Old Long Beach's broker-sourced mortgage lending and loan sales
S-80
<PAGE>
operations and approximately $40 million in cash. The assets received from Old
Long Beach by LBFC were then transferred to Long Beach, a wholly-owned
subsidiary of LBFC. Immediately following the Reorganization, Long Beach
continued the activities previously conducted by the broker-sourced and loan
sales divisions of Old Long Beach. LBFC is a publicly-traded company based in
Orange, California.
Substantially all of the loans originated by Long Beach while it operated
as a division of Old Long Beach were serviced by the servicing division of Old
Long Beach. Because Long Beach does not currently have internal servicing
capabilities, the loans originated or purchased by Long Beach will be
sub-serviced by the servicing division of Ameriquest Mortgage Company until Long
Beach develops such capabilities. Ameriquest and Long Beach have entered into a
contract (the "Subservicing Agreement") pursuant to which Ameriquest will
sub-service the Mortgage Loans indirectly sold by Long Beach to the Depositor.
Notwithstanding the foregoing, Long Beach will act as servicer for such Mortgage
Loans (in such capacity, with respect to such Mortgage Loans, the "Servicer"),
and will remain primarily liable for servicing such Mortgage Loans.
Because of the recent date of the Reorganization, there is currently no
meaningful data regarding originations and sales or loss and delinquency
experience relating to loans originated or purchased by Long Beach following the
Reorganization.
NATIONAL MORTGAGE COMPANY
The information set forth in the following paragraphs has been provided by
National Mortgage Company ("National Mortgage"). None of the Issuer, the other
Originators, the Depositor, the Master Servicer, the Seller, the Wilshire SPE,
the Owner Trustee, the Indenture Trustee or any of their respective affiliates
has made or will make any representation as to the accuracy or completeness of
such information. Pursuant to the related Servicing Agreement, National Mortgage
will serve as servicer for the Mortgage Loans sold indirectly by it to the
Depositor (in such capacity, with respect to such Mortgage Loans, the
"Servicer"). Notwithstanding the foregoing, the Master Servicer and National
Mortgage have advised the Depositor that with respect to a portion of the
Mortgage Loans initially to be serviced by National Mortgage, the servicing
thereof is expected to be transferred to the Master Servicer, whereupon the
Master Servicer will act in the capacity as "Servicer" under the applicable
Servicing Agreement to the extent of such Mortgage Loans. Such portion of the
Mortgage Loans that is expected to be subject to such servicing transfer
represents approximately 23.72% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date.
The table below sets forth the overall delinquency experience on
residential one-to-four-family mortgage loans for non-conforming credits which
are currently serviced by National Mortgage. No mortgage loan is considered
delinquent for purposes of the table until a payment is 30 days past due on a
contractual basis. It should be noted that National Mortgage commenced its
servicing activities for these types of non-conforming mortgage loans in 1993
and that its portfolio consists of mortgage loans that were originated during
the periods from 1993 to 1998 in accordance with the underwriting standards it
had established or other underwriting guidelines that it determined were
substantially similar. The information in the table below is not intended to
indicate or predict the expected delinquency experience on past, current or
future pools of mortgage loans for which National Mortgage is the primary
servicer.
S-81
<PAGE>
<TABLE>
<CAPTION>
NATIONAL MORTGAGE CORPORATION
NON-CONFORMING MORTGAGE LOAN PORTFOLIO EXPERIENCE
Year Ended December 31, Six Months Ended
-------------------------------- -----------------
1995 1996 1997 June 30, 1998
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Total principal balance (at period end).... $178,743 $230,458 $458,497 $531,943
Average portfolio principal balance(1)..... $177,084 $203,276 $310,734 $433,514
DELINQUENCIES (at period end)(2)
30-59 Days:
Principal balance........................ $9,161 $8,185 $15, 328 $18,011
Percent(3)............................... 5.13% 3.55% 3.34% 3.39%
60-89 Days:
Principal balance........................ $821 $285 $1,103 $888
Percent(3)............................... 0.46% 0.12% 0.24% 0.17%
90 Days or More:
Principal balance........................ $1,473 $4,369 $4,646 $5,097
Percent(3)............................... 0.82% 1.90% 1.01% 0.96%
Total Delinquencies:
Principal balance........................ $11,455 $12,840 $21,077 $23,995
Percent(3)............................... 6.41% 5.57% 4.60% 4.51%
FORECLOSURES
Principal balance........................ $8,112 $10,176 $16,312 $19,170
Percent(3)............................... 4.54% 4.42% 3.56% 3.60%
REO (at period end)........................ $929 $3,414 $4,665 $5.271
Net gains/(losses) on liquidated loans..... $(168) $(1,576) $(1,626) (1,531)(4)
Percentage of net gains/(losses) on
liquidated loans (based on average
portfolio principal balance)............. (0.10)% (0.78)% (0.52)% (0.35)%(4)
</TABLE>
_________________________________
(1) Calculated by summing the actual outstanding principal balances at the end
of each month and dividing the total by the number of months in the
applicable period.
(2) Delinquency information does not include loans in foreclosure or REO.
(3) Percentages are expressed based upon the total outstanding principal
balance at the end of the indicated period.
(4) Annualized.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the mortgage portfolios set forth in the foregoing tables. The statistics shown
above represent the delinquency experience for the indicated mortgage servicing
portfolios only for the periods presented, whereas the aggregate delinquency
experience on the Mortgage Loans comprising the Mortgage Pool will depend on the
results obtained over the life of the Mortgage Pool. The mortgage servicing
portfolios set forth above include mortgage loans that were originated using a
variety of different underwriting procedures and standards which may have been
more selective. They include mortgage loans with a variety of payment and other
characteristics (including geographic location) which are not necessarily
representative of the payment and other characteristics of the Mortgage Loans
comprising the Mortgage Pool. It should be noted that if the residential real
estate market should experience an overall decline in property values, the
actual rates of delinquencies and foreclosures could be higher than those
previously experienced by National Mortgage. In addition, adverse economic
conditions may affect the timely payment by mortgagors of scheduled payments of
principal and interest on the Mortgage Loans and, accordingly, the actual rates
of delinquencies and foreclosures with respect to the Mortgage Pool.
S-82
<PAGE>
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to each Servicer in respect of its
servicing activities for the Notes will be equal to accrued interest at the
Servicing Fee Rate of 0.50% per annum with respect to each Mortgage Loan
serviced by it for each calendar month on the same principal balance on which
interest on such Mortgage Loan accrues for such calendar month (the "Servicing
Fee"). As additional servicing compensation, each Servicer is entitled to retain
all assumption fees and late payment charges in respect of Mortgage Loans
serviced by it, to the extent collected from mortgagors, together with any
interest or other income earned on funds held in the Certificate Account (to the
extent not payable as compensation to the Indenture Trustee) and any escrow
accounts in respect of Mortgage Loans serviced by it.
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of such prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan, the
mortgagor is not charged interest on the amount of such prepayment for the month
in which such prepayment is made. Each Servicer is obligated to pay from its own
funds ("Compensating Interest") only those interest shortfalls attributable to
full and partial prepayments by the mortgagors on the Mortgage Loans serviced by
it ("Prepayment Interest Shortfall"), but only to the extent of its aggregate
Servicing Fee for the related Due Period. Each Servicer is obligated to pay
certain insurance premiums and certain ongoing expenses associated with the
Mortgage Pool in respect of Mortgage Loans serviced by it and incurred by such
Servicer in connection with its responsibilities under the related Servicing
Agreement and is entitled to reimbursement therefor as provided in such
Servicing Agreement. With respect to the Mortgage Loans serviced by Ameriquest,
Ameriquest will also be entitled to reimbursement of servicing advances and
principal and interest advances made by it as servicer of such Mortgage Loans
prior to the Cut-off Date. See "Description of the Securities--Retained
Interest; Servicing Compensation and Payment of Expenses" in the Prospectus for
information regarding expenses payable by the Servicers.
SALE OF DEFAULTED MORTGAGE LOANS
If consent to the operation of the provisions described below shall have
been given by the related Servicer (unless the Directing Holder, as defined
below, is the Seller or an affiliate thereof, in which case such consent shall
not be required), then with respect to any Mortgage Loan that is delinquent in
excess of the number of days provided in the related Servicing Agreement, (i)
the holder of a majority in Percentage Interest of the Equity Certificates (the
"Directing Holder") may direct the related Servicer to commence foreclosure and
(ii) prior to commencement of foreclosure of any Mortgage Loan, such Servicer
will notify the Directing Holder of such proposed foreclosure in order to permit
the Directing Holder the right to instruct such Servicer to delay the proposed
foreclosure. In the case of the exercise by the Directing Holder of the right to
direct the related Servicer pursuant to either clause (i) or clause (ii) above,
the Directing Holder will provide to such Servicer an appraisal of the related
Mortgaged Property (the "Loan Appraisal"). Within two business days of
instructing the related Servicer to commence or delay foreclosure, the Directing
Holder will deposit in a segregated account maintained with the related Servicer
(the related "Collateral Account") for the benefit of the Noteholders an amount
equal to 125% of the Valuation (as defined below) of the related Mortgage Loan
plus three months' interest at the related Mortgage Rate. While foreclosure is
delayed pursuant to the direction of the Directing Holder, the Directing Holder
may direct the related Servicer to proceed with foreclosure at anytime.
With respect to any election by the Directing Holder to delay foreclosure,
the "Valuation" of any Mortgage Loan shall be the greater of the outstanding
principal balance thereof and the fair market value thereof as provided in the
related Loan Appraisal. With respect to any election by the Directing Holder to
commence foreclosure, the "Valuation" of any Mortgage Loan shall equal the
outstanding principal balance thereof.
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<PAGE>
Upon the liquidation of the related Mortgage Loan or the disposition of the
related Mortgaged Property in accordance with the requirements set forth in the
related Servicing Agreement, the related Servicer will calculate the amount, if
any, by which the Valuation exceeds the actual sales price obtained for the
related Mortgage Loan or the Mortgaged Property, as the case may be, and the
related Servicer will withdraw the amount of such excess from the Collateral
Account and deposit such amount into the related Certificate Account. If the
amount realized pursuant to the above-described procedures exceeds the
Valuation, the related Servicer will deposit immediately upon realization from
such proceeds such excess into the Certificate Account. The related Servicer
shall apply all such amounts as additional liquidation proceeds pursuant to the
related Servicing Agreement. If any election to delay foreclosure is to be
extended for a period in excess of three months from the Directing Holder's
direction to the related Servicer to delay foreclosure, the Directing Holder
will be required to deposit in the Collateral Account in advance the amount of
each additional month's interest at the related Mortgage Rate. If the
above-described procedures do not result in the Mortgage Loan being brought
current within six months of the Directing Holder's direction to the related
Servicer to delay foreclosure, the Directing Holder will be required to either
(i) purchase the Mortgage Loan for a purchase price equal to the fair market
value thereof as shown on the Loan Appraisal or (ii) allow the related Servicer
to proceed with the commencement of foreclosure. Should the Directing Holder
elect to purchase the Mortgage Loan, the related Servicer will first apply funds
on deposit in the related Collateral Account towards such purchase price; any
shortage will be paid by the Directing Holder and any excess will be returned to
it.
With respect to any Mortgage Loan as to which the Directing Holder has
directed the related Servicer to commence foreclosure or to delay foreclosure,
such Servicer may withdraw from the Collateral Account from time to time amounts
necessary to reimburse such Servicer for all P&I Advances and servicing advances
in accordance with the related Servicing Agreement. In the event that the
related Mortgage Loan is brought current, the amounts so withdrawn from the
Collateral Account by the related Servicer as reimbursement for P&I Advances or
servicing advances shall be redeposited therein by the related Servicer and such
Servicer shall be reimbursed as provided in the related Servicing Agreement.
Following foreclosure, liquidation, disposition or the bringing current of the
related Mortgage Loan, as applicable, all amounts remaining in the Collateral
Account will be released to the Directing Holder. In the event that amounts on
deposit in the Collateral Account are insufficient to cover the withdrawals that
the related Servicer is entitled to make for P&I Advances, servicing advances or
for deposit into the Certificate Account, the Directing Holder will be obligated
to pay such amounts to the related Servicer for deposit into the Collateral
Account. The Directing Holder may direct that amounts on deposit in the
Collateral Account be invested in Permitted Investments. Interest or other
income earned on funds in the Collateral Account will be paid to the Directing
Holder and the amount of any loss on such funds will be immediately deposited
into the Collateral Account by the Directing Holder when realized. The Directing
Holder will grant to the related Servicer for the benefit of the Noteholders a
security interest in the Collateral Account, all amounts deposited therein or
invested in Permitted Investments, and all proceeds of the foregoing.
Notwithstanding the foregoing, the provisions described above shall not be
operative in the case of the Mortgage Loans serviced by Ameriquest.
SERVICER EVENTS OF DEFAULT
In addition to those Events of Default (as defined in the Prospectus)
pertaining to the servicing of the Mortgage Loans and described under
"Description of the Securities--Events of Default" in the Prospectus, upon the
occurrence of certain loss triggers with respect to the Mortgage Loans, the
Servicer may be removed as servicer of the Mortgage Loans serviced by it in
accordance with the terms of the related Servicing Agreement. If any Servicer is
removed in connection with an Event of Default applicable to such Servicer under
the terms of the related Servicing Agreement, the Master Servicer will become
the successor Servicer of the Mortgage Loans serviced by such terminated
Servicer.
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THE MASTER SERVICER
Wilshire Servicing Corporation (the "Master Servicer") is the Master
Servicer under each of the Servicing Agreements. The Master Servicer is a
Delaware corporation. The Master Servicer's principal offices are located in
Portland, Oregon.
The principal compensation to be paid to the Master Servicer in respect of
its obligations under the Servicing Agreements (the "Master Servicing Fee") will
be equal to accrued interest at the Master Servicing Fee Rate on the Scheduled
Principal Balance of each Mortgage Loan, payable monthly. The "Master Servicing
Fee Rate" is equal to (i) 0.26% per annum in the case of each 1996-LB3 Mortgage
Loan and (ii) 0.05% per annum in the case of each other Mortgage Loan.
The Master Servicer is a wholly owned subsidiary of Wilshire Financial
Services Group Inc. ("WFSG"). The Master Servicer was formed in November 1996 to
conduct the loan servicing business of WFSG and currently services WFSG's
portfolio as well as portfolios for unaffiliated third parties. Currently,
Wilshire Credit Corporation ("WCC"), an affiliate of WFSG and the Master
Servicer, subservices such portfolios for Wilshire Servicing. WCC is wholly
owned by Andrew A. Weiderhorn and Lawrence A. Mendelsohn, the principal
shareholders of WFSG. WFSG has recently indicated that it is considering
acquiring WCC.
WCC is primarily engaged in the specialty loan servicing and resolution
business. At December 31, 1997, WCC was servicing approximately $2.8 billion
aggregate principal amount of loans and other assets. WCC's principal executive
offices are located at 1776 S.W. Madison Street, Portland, Oregon 97205, and its
telephone number is (503) 223-5600.
The Master Servicer and National Mortgage have advised the Depositor that
with respect to a portion of the Mortgage Loans initially to be serviced by
National Mortgage, the servicing thereof is expected to be transferred to the
Master Servicer by October 30, 1998, whereupon the Master Servicer will act in
the capacity as "Servicer" under the applicable Servicing Agreement to the
extent of such Mortgage Loans, and, accordingly, will receive the related
Servicing Fees and other compensation provided for in such Servicing Agreement
to the extent of such Mortgage Loans. Such portion of the Mortgage Loans that
are expected to be subject to such servicing transfer represents approximately
23.72% of the Mortgage Loans, by aggregate principal balance as of the Cut-off
Date. The Master Servicer has advised the Depositor that it is intended that
such Mortgage Loans will be subserviced for the Master Servicer by WCC. The
Master Servicer may in the future negotiate to purchase the servicing of other
portions of the Mortgage Pool from one or more of the initial Servicers thereof
and may engage WCC to subservice such Mortgage Loans. No consent shall be
required in connection with the retention of WCC as a subservicer of any of the
Mortgage Loans. Investors should note that when servicing of mortgage loans is
transferred, there may be a rise in delinquencies associated with such transfer.
THE INDENTURE AND OWNER TRUST AGREEMENT
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 Owner Trust Agreement and Indenture.
Whenever particular defined terms of the Indenture are referred to, such defined
terms are thereby incorporated herein by reference. The Depositor will provide
to a prospective or actual Noteholder without charge, on written request, a copy
(without exhibits) of the Indenture and the Owner Trust Agreement. Requests
should be addressed to the Secretary, Salomon Brothers Mortgage Securities VII,
Inc., Seven World Trade Center, New York, New York 10048.
GENERAL
The Notes will be issued pursuant to the Indenture, a form of which is
filed as an exhibit to the Registration Statement. A Current Report on Form 8-K
relating to the Notes containing a copy of the
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<PAGE>
Indenture and the Owner Trust Agreement as executed will be filed by the
Depositor with the Securities and Exchange Commission within fifteen days of the
initial issuance of the Notes. Reference is made to the Prospectus for important
information in addition to that set forth herein regarding the Trust Estate, the
terms and conditions of the Indenture and the Owner Trust Agreement and the
Notes. The Notes will be transferable and exchangeable at the corporate trust
offices of the Indenture Trustee, located in Minneapolis, Minnesota.
ASSIGNMENT OF MORTGAGE LOANS
On or prior to the date the Notes are issued, the Seller will convey each
Mortgage Loan to the Wilshire SPE, who in turn will convey each such Mortgage
Loan to the Depositor, who in turn will convey each Mortgage Loan to the Issuer.
At the time of issuance of the Notes, the Issuer will pledge all of its
right, title and interest in and to the Mortgage Loans, including all principal
and interest due on each such Mortgage Loan after the Cut- off Dates, without
recourse, to the Indenture Trustee pursuant to the Indenture as collateral for
the Notes; provided, however, that the Seller will reserve and retain all its
right, title and interest in and to principal and interest due on such Mortgage
Loan on or prior to the Cut-off Date (whether or not received on or prior to the
Cut-off Date), and to prepayments received prior to the Cut-off Date. The
Indenture Trustee, concurrently with such assignment, will authenticate and
deliver the Notes at the direction of the Issuer in exchange for, among other
things, the Mortgage Loans.
The Indenture will require the Issuer to deliver to the Indenture Trustee
or to a custodian with respect to each Mortgage Loan (i) the mortgage note
endorsed without recourse to the Indenture Trustee, (ii) the original mortgage
with evidence of recording indicated thereon and (iii) an assignment of the
mortgage in recordable form to the Indenture Trustee. Such assignments of
Mortgage Loans are required to be recorded by or on behalf of the Seller, at the
expense of the Seller, in the appropriate offices for real property records.
EVENTS OF DEFAULT
Notwithstanding the Prospectus, an "Event of Default" under the Indenture
with respect to the Notes is as follows: (a) the failure of the Issuer to pay
the Interest Payment Amount, the Principal Payment Amount or any
Overcollateralization Increase Amount on any Payment Date, in each case to the
extent that funds are available on such Payment Date to make such payments,
which continues unremedied for a period of five days; (b) the failure by the
Issuer on the Final Maturity Date to reduce the Note Balances of any Notes then
outstanding to zero; (c) a default in the observance or performance of any
covenant or agreement of the Issuer in the Indenture and the continuation of any
such default for a period of thirty days after notice to the Issuer by the
Indenture Trustee or by the holders of at least 25% of the Voting Rights of the
Notes; (d) any representation or warranty made by the Issuer in the Indenture or
in any certificate or other writing delivered pursuant thereto having been
incorrect in any material respect as of the time made, and the circumstance in
respect of which such representation or warranty being incorrect not having been
cured within thirty days after notice thereof is given to the Issuer by the
Indenture Trustee or by the holders of at least 25% of the Voting Rights of the
Notes; or (e) certain events of bankruptcy, insolvency, receivership or
reorganization of the Issuer.
Notwithstanding, the Prospectus, if an Event of Default occurs and is
continuing, the Indenture Trustee or the holders of a majority of the Voting
Rights may declare the Note Balance of all the Notes 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 Voting Rights.
If following an Event of Default, the Notes have been declared to be due
and payable, the Indenture Trustee may, in its discretion, notwithstanding such
acceleration, elect to maintain possession of the collateral securing the Notes
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
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principal of and interest on the Notes as they would have become due if there
had not been such a declaration. In addition, the Indenture Trustee may not sell
or otherwise liquidate the collateral securing the Notes following an Event of
Default, unless (a) the holders of 100% of the then aggregate outstanding Voting
Rights 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
at their respective Note Accrual Rates, on the outstanding Notes at the date of
such sale or (c) the Indenture 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 Indenture Trustee obtains the consent of the holders of 66 2/3%
of the then aggregate outstanding Voting Rights.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default, the Indenture provides that the Indenture
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 Indenture Trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the Noteholders after the occurrence of such an Event of Default.
In the event the principal of the Notes 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 will have any right under the Indenture to institute any
proceeding with respect to such Indenture unless (a) such holder previously has
given to the Indenture Trustee written notice of default and the continuance
thereof, (b) the holders of Notes of any class evidencing not less than 25% of
the aggregate outstanding Note Balance constituting such class (i) have made
written request upon the Indenture Trustee to institute such proceeding in its
own name as Indenture Trustee thereunder and (ii) have offered to the Indenture
Trustee reasonable indemnity, (c) the Indenture 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 Indenture Trustee during such 60 day period by the holders of a
majority of the Note Balance of such class. However, the Indenture Trustee will
be under no obligation to exercise any of the trusts or powers vested in it by
the Indenture 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 covered by such Indenture, unless such holders have offered to the
Indenture Trustee reasonable security or indemnity against the costs, expenses
and liabilities which may be incurred therein or thereby.
VOTING RIGHTS
At all times, 100% of all Voting Rights will be allocated among the holders
of the Class A Notes (or, after the Class A Notes have been paid in full, the
class of Subordinate Notes then outstanding with the lowest numerical class
designation) in proportion to the then outstanding Note Balances of their
respective Notes.
OPTIONAL REDEMPTION
The circumstances under which the obligations created by the Indenture will
terminate in respect of the Notes are described in "Description of the
Securities--Termination" in the Prospectus.
At its option, the majority holder of the Equity Certificates may redeem
the Notes, in whole but not in part, on any Payment Date on or after the Payment
Date on which the aggregate Note Balance is reduced to less than 20% of the
aggregate initial Note Balance. Any such redemption will be paid in cash at a
price equal to the sum of (w) 100% of the aggregate Note Balance then
outstanding, (x) the aggregate of any Allocated Realized Loss Amounts on the
Notes remaining unpaid immediately prior
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to such Payment Date, (y) the aggregate of the Interest Payment Amounts on the
Notes for such Payment Date and (z) the aggregate of any Interest Carry Forward
Amounts for such Payment Date. Upon any such redemption, the remaining assets in
the Trust Estate shall be released from the lien of the Indenture.
In addition, with respect to the 1996-LB3 Mortgage Loans, the majority
holder of the Equity Certificates may at its option obtain the release of such
portion of the Mortgage Pool (together with any properties acquired in respect
thereof) remaining in the Trust Estate from the lien of the Indenture, and in
connection therewith effect a partial redemption of the Notes, on any Payment
Date on or after the Payment Date following the Due Period in which the
aggregate principal balance of the 1996-LB3 Mortgage Loans (and properties
acquired in respect thereof) remaining in the Trust Estate is reduced to less
than $19,989,567.32. The 1996-LB3 Mortgage Loans have an aggregate principal
balance of approximately $57,071,340 as of the Cut-off Date. Any such redemption
shall be paid in cash at a price generally equal to the sum of (x) 100% of the
then-outstanding principal balance of each such Mortgage Loan plus accrued
interest thereon at their respective Mortgage Rates through the last day of the
calendar month preceding the month in which such redemption occurs, (y) the then
fair market value of each such property and (z) the amount of any servicing
advances reimbursable to the related Servicer in respect of such Mortgage Loans.
For purposes of payments on the Notes and Equity Certificates on the Payment
Date of such redemption, such redemption price shall be applied by the Indenture
Trustee as a final liquidation of each of such Mortgage Loans and properties.
The redemption price relating to any such properties, at their then fair market
value, may result in a shortfall in payment to, and/or the allocation of
Realized Losses to, one or more classes of the Notes. Furthermore, the Master
Servicing Fee, the Servicing Fee and the Indenture Trustee Fee, as well as
expenses and reimbursements permitted to be paid from the assets of the Trust
Estate under the Indenture or the applicable Servicing Agreement, in each case
to the extent payable or reimbursable with respect to such Mortgage Loans, will
be payable from the amount received in respect of such redemption price and
therefore, as provided in the Indenture, will be excluded from the Available
Payment Amount for the Payment Date of such redemption.
In no event will the trust created by the Indenture continue beyond the
expiration of 21 years from the death of the survivor of the persons named in
the Indenture. See "Description of the Securities--Termination" in the
Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Notes, Thacher Proffitt & Wood, counsel to the
Depositor, will deliver its opinion generally to the effect that based on the
application of existing law and assuming compliance with the Owner Trust
Agreement and assuming that the Seller qualifies as a "real estate investment
trust" under Section 856 of the Code, for federal income tax purposes, (a) the
Notes will be characterized as indebtedness and not as representing an ownership
interest in the Trust Estate or an equity interest in the Issuer or the
Depositor and (b) the Issuer will not be (i) classified as an association
taxable as a corporation for federal income tax purposes (other than as a
"qualified REIT subsidiary" as defined in Section 856(i) of the Code) or (ii) a
"publicly traded partnership" as defined in Treasury Regulation Section 1.7704.
The Notes will not be treated as having been issued with "original issue
discount" (as defined in the Prospectus). The prepayment assumption that will be
used in determining the rate of amortization of market discount and premium, if
any, for federal income tax purposes will be based on the assumption that the
Mortgage Loans will prepay at a rate equal to 28% CPR. No representation is made
that the Mortgage Loans will prepay at that rate or at any other rate. See
"Certain Federal Income Tax Consequences" in the Prospectus.
Taxable mortgage pool ("TMP") rules enacted as part of the Tax Reform Act
of 1986 treat certain arrangements in which debt obligations are secured or
backed by real estate mortgage loans as taxable
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corporations. An entity (or a portion thereof) will be characterized as a TMP if
(i) substantially all of its assets are debt obligations and more than 50% of
such debt obligations consist of real estate mortgage loans or interests
therein, (ii) the entity is the obligor under debt obligations with two or more
maturities, and (iii) payments on the debt obligations referred to in clause
(ii) bear a relationship to payments on the debt obligations referred to in
clause (i). Furthermore, a group of assets held by an entity can be treated as a
separate TMP if the assets are expected to produce significant cashflow that
will support one or more of the entity's issues of debt obligation.
It is anticipated that the Issuer will be characterized as a TMP for
federal income tax purposes. In general, a TMP is treated as a "separate"
corporation not includible with any other corporation in a consolidated income
tax return, and is subject to corporate income taxation. However, it is
anticipated that for federal income tax purposes 100% of the Issuer will at all
times be owned by the Seller or one or more "qualified REIT subsidiaries" (as
defined in Section 856(i) of the Code) of the Seller, which is a "real estate
investment trust" (a "REIT") (as defined in Section 856(a) of the Code). So long
as the Issuer is so owned and the Seller and such owner or owners qualify as a
REIT and as qualified REIT subsidiaries, respectively, characterization of the
Issuer as a TMP will result only in the shareholders of the Seller being
required to include in income, as "excess inclusion" income, some or all of
their allocable share of the Issuer's net income that would be "excess
inclusion" income if the Issuer were treated as "real estate mortgage investment
conduit," or REMIC, within the meaning of Section 860D of the Code.
Characterization of the Issuer as an owner trust or a "qualified REIT
subsidiary" would not result in entity-level, corporate income taxation with
respect to the Issuer. The Seller's status as a REIT is dependent upon, among
other things, the Seller filing a timely tax return electing such status. In the
event of the Seller's failure to continue to qualify as a REIT or the failure of
any owner or owners of the Issuer that are subsidiaries of the Seller to
continue to qualify as "qualified REIT subsidiaries" for federal income tax
purposes, or for any other reason, the net income (after the deduction of
interest and original issue discount, if any, on the Notes) of the Issuer would
be subject to corporate income tax, reducing cashflow of the Issuer available to
make payments on the Notes, and the Issuer would not be permitted to be included
in a consolidated income tax return of another corporate entity. No assurance
can be given with regard to the prospective qualification of the Issuer as
either an owner trust or a "qualified REIT subsidiary" or of the Wilshire SPE as
a "qualified REIT subsidiary" for federal income tax purposes. In addition
holders of the Notes should be aware that the equity in the Issuer may be
pledged under repurchase agreements. The lender under such an arrangement,
including an affiliate of the Underwriter in a capacity as such a lender, would
have the right to sell the equity in the event of default on such indebtedness.
If a REIT or a "qualified REIT subsidiary" ceases to be the sole owner of the
Issuer, the Issuer would be subject to corporate income taxation and thus funds
that would otherwise be available to make payments on the Notes would be used to
pay income tax.
The Notes will not be treated as assets described in Section 7701(a)(19)(C)
of the Code or "real estate assets" under Section 856(c)(4)(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 "Certain 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.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated September 29, 1998 (the "Underwriting Agreement"), the
Depositor has agreed to sell, and Salomon Smith Barney Inc. (the "Underwriter")
has agreed to purchase the Notes. The Underwriter is obligated to purchase all
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Notes of the respective classes offered hereby if it purchases any. The
Underwriter is an affiliate of the Depositor.
The Notes will be purchased from the Depositor by the Underwriter and will
be offered by the Underwriter to the public 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 Notes, before deducting
expenses payable by the Depositor, will be approximately 100% of the aggregate
initial Note Balance of the Notes. In connection with the purchase and sale of
the Notes, the Underwriter may be deemed to have received compensation from the
Depositor in the form of underwriting discounts.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended, or will contribute to payments the
Underwriter may be required to make in respect thereof.
SECONDARY MARKET
There can be no assurance that a secondary market for the Notes will
develop or, if it does develop, that it will continue. The primary source of
information available to investors concerning the Notes will be the monthly
statements discussed in the Prospectus under "Description of the
Securities--Reports to Securityholders", which will include information as to
the outstanding principal balance of the Notes and the status of the applicable
form of credit enhancement. There can be no assurance that any additional
information regarding the Notes will be available through any other source. In
addition, the Depositor is not aware of any source through which price
information about the Notes will be generally available on an ongoing basis. The
limited nature of such information regarding the Notes may adversely affect the
liquidity of the Notes, even if a secondary market for the Notes becomes
available.
LEGAL OPINIONS
Certain legal matters relating to the Notes will be passed upon for the
Depositor and the Underwriter by Thacher Proffitt & Wood, New York, New York.
RATINGS
It is a condition of the issuance of the Notes that the Class A Notes be
rated "AAA" by Duff & Phelps Credit Rating Co. ("DCR") and "AAA" by Standard &
Poor's Ratings Services ("S&P"), that the Class M-1 Notes be rated at least "AA"
by DCR and at least "AA" by S&P, that the Class M-2 Notes be rated at least "A"
by DCR and at least "A" by S&P and that the Class M-3 Notes be rated at least
"BBB" by DCR.
The ratings of DCR and S&P assigned to the Notes address the likelihood of
the receipt by Noteholders of all payments to which such Noteholders are
entitled, other than payments of interest to the extent of any Interest Carry
Forward Amounts. The rating process addresses structural and legal aspects
associated with the Notes, including the nature of the underlying mortgage
loans. The ratings assigned to the Notes do not represent any assessment of the
likelihood that principal prepayments will be made by the mortgagors or the
degree to which the rate of such prepayments will differ from that originally
anticipated. The ratings do not address the possibility that Noteholders might
suffer a lower than anticipated yield due to non-credit events.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be
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evaluated independently of any other security rating. In the event that the
ratings initially assigned to the Notes are subsequently lowered for any reason,
no person or entity is obligated to provide any additional credit support or
credit enhancement with respect to the Notes.
The Depositor has not requested that any rating agency rate the Notes other
than as stated above. 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 as
stated above.
LEGAL INVESTMENT
The Class A Notes and the Class M-1 Notes will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") for so long as they are rated not lower than the second highest
rating category by a Rating Agency (as defined in the Prospectus) and, as such,
will be legal investments for certain entities to the extent provided in SMMEA.
SMMEA, however, provides for state limitation on the authority of such entities
to invest in "mortgage related securities", provided that such restricting
legislation was enacted prior to October 3, 1991. Certain states have enacted
legislation which overrides the preemption provisions of SMMEA. The Class M-2
Notes and the Class M-3 Notes will not constitute "mortgage related securities"
for purposes of SMMEA.
The Depositor makes no representations as to the proper characterization of
the Notes for legal investment or other purposes, or as to the ability of
particular investors to purchase the Notes under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of the
Notes. Accordingly, all institutions whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Notes constitute a legal investment
or are subject to investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and the Code impose certain requirements on employee benefit plans and certain
other retirement plans and arrangements (including, but not limited to,
individual retirement accounts and annuities), as well as on collective
investment funds and certain separate and general accounts of insurance
companies in which such plans or arrangements are invested (all of which are
hereinafter referred to as a "Plan") and on persons who are fiduciaries with
respect to such Plans. ERISA and the Code prohibit certain transactions
involving the assets of a Plan and "disqualified persons" (within the meaning of
the Code; "Disqualified Persons") and "parties in interest" (within the meaning
of ERISA; "Parties in Interest") who have certain specified relationships to the
Plan. Accordingly, prior to making an investment in the Notes, investing Plans
should determine whether the Issuer, the Depositor, the Seller, the Trust
Estate, the Underwriter, any other underwriter, the Owner Trustee, the Indenture
Trustee, the Master Servicer, the Servicers, any other servicer, any
administrator, any provider of credit support, or any insurer or any of their
affiliates is a Party in Interest or Disqualified Person with respect to such
Plan and, if so, whether such transaction is subject to one or more statutory or
administrative exemptions. Additionally, an investment of the assets of a Plan
in securities may cause the assets included in the Trust Estate to be deemed
"Plan Assets" of such Plan, and any person with certain specified relationships
to the Trust Estate to be deemed a Party in Interest or Disqualified Person. The
U.S. Department of Labor (the "DOL") has promulgated regulations at 29 C.F.R.
Section 2510.3-101 (the "Plan Asset Regulations")
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defining the term "Plan Assets" for purposes of applying the general fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code. Under the Plan Asset Regulations, generally,
when a Plan acquires an "equity interest" in another entity (such as the Trust
Estate), the underlying assets of that entity may be considered to be Plan
Assets. The Plan Asset 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." Although not entirely free from doubt, it is believed that, as of the
date hereof, the Notes will be treated as debt obligations without significant
equity features for the purposes of the Plan Asset Regulations. Because of the
factual nature of certain of the above-described provisions of ERISA, the Code
and the Plan Asset Regulations, Plans or persons investing Plan Assets should
carefully consider whether such an investment might constitute or give rise to a
prohibited transaction under ERISA or the Code. Any Plan fiduciary which
proposes to cause a Plan to acquire any of the Notes should consult with its
counsel with respect to the potential consequences under ERISA and the Code of
the Plan's acquisition and ownership of such Notes.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND MAY BE DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Salomon
Brothers Mortgage Securities VII, Inc., Wilshire REIT Trust Series 1998-1,
Asset-Backed Floating Rate Notes, Series 1998-11, Class A, Class M-1, Class M-2
and Class M-3 Notes (the "Global Securities") will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, Cedel or Euroclear. The Global Securities will be
traceable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors through Cedel and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedel and Euroclear (in such capacity)
and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their Relevant Depositary
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed notes issues in same-day funds.
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TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
TRADING BETWEEN DTC, SELLER AND CEDEL OR EUROCLEAR PARTICIPANTS. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Participant or a Euroclear Participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
Relevant Depositary to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (I.E., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their account one day later. As an alternative, if
Cedel or Euroclear has extended a line of credit to them, Cedel Participants or
Euroclear Participants can elect not to preposition funds and allow that credit
line to be drawn upon to finance settlement. Under this procedure, Cedel
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges, although
the result will depend on each Cedel Participant's or Euroclear Participant's
particular cost of funds. Since the settlement is taking place during New York
business hours, DTC Participants can employ their usual procedures for crediting
Global Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed
I-2
<PAGE>
to consist to 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of Cedel
Participant or Euroclear Participant the following day, and receipt of the cash
proceeds in the Cedel Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the Cedel Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one-day period.
If settlement is not completed on the intended value date (i.e., the trade
fails), receipt of the cash proceeds in the Cedel Participant's or Euroclear
Participant's account would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the trade is reflected in their Cedel or Euroclear accounts)
in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel
Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons (as defined below), unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between such beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate: Exemption for
Non-U.S. Persons (Form W-8). Beneficial Holders of Global Securities that are
Non-U.S. Persons (as defined below) can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form 1001 (Holdership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed
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<PAGE>
at that rate unless the filer alternatively files Form W-8. Form 1001 may be
filed by Noteholders or their agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in, or under the laws of, the
United States or any political subdivision thereof (except, in the case of a
partnership, to the extent provided in regulations), or an estate whose income
is subject to United States federal income tax regardless of its source, or a
trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
Persons have the authority to control all substantial decisions of the trust.
The term "Non-U.S. Person" means any person who is not a U.S. Person. This
summary does not deal with all aspects of U.S. Federal income tax withholding
that may be relevant to foreign holders of the Global Securities. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
I-4
<PAGE>
MORTGAGE PASS-THROUGH CERTIFICATES
MORTGAGE-BACKED NOTES
(ISSUABLE IN SERIES)
Principal and interest with respect to the Certificates and the Notes (together,
the "Securities") will be payable each month on the date specified in the
related Prospectus Supplement, commencing with the month following the month in
which the applicable Cut-off Date (as defined herein) occurs.
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
The Securities offered hereby and by Supplements to this Prospectus will be
offered from time to time in series.
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in, and each series of Notes will represent
indebtedness of certain assets deposited into a trust fund (the "Trust Fund" or
the "Trust Fund Assets"). The Trust Fund for any series of Securities will
consist of a segregated pool of (a) various types of one- to four-family
residential first and junior lien mortgage loans, multifamily residential
mortgage loans, cooperative apartment loans or manufactured housing conditional
sales contracts and installment loan agreements (collectively, the "Mortgage
Loans"), or beneficial interests therein, (b) pass-through or participation
certificates issued or guaranteed by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC") (any such certificates, "Agency
Securities"), (c) pass-through or participation certificates or other
mortgage-backed securities issued or guaranteed by private entities ("Private
Mortgage-Backed Securities") or (d) funding agreements secured by Mortgage
Loans, Agency Securities or Private Mortgage-Backed Securities (each, a "Funding
Agreement"), or any combination thereof, together with other assets described
herein.
Each series of Securities will include one or more classes. Each class of
Securities of any series will represent the right, which right may be senior to
the rights of one or more of the other classes of the Securities, to receive a
specified portion of payments of principal and interest on the Mortgage Loans,
Agency Securities, Private Mortgage-Backed Securities or Funding Agreements in
the related Trust Fund in the manner described herein and in the related
Prospectus Supplement. A series may include one or more classes of Securities
entitled to principal distributions, with disproportionate, nominal or no
interest distributions, or to interest distributions, with disproportionate,
nominal or no principal distributions. A series may include two or more classes
of Securities that differ as to the timing, sequential order or amount of
distributions of principal or interest or both. If so specified in the related
Prospectus Supplement, the Trust Fund for a series of Securities may include
pool insurance policies, letters of credit, reserve funds or other types of
credit support, or any combination thereof, and currency or interest rate
exchange agreements and other financial assets, or any combination thereof (with
respect to any series, collectively, "Cash Flow Agreements"). See "Description
of the Securities" and "Description of Credit Support".
The only obligations of the Depositor with respect to a series of Securities
will be pursuant to its representations and warranties. The Master Servicer with
respect to a series of Securities evidencing interests in a Trust Fund including
Mortgage Loans will be named in the related Prospectus Supplement. The principal
obligations of a Master Servicer will be limited to its contractual servicing
obligations, and, to the extent provided in the related Prospectus Supplement,
its obligation to make certain cash advances in the event of payment
delinquencies on the Mortgage Loans. The Securities of each series will not
represent an obligation of or interest in the Depositor, the Master Servicer or
any of their respective affiliates, except to the limited extent described
herein and in the related Prospectus Supplement. The Securities will not be
guaranteed or insured by any governmental agency or instrumentality. Although
payment of principal and interest on Agency Securities will be guaranteed as
described herein and in the related prospectus supplement by GNMA, FNMA or
FHLMC, the Securities of any series evidencing interests in a Trust Fund
including Agency Securities will not be so guaranteed. Each Trust Fund will be
held in trust for the benefit of the holders of (i) the related series of
Certificates pursuant to a Pooling and Servicing Agreement or a Trust Agreement
or (ii) the related series of Notes pursuant to an Indenture, each as more fully
described herein. If so provided in the related Prospectus Supplement, with
respect to each series of Certificates, one or more elections may be made to
treat the related Trust Fund or a designated portion thereof as a "real estate
mortgage investment conduit" for federal income tax purposes. See "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 September 22, 1998.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES OFFERED
HEREBY AND THEREBY OR AN OFFER OF THE SECURITIES TO ANY PERSON IN ANY STATE OR
OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE
THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE
AMENDED OR SUPPLEMENTED ACCORDINGLY.
-------------------------------------------
TABLE 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
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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
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assumed amortization schedule and a balloon
payment at the end of a specified term; and
(7) Another type of Mortgage Loan described in
the related Prospectus Supplement.
All of the Mortgage Loans will be covered by
standard hazard insurance policies insuring
against losses due to fire and various other
causes. Certain of the Mortgage Loans will be
covered by primary mortgage insurance policies
to the extent provided herein and in the
related Prospectus Supplement and if so
provided in the related Prospectus Supplement,
certain of the Mortgage Loans will be insured
or guaranteed by the Federal Housing
Administration (the "FHA") or the United States
Department of Veterans Affairs (the "VA"). See
"Description of Primary Insurance Policies".
B. Agency Securities.............The Agency Securities evidenced by a series of
Certificates will consist of (i) Mortgage
Participation Certificates issued and
guaranteed as to timely payment of interest
and, unless otherwise specified in the related
Prospectus Supplement, ultimate payment of
principal by the Federal Home Loan Mortgage
Corporation ("FHLMC Certificates"), (ii)
Guaranteed Mortgage Pass-Through Certificates
issued and guaranteed as to timely payment of
principal and interest by the Federal National
Mortgage Association ("FNMA Certificates"),
(iii) fully modified pass- through
mortgage-backed certificates guaranteed as to
timely payment of principal and interest by the
Government National Mortgage Association ("GNMA
Certificates"), (iv) stripped mortgage-backed
securities representing an undivided interest
in all or a part of either the principal
distributions (but not the interest
distributions) or the interest distributions
(but not the principal distributions) or in
some specified portion of the principal and
interest distributions (but not all of such
distributions) on certain FHLMC, FNMA or GNMA
Certificates and, unless otherwise specified in
the Prospectus Supplement, guaranteed to the
same extent as the underlying securities, (v)
another type of guaranteed pass-through
certificate issued or guaranteed by GNMA, FNMA
or FHLMC and described in the related
Prospectus Supplement or (vi) a combination of
such Agency Securities. All GNMA Certificates
will be backed by the full faith and credit of
the United States. No FHLMC or FNMA
Certificates will be backed, directly or
indirectly, by the full faith and credit of the
United States.
The Agency Securities may consist of
pass-through securities issued under FHLMC's
Cash or Guarantor Program, the GNMA I Program,
the GNMA II Program or
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another program specified in the Prospectus
Supplement. The payment characteristics of the
Mortgage Loans underlying the Agency Securities
will be described in the related Prospectus
Supplement.
C. Private Mortgage-Backed
Securities..................Private Mortgage-Backed Securities may include
(a) mortgage participations or pass-through
certificates representing beneficial interests
in certain mortgage loans or (b) collateralized
mortgage obligations secured by such mortgage
loans. Although individual mortgage loans
underlying a Private Mortgage-Backed Security
may be insured or guaranteed by the United
States or an agency or instrumentality thereof,
they need not be, and the Private
Mortgage-Backed Securities themselves will not
be so insured or guaranteed. See "The Trust
Funds-Private Mortgage-Backed Securities"
herein.
. Funding Agreements.............Funding Agreements are obligations of a Finance
Company (as defined herein) which are secured
by Mortgage Loans, Agency Securities or Private
Mortgage- Backed Securities. See "The Trust
Funds-Funding Agreements" herein.
Pre-Funding Account..............If so specified in the related Prospectus
Supplement, a portion of the proceeds of the
sale of one or more Classes of Securities of a
series may be deposited in a segregated account
to be applied to acquire additional Mortgage
Loans from the Mortgage Loan Seller, subject to
the limitations set forth herein under
"Description of the Securities--Pre-Funding
Account." Monies on deposit in the Pre-Funding
Account and not applied to acquire such
additional Mortgage Loans within the time set
forth in the related Agreement (as defined
herein) may be treated as principal and applied
in the manner described in the related
Prospectus Supplement.
Certificate Account..............Each Trust Fund will include one or more
accounts (collectively, the "Certificate
Account") established and maintained on behalf
of the Securityholders into which the Master
Servicer will, to the extent described herein
and in the related Prospectus Supplement,
deposit all payments and collections received
or advanced with respect to the related Trust
Fund Assets. A Certificate Account may be
maintained as an interest bearing or a
non-interest bearing account, or funds held
therein may be invested in certain short-term
high-quality obligations. See "Description of
the Securities--Deposits to Certificate
Account".
Credit Support...................If so specified in the related Prospectus
Supplement, one or more classes of Securities
of a series evidencing interests in a Trust
Fund that includes Mortgage Loans or Private
Mortgage-Backed Securities may be provided
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partial or full protection against certain
defaults and losses on such assets in the form
of subordination of one or more other classes
of Securities in such series or by one or more
other types of credit support, such as a letter
of credit, reserve fund, insurance policy or a
combination thereof (any such coverage, "Credit
Support"), and currency or interest rate
exchange agreements and other financial assets,
or any combination thereof (with respect to any
series, collectively, "Cash Flow Agreements").
With respect to any series of Notes, the
related Equity Certificates, insofar as they
represent the beneficial ownership interest in
the Issuer, will be subordinate to the related
Notes. The amount and types of coverage, the
identification of the entity providing the
coverage (if applicable) and related
information with respect to each type of Credit
Support, if any, will be described in the
Prospectus Supplement for a series of
Securities. See "Description of Credit
Support".
Interest on Securities...........Interest on each class of Securities (other
than certain classes of Strip Securities) of
each series will accrue at the applicable
Security Interest Rate on the outstanding
Principal Balance thereof and will be
distributed to Securityholders as provided in
the related Prospectus Supplement (each of the
specified dates on which distributions are to
be made, a "Distribution Date"). Distributions
with respect to interest on Strip Securities
with no or, in certain cases, a nominal
Principal Balance will be made on each
Distribution Date on the basis of a notional
amount as described herein and in the related
Prospectus Supplement. Distributions of
interest with respect to one or more classes of
Securities may be reduced to the extent of
certain delinquencies and other contingencies
described herein and in the related Prospectus
Supplement. See "Yield Considerations" and
"Description of the Securities--Interest on the
Securities".
Principal of Securities..........The Securities of each series (other than
certain Strip Securities) initially will have
an aggregate Principal Balance equal to the
outstanding principal balance of the Trust Fund
Assets as of, unless the related Prospectus
Supplement provides otherwise, the close of
business on the first day of the month of
formation of the related Trust Fund (the
"Cut-off Date"), after application of scheduled
payments due on or before such date, whether or
not received. The Principal Balance of a
Security represents the maximum amount that the
holder thereof is entitled to receive in
respect of principal from future cash flow on
the assets in the related Trust Fund. The
Prospectus Supplement will include the initial
Principal Balance of each class of Securities
offered thereby. Unless otherwise
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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
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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
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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
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<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.
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities offered hereby:
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Securities of any
series will develop or, if it does develop, that it will provide Securityholders
with liquidity of investment or that it will continue for the life of the
Securities of any series. The Prospectus Supplement for any series of Securities
may indicate that an underwriter specified therein intends to establish a
secondary market in such Securities, however no underwriter will be obligated to
do so. The Securities offered hereby will not be listed on any securities
exchange.
LIMITED OBLIGATIONS
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their respective affiliates. The only
obligations of the foregoing entities with respect to the Securities, any
Mortgage Loan or any other Trust Fund Asset will be the obligations (if any) of
the Depositor pursuant to certain limited representations and warranties made
with respect to the Mortgage Loans or other Trust Fund Asset, the Master
Servicer's servicing obligations under the related Pooling and Servicing
Agreement or Servicing Agreement, as applicable (including, if and to the extent
described in the related Prospectus Supplement, its limited obligation to make
certain advances in the event of delinquencies on the Mortgage Loans) and
pursuant to the terms of any other Trust Fund Assets, and, if and to the extent
expressly described in the related Prospectus Supplement, certain limited
obligations of the Master Servicer in connection with a purchase obligation or
an agreement to purchase. Unless otherwise specified in the related Prospectus
Supplement, neither the Securities nor the underlying Mortgage Loans or other
Trust Fund Assets will be guaranteed or insured by any governmental agency or
instrumentality, by the Depositor, the Master Servicer or any of their
respective affiliates or by any other person. Proceeds of the assets included in
the related Trust Fund for each series of Securities (including the Mortgage
Loans or other Trust Fund Assets and any form of credit enhancement) will be the
sole source of payments on the Securities, and there will be no recourse to the
Depositor, the Master Servicer or any other entity in the event that such
proceeds are insufficient or otherwise unavailable to make all payments provided
for under the Securities.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT SUPPORT
With respect to each series of Securities, Credit Support will be provided
in limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit Support will be provided in one or more of the forms referred to
herein. See "Description of Credit Support" herein. Regardless of the form of
Credit Support provided, the amount of coverage will be limited in amount and in
most cases will be subject to periodic reduction in accordance with a schedule
or formula. Furthermore, such Credit Support may provide only very limited
coverage as to certain types of losses or risks, and may provide no coverage as
to certain other types of losses or risks. In the event losses exceed the amount
of coverage provided by any Credit Support or losses of a type not covered by
any Credit Support occur, such losses will be borne by the holders of the
related Securities (or certain classes thereof). The Depositor, the Master
Servicer or other specified person will generally be permitted to reduce,
terminate or substitute all or a portion of the Credit Support for any series of
Securities, if each applicable Rating Agency indicates that the then-current
rating(s) thereof will not be adversely affected. The rating(s) of any series of
Securities by any applicable Rating Agency may be lowered following the initial
issuance thereof as a result of the downgrading of the obligations of any
applicable credit support provider, or as a result of losses on the related
Mortgage Loans in excess of the levels contemplated by such Rating Agency at the
time of its initial rating analysis. Neither the Depositor, the Master Servicer
nor any of their
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<PAGE>
respective affiliates will have any obligation to replace or supplement any
Credit Support, or to take any other action to maintain any rating(s) of any
series of Securities.
RISKS OF DECLINING PROPERTY VALUES AND HIGH LOAN-TO-VALUE RATIOS
An investment in securities such as the Securities which generally
represent interests in mortgage loans and/or manufactured housing, conditional
sales contracts and installment loan agreements may be affected by, among other
things, a decline in real estate values and changes in the borrowers' financial
condition. No assurance can be given that values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding balances of the
Mortgage Loans, and any secondary financing on the Mortgaged Properties, in a
particular Mortgage Pool become equal to or greater than the value of the
Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. Mortgaged Properties subject to high Loan-to-Value Ratios are at
greater risk since such properties initially have less equity than Mortgaged
Properties with low Loan-to-Value ratios and therefore a decline in property
values could dissipate equity more quickly. Delinquencies, foreclosures and
losses due to declining values of Mortgaged Properties, especially those with
high Loan-to-Value Ratios, would cause losses to the Trust Fund and, to the
extent not covered by Credit Support, would adversely affect the yield to
maturity on the Securities.
RISKS OF NEGATIVELY AMORTIZING LOANS
In the case of Mortgage Loans that are subject to negative amortization,
the principal balances of such Mortgage Loans could be increased to an amount
equal to or in excess of the value of the underlying Mortgaged Properties,
thereby increasing the likelihood of default. To the extent that such losses are
not covered by any reserve fund or instrument of Credit Support in the related
Trust Fund, holders of Securities of the series evidencing interests in the
related Mortgage Pool will bear all risk of loss resulting from default by
mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans. Certain of the types of loans which may be included in
the Mortgage Pools may involve additional uncertainties not present in
traditional types of loans.
RISKS OF BUYDOWN MORTGAGE LOANS
Certain of the Mortgage Loans contained in a Mortgage Pool may be subject
to temporary buydown plans ("Buydown Mortgage Loans") pursuant to which the
monthly payments made by the Mortgagor during the early years of the Mortgage
Loan (the "Buydown Period") will be less than the scheduled monthly payments on
the Mortgage Loan, the resulting difference to be made up from (i) an amount
(such amount, exclusive of investment earnings thereon, being hereinafter
referred to as "Buydown Funds") contributed by the borrower, the seller of the
Mortgaged Property or another source and placed in a custodial account (the
"Buydown Account"), (ii) if the Buydown Funds are contributed on a present value
basis, investment earnings on such Buydown Funds or (iii) additional buydown
funds to be contributed over time by the mortgagor's employer or another source.
See "Description of the Securities--Deposits to Certificate Account" herein.
Generally, the mortgagor under each Buydown Mortgage Loan will be qualified at
the applicable lower monthly payment. Accordingly, the repayment of a Buydown
Mortgage Loan is dependent on the ability of the Mortgagor to make larger level
monthly payments after the Buydown Funds have been depleted and, for certain
Buydown Mortgage Loans, during the Buydown Period. The inability of a Mortgagor
to make such larger monthly payments could lead to losses on the Mortgage Loans,
and to the extent not covered by Credit Support, may adversely affect the yield
to maturity on the Securities.
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<PAGE>
GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency than will be
experienced on mortgage loans generally. For example, a region's economic
condition and housing market may be directly, or indirectly, adversely affected
by natural disasters or civil disturbances such as earthquakes, hurricanes,
floods, eruptions or riots. The economic impact of any of these types of events
may also be felt in areas beyond the region immediately affected by the disaster
or disturbance. The Mortgage Loans underlying certain series of Securities may
be concentrated in these regions, and such concentration may present risk
considerations in addition to those generally present for similar
mortgage-backed securities without such concentration. Moreover, as described
below, any Mortgage Loan for which a breach of a representation or warranty
exists will remain in the related Trust Fund in the event that a Mortgage Loan
Seller is unable, or disputes its obligation, to repurchase such Mortgage Loan
and such a breach does not also constitute a breach of any representation made
by any other person. In such event, any resulting losses will be borne by the
related form of Credit Support, to the extent available.
RISKS OF LOANS WITH BALLOON PAYMENTS
Certain of the Mortgage Loans included in a Trust Fund, particularly those
secured by Multifamily Properties, may not be fully amortizing (or may not
amortize at all) over their terms to maturity and, thus, will require
substantial payments of principal and interest (that is, balloon payments) at
their stated maturity. Mortgage Loans of this type involve a greater degree of
risk than self-amortizing loans because the ability of a Mortgagor to make a
balloon payment typically will depend upon its ability either to fully refinance
the loan or to sell the related Mortgaged Property at a price sufficient to
permit the mortgagor to make the balloon payment. The ability of a mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the value of the related Mortgaged Property, the level of available
mortgage rates at the time of sale or refinancing, the mortgagor's equity in the
related Mortgaged Property, prevailing general economic conditions, the
availability of credit for loans secured by comparable real properties and, in
the case of Multifamily Properties, the financial condition and operating
history of the mortgagor and the related Mortgaged Property, tax laws and rent
control laws.
RISKS OF LENDING ON NON-OWNER-OCCUPIED PROPERTIES
It is anticipated that some or all of the Mortgage Loans included in any
Trust Fund, particularly Mortgage Loans secured by Multifamily Properties, will
be nonrecourse loans or loans for which recourse may be restricted or
unenforceable. As to those Mortgage Loans, recourse in the event of mortgagor
default will be limited to the specific real property and other assets, if any,
that were pledged to secure the Mortgage Loan. However, even with respect to
those Mortgage Loans that provide for recourse against the mortgagor and its
assets generally, there can be no assurance that enforcement of such recourse
provisions will be practicable, or that the other assets of the mortgagor will
be sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property.
Mortgage Loans made on the security of Multifamily Properties may entail
risks of delinquency and foreclosure, and risks of loss in the event thereof,
that are greater than similar risks associated with loans made on the security
of Single Family Properties. The ability of a borrower to repay a loan secured
by an income-producing property typically is dependent primarily upon the
successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an
income-producing property is directly related to the net operating income
derived from such property. If the net operating income of the property is
reduced (for example, if rental or occupancy rates decline or real estate tax
rates or other operating expenses increase), the borrower's ability to repay the
loan may be impaired. In addition, the concentration
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of default, foreclosure and loss risk for a pool of Mortgage Loans secured by
Multifamily Properties may be greater than for a pool of Mortgage Loans secured
by Single Family Properties of comparable aggregate unpaid principal balance
because the pool of Mortgage Loans secured by Multifamily Properties is likely
to consist of a smaller number of higher balance loans.
RISKS OF NON-CONFORMING LOANS
Mortgage Loans to be included in a Mortgage Pool may be non-conforming
Mortgage Loans. Non-conforming Mortgage Loans are Mortgage Loans that do not
qualify for purchase by government sponsored agencies such as FNMA and FHLMC due
to credit characteristics that to not satisfy such FNMA and FHLMC guidelines,
including mortgagors whose creditworthiness and repayment ability do not satisfy
such FNMA and FHLMC underwriting guidelines and mortgagors who may have a record
of credit write-offs, outstanding judgments, prior bankruptcies and other
derogatory credit items. Accordingly, non-conforming Mortgage Loans are likely
to experience rates of delinquency, foreclosure and loss that are higher, and
that may be substantially higher, than mortgage loans originated in accordance
with FNMA or FHLMC underwriting guidelines. The principal differences between
conforming Mortgage Loans and non-conforming Mortgage Loans include the
applicable Loan-to-Value Ratios, the credit and income histories of the related
Mortgagors, the documentation required for approval of the related Mortgage
Loans, the types of properties securing the Mortgage Loans, the loan sizes and
the Mortgagors' occupancy status with respect to the Mortgaged Properties. As a
result of these and other factors, the interest rates charged on non-conforming
Mortgage Loans are often higher than those charged for conforming Mortgage
Loans. The combination of different underwriting criteria and higher rates of
interest may also lead to higher delinquency, foreclosure and losses on
non-conforming Mortgage Loans as compared to conforming Mortgage Loans.
RISKS OF HIGH LTV LOANS
Some or all of the Mortgage Loans included in any Trust Fund may be High
LTV Loans. High LTV Loans with combined Loan-to-Value Ratios in excess of 100%
may have been originated with a limited expectation of recovering any amounts
from the foreclosure of the related Mortgaged Property and are underwritten with
an emphasis on the creditworthiness of the related borrower. If such Mortgage
Loans go into foreclosure and are liquidated, there may be no amounts recovered
from the related Mortgaged Property unless the value of the property increases
or the principal amount of the related senior liens have been reduced such as to
reduce the current combined Loan-to-Value Ratio of the related Mortgage Loan to
below 100%. Any such losses, to the extent not covered by credit enhancement,
may affect the yield to maturity of the Securities.
RISKS OF UNDERWRITING STANDARDS OF UNAFFILIATED MORTGAGE LOAN SELLERS
Mortgage Loans to be included in a Mortgage Pool will have been purchased
by the Depositor, either directly or indirectly from Mortgage Loan Sellers. Such
Mortgage Loans will generally have been originated in accordance with
underwriting standards acceptable to the Depositor and generally described
herein under "Mortgage Loan Program--Underwriting Standards" as more
particularly described in the underwriting criteria included in the related
Prospectus Supplement. Nevertheless, in some cases, particularly those involving
unaffiliated Mortgage Loan Sellers, the Depositor may not be able to establish
the underwriting standards used in the origination of the related Mortgage
Loans. In those cases, the related Prospectus Supplement will include a
statement to such effect and will reflect what, if any, re-underwriting of the
related Mortgage Loans was completed by the Depositor or any of its affiliates.
To the extent the Mortgage Loans cannot be re-underwritten or the underwriting
criteria cannot be verified, the Mortgage Loans might suffer losses greater than
they would had they been directly underwritten by the Depositor or an affiliate
thereof. Any such losses, to the extent not covered by Credit Support, may
adversely affect the yield to maturity of the Securities.
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RISKS ASSOCIATED WITH JUNIOR LIEN MORTGAGE LOANS
Certain of the Mortgage Pools may contain Mortgage Loans secured by junior
liens and the related senior liens may not be included in the Mortgage Pool. An
overall decline in the residential real estate market could adversely affect the
values of the Mortgaged Properties securing the Mortgage Loans with junior liens
such that the outstanding principal balances, together with any senior financing
thereon, exceeds the value of the Mortgaged Properties. Since Mortgage Loans
secured by junior liens are subordinate to the rights of the beneficiaries under
the related senior deeds of trust or senior mortgages, such a decline would
adversely affect the position of the related junior beneficiary or junior
mortgagee before having such an effect on the position of the related senior
beneficiaries or senior mortgagees. A rise in interest rates over a period of
time, the general condition of the Mortgaged Property and other factors may also
have the effect of reducing the value of the Mortgaged Property from the value
at the time the junior lien Mortgage Loan was originated. As a result, the
Loan-to-Value Ratio may exceed the ratio in effect at the time the Mortgage Loan
was originated. Such an increase may reduce the likelihood that, in the event of
a default by the related mortgagor, liquidation or other proceeds will be
sufficient to satisfy the junior lien Mortgage Loan after satisfaction of any
senior liens and the payment of any liquidation expenses.
Other factors may affect the prepayment rate of junior lien Mortgage Loans,
such as the amounts of, and interest on, the related senior mortgage loans and
the use of senior lien mortgage loans as long-term financing for home purchases
and junior lien mortgage loans as shorter-term financing for a variety of
purposes, such as home improvement, educational expenses and purchases of
consumer durable such as automobiles. Accordingly, junior lien Mortgage Loans
may experience a higher rate of prepayments that traditional senior lien
mortgage loans. In addition, any future limitations on the rights of borrowers
to deduct interest payments on junior lien Mortgage Loans for federal income tax
purposes may further increase the rate of prepayments on such junior lien
Mortgage Loans.
RISKS OF NONPERFECTION OF SECURITY INTERESTS
Any Contract included in a Mortgage Pool will be secured by a security
interest in a Manufactured Home. Perfection of security interests in
Manufactured Homes and enforcement of rights to realize upon the value of the
Manufactured Homes as collateral for the Contracts are subject to a number of
federal and state laws, including the UCC as adopted in each state and each
state's certificate of title statutes. The steps necessary to perfect the
security interest in a Manufactured Home will vary from state to state. In the
event the Master Servicer fails, due to clerical errors or otherwise, to take
the appropriate steps to perfect such a security interest, the Trustee may not
have a first priority security interest in the Manufactured Home securing a
Contract. Additionally, courts in many states have held that manufactured homes
may, under certain circumstances, become subject to real estate title and
recording laws. As a result, a security interest in a manufactured home could be
rendered subordinate to the interests of other parties claiming an interest in
the home under applicable state real estate law. The failure to properly perfect
a valid, first priority security interest in a Manufactured Home securing a
Contract could lead to losses that may adversely affect the yield to maturity of
the Securities.
RISKS RELATING TO LIQUIDATION OF MORTGAGED PROPERTIES
Substantial delays can be encountered in connection with the liquidation of
defaulted Mortgage Loans and corresponding delays in the receipt of related
proceeds by the Securityholders could occur. An action to foreclose on a
Mortgaged Property securing a Mortgage Loan is regulated by state statutes,
rules and judicial decisions and is subject to many of the delays and expenses
of other lawsuits if defenses or counterclaims are interposed, sometimes
requiring several years to complete. Furthermore, in some states an action to
obtain a deficiency judgment is not permitted following a nonjudicial sale of a
Mortgaged Property. In the event of a default by a Mortgagor, these
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restrictions, among other things, may impede the ability of the Master Servicer
to foreclose on or sell the Mortgaged Property or to obtain Liquidation Proceeds
sufficient to repay all amounts due on the related Mortgage Loan. The Master
Servicer will be entitled to deduct from Liquidation Proceeds all expenses
reasonably incurred in attempting to recover amounts due on the related
Liquidated Mortgage Loan and not yet repaid, including payments to prior
lienholders, accrued Servicing Fees, legal fees and costs of legal action, real
estate taxes, and maintenance and preservation expenses. In the event that any
Mortgaged Properties fail to provide adequate security for the related Mortgage
Loans and insufficient funds are available from any applicable Credit Support,
Securityholders could experience a loss on their investment.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
ENVIRONMENTAL RISKS
The Mortgaged Properties are subject to certain environmental risks. Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner of real property may be liable for the costs of
removal or remediation of hazardous or toxic substances on, under or in such
property. Such laws often impose liability whether or not the owner or operation
knew of, or was responsible for, the presence of such hazardous or toxic
substances. A lender also risks such liability on foreclosure of the mortgage on
such property. In addition, the presence of hazardous or toxic substances, or
the failure to properly remediate such property, may adversely affect the
owner's or operator's ability to sell such property. Although the incidence of
environmental contamination of residential properties is less common than that
for commercial properties, Mortgage Loans contained in a Mortgage Pool may be
secured by Mortgaged Properties in violation of environmental laws, ordinances
or regulations. The Master Servicer is generally prohibited from foreclosing on
a Mortgaged Property unless it has taken adequate steps to ensure environmental
compliance with respect to such Mortgaged Property. However, to the extent the
Master Servicer errs and forecloses on Mortgaged Property that is subject to
environmental law violations, and to the extent a Mortgage Loan Seller does not
provide adequate representations and warranties against such violations, or is
unable to honor such obligations, including the obligation to repurchase a
Mortgage Loan upon the breach of a representation or warranty, a Mortgage Pool
could experience losses.
LIMITED NATURE OF RATINGS
It is a condition to the issuance of the Securities that each series of
Securities be rated in one of the four highest rating categories by a nationally
recognized statistical rating agency. A security rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time. No person is obligated to maintain the rating on any Security, and
accordingly, there can be no assurance that the ratings assigned to any Security
on the date on which such Security is originally issued will not be lowered or
withdrawn by a Rating Agency at any time thereafter. In the event any rating is
revised or withdrawn, the liquidity or the market value of the related Security
may be adversely affected. See "Rating" in the related Prospectus Supplement.
LIMITED REPRESENTATIONS BY AND AGAINST THE MORTGAGE LOAN SELLER
Each Mortgage Loan Seller will have made representations and warranties in
respect of the Mortgage Loans sold by such Mortgage Loan Seller and evidenced by
a series of Securities. In the event of a breach of a Mortgage Loan Seller's
representation or warranty that materially adversely
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affects the interests of the Securityholders in a Mortgage Loan, unless
otherwise specified in the related Prospectus Supplement, the related Mortgage
Loan Seller will be obligated to cure the breach or repurchase or, if permitted,
replace such Mortgage Loan as described below. However, there can be no
assurance that a Mortgage Loan Seller will honor its obligation to cure,
repurchase or, if permitted, replace any Mortgage Loan as to which such a breach
of a representation or warranty arises. A Mortgage Loan Seller's failure or
refusal to honor its repurchase obligation could lead to losses that, to the
extent not covered by Credit Enhancement, may adversely affect the yield to
maturity of the Securities.
In instances where a Mortgage Loan Seller is unable, or disputes its
obligation, to purchase affected Mortgage Loans, the Master Servicer may
negotiate and enter into one or more settlement agreements with such Mortgage
Loan Seller that could provide for, among other things, the purchase of only a
portion of the affected Mortgage Loans. Any such settlement could lead to losses
on the Mortgage Loans which would be borne by the related Securities. Neither
the Depositor nor the Master Servicer will be obligated to purchase a Mortgage
Loan if a Mortgage Loan Seller defaults on its obligation to do so, and no
assurance can be given that the Mortgage Loan Sellers will carry out such
purchase obligations. Such a default by a Mortgage Loan Seller is not a default
by the Depositor or by the Master Servicer. Any Mortgage Loan not so purchased
or substituted for shall remain in the related Trust Fund and any losses related
thereto shall be allocated to the related Credit Support, to the extent
available, and otherwise to one or more classes of the related series of
Securities.
All of the representations and warranties of a Mortgage Loan Seller in
respect of a Mortgage Loan will have been made as of the date on which such
Mortgage Loan was purchased from the Mortgage Loan Seller by or on behalf of the
Depositor; the date as of which such representations and warranties were made
will be a date prior to the date of initial issuance of the related series of
Securities. A substantial period of time may have elapsed between the date as of
which the representations and warranties were made and the later date of initial
issuance of the related series of Securities. Accordingly, the Mortgage Loan
Seller's purchase obligation (or, if specified in the related Prospectus
Supplement, limited replacement option) will not arise if, during the period
commencing on the date of sale of a Mortgage Loan by the Mortgage Loan Seller,
an event occurs that would have given rise to such an obligation had the event
occurred prior to sale of the affected Mortgage Loan. The occurrence of events
during this period that are not covered by a Mortgage Loan Seller's purchase
obligation could lead to losses that, to the extent not covered by Credit
Support, may adversely affect the yield to maturity of the Securities.
SUBORDINATION OF CERTAIN CLASSES OF SECURITIES
Credit Support for a particular series of Securities may be provided in the
form of subordination of one or more classes of Securities in a series under
which losses are first allocated to any Subordinate Securities up to a specified
limit. Losses not covered by any form of Credit Support will be borne by the
holders of the related Securities (or certain classes thereof). Therefore, in
the event of substantial losses in any Mortgage Pool, such losses may be borne
by such holders.
BOOK-ENTRY REGISTRATION MAY AFFECT LIQUIDITY
Because transfers and pledges of DTC Registered Securities can be effected
only through book entries at DTC through participants, the liquidity of the
secondary market for DTC Registered Securities may be reduced to the extent that
some investors are unwilling to hold Securities in book entry form in the name
of DTC and the ability to pledge DTC Registered Securities may be limited due to
the lack of a physical certificate. Beneficial owners of DTC Registered
Securities may, in certain cases experience delay in the receipt of payments of
principal and interest such payments will be forwarded by the related Trustee to
DTC who will then forward payment to the participants who will thereafter
forward payment to beneficial owners. In the event of the insolvency of DTC or a
participant in whose name DTC Registered Securities are recorded, the ability of
beneficial
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owners to obtain timely payment and (if the limits of applicable insurance
coverage is otherwise unavailable) ultimate payment of principal and interest on
DTC Registered Securities may be impaired.
YIELD CONSIDERATIONS
The yield to maturity of the Securities of each series offered hereby will
depend on, among other things, the rate and timing of principal payments
(including prepayments, liquidations due to defaults and repurchases) on the
related Mortgage Loans and the price paid by Securityholders. Such yield may be
adversely affected by a higher or lower than anticipated rate of prepayments on
the related Mortgage Loans. 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.
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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".
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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
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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.
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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
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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
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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
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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.
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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.
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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,
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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.
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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.
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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.
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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
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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
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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
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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
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or certain transfers by the borrower of the underlying Mortgaged Property. The
Multifamily Loans may contain due-on-encumbrance provisions (permitting the
lender to accelerate the maturity of the Multifamily Loan upon further
encumbrance by the borrower of the underlying Multifamily Property).
Conventional mortgage loans that underlie FHLMC Certificates and FNMA
Certificates may contain, and in certain instances must contain, such
due-on-sale provisions. FHA Loans, VA Loans and other mortgage loans underlying
GNMA Certificates contain no such clause and may be assumed by the purchaser of
the mortgaged property. Thus, the rate of prepayments on FHA Loans, VA Loans and
other mortgage loans underlying GNMA Certificates may be lower than that of
conventional Mortgage Loans bearing comparable interest rates.
With respect to a series of 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".
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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
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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
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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.
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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
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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
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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
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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.
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(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
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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.
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ASSIGNMENT OF AGENCY SECURITIES
The Depositor will cause the Agency Securities to be registered in the name
of the Trustee or its nominee, and the Trustee concurrently will execute,
countersign and deliver the 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
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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
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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.
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PAYMENTS ON AGENCY SECURITIES AND PRIVATE MORTGAGE-BACKED SECURITIES
The Agency Securities and Private Mortgage-Backed Securities included in a
Trust Fund will be registered in the name of the Trustee so that all
distributions thereon will be made directly to the Trustee. The Trustee will
deposit or cause to be deposited into the Certificate Account for each Trust
Fund including Agency Securities and Private Mortgage-Backed Securities as and
when received, unless otherwise provided in the 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),
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(b) all prepayments, together with related payments of the
interest thereon, Liquidation Proceeds, Insurance Proceeds and other
unscheduled recoveries received subsequent to the related Prepayment
Period, and
(c) all amounts in the Certificate Account that are due or
reimbursable to the Depositor, the Trustee, a Mortgage Loan Seller, a
Sub-Servicer or the Master Servicer or that are payable in respect of
certain expenses of the related Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Certificate Account;
(iii) all advances with respect to such Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid with respect to interest shortfalls resulting from
prepayments during the related Prepayment Period; and
(v) to the extent not on deposit in the related Certificate Account as
of the corresponding Determination Date, any amounts collected under, from
or in respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related 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
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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
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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
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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;
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(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
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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.
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SUB-SERVICING
Any Master Servicer may delegate its servicing obligations in respect of
the Mortgage Loans to third-party servicers (each, a "Sub-Servicer"), but such
Master Servicer will remain obligated under the related 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
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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
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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.
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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
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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
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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
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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.
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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
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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.
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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
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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
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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.
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If the related Prospectus Supplement so provides, at such time as the
Letter of Credit Bank makes a payment as described above with respect to a
Liquidated Loan, or a payment of the full amount owing on a Mortgage Loan as to
which the Mortgaged Property has been damaged (as described in (ii)(B) above),
the Liquidated Loan will be removed from the related Trust Fund in accordance
with the terms set forth in the related Prospectus Supplement and will no longer
be subject to the Agreement. Unless otherwise provided in the related Prospectus
Supplement, Mortgage Loans that have been subject to bankruptcy proceedings as
described above, or as to which payment under the Letter of Credit has been made
for the purpose of restoring the related Mortgaged Property (as described in
(ii)(A) above), will remain part of the related Trust Fund. Any Defaulted
Mortgage Amount, Special Hazard Amount and Bankruptcy Amount covered by any
Letter of Credit will each be reduced to the extent of related unreimbursed
draws thereunder.
In the event that the Letter of Credit Bank ceases to be a duly organized
commercial bank, or its debt obligations are rated lower than the highest rating
on any class of the 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
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of the mortgagor, and if required by the insurer, has sold the property with the
approval of the insurer.
Assuming the satisfaction of these conditions, the insurer has the option
to either (i) acquire the property securing the defaulted Mortgage Loan for a
payment equal to the principal balance thereof plus accrued and unpaid interest
at the Interest Rate to the date of acquisition and certain expenses described
above advanced by or on behalf of the insured, on condition that the insurer
must be provided with good and merchantable title to the Mortgaged Property
(unless the property has been conveyed pursuant to the terms of the applicable
primary mortgage insurance policy) or (ii) pay the amount by which the sum of
the principal balance of the defaulted Mortgage Loan and accrued and unpaid
interest at the Interest Rate to the date of the payment of the claim and such
expenses exceed the proceeds received from a sale of the Mortgaged Property
which the insurer has approved. In both (i) and (ii), the amount of payment
under a Mortgage Pool Insurance Policy will be reduced by the amount of such
loss paid under the primary mortgage insurance policy.
Unless earlier directed by the insurer, a claim under a Mortgage Pool
Insurance Policy must be filed (i) in the case when a primary mortgage insurance
policy is in force, within a specified number of days (typically, 60 days) after
the claim for loss has been settled or paid thereunder, or after acquisition by
the insured or a sale of the property approved by the insurer, whichever is
later, or (ii) in the case when a primary mortgage insurance policy is not in
force, within a specified number of days (typically, 60 days) after acquisition
by the insured or a sale of the property approved by the insurer. A claim must
be paid within a specified period (typically, 30 days) after the claim is made
by the insured.
Unless otherwise specified in the Prospectus Supplement relating to a
series of 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.
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Because each Mortgage Pool Insurance Policy will require that the property
subject to a defaulted Mortgage Loan be restored to its original condition prior
to claiming against the insurer, such policy will not provide coverage against
hazard losses. As set forth below, the primary hazard insurance policies
covering the Mortgage Loans typically exclude from coverage physical damage
resulting from a number of causes and, even when the damage is covered, may
afford recoveries that are significantly less than the full replacement cost of
such losses. Further, a special hazard insurance policy (or a Letter of Credit
to the extent of the Special Hazard Amount) will not cover all risks, and the
coverage thereunder will be limited in amount. Certain hazard risks will, as a
result, be uninsured and will therefore be borne by 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
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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".
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FINANCIAL GUARANTEE INSURANCE
Financial guarantee insurance ("Financial Guarantee Insurance"), if any,
with respect to a series of Securities will be provided by one or more insurance
companies. Such Financial Guarantee Insurance will guarantee, with respect to
one or more classes of Securities of the related series, timely distributions of
interest and full distributions of principal on the basis of a schedule of
principal distributions set forth in or determined in the manner specified in
the related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Financial Guarantee Insurance will also guarantee against any
payment made to a Securityholder that is subsequently recovered as a "voidable
preference" payment under federal bankruptcy law. A copy of the Financial
Guarantee Insurance policy for a series, if any, will be filed with the
Commission as an exhibit to a Current Report on Form 8-K to be filed with the
Commission within 15 days of issuance of the Securities of the related series.
RESERVE FUND
If so provided in the related Prospectus Supplement, the Depositor will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash, one or more irrevocable letters of credit or one or more
Permitted Investments in specified amounts, or any other instrument satisfactory
to the Rating Agency or Agencies, which will be applied and maintained in the
manner and under the conditions specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, to the extent described in the
Prospectus Supplement for a Senior/Subordinate Series, a Reserve Fund may be
funded through application of all or a portion of amounts otherwise payable on
the Subordinate Securities. Amounts in a Reserve Fund may be distributed to
Securityholders, or applied to reimburse the Master Servicer for outstanding
advances, or may be used for other purposes, in the manner and to the extent
specified in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, any such Reserve Fund will not be deemed to be
part of the related Trust Fund.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, the Master Servicer or any
other person named in the related Prospectus Supplement.
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include certain other agreements, such
as interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements designed to reduce the
effects of interest rate or currency exchange rate fluctuations on the Trust
Fund Assets on one or more classes of Securities. The principal terms of any
such guaranteed investment contract or other agreement (any such agreement a
"Cash Flow Agreement"), and the identity of the Cash Flow Agreement obligor,
will be described in the Prospectus Supplement for a series of Securities.
DESCRIPTION OF PRIMARY INSURANCE POLICIES
Each Mortgage Loan will be covered by a primary hazard insurance policy
and, if required as described below, a primary mortgage insurance policy.
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PRIMARY MORTGAGE INSURANCE POLICIES
As set forth under "Description of the Securities--Realization Upon
Defaulted Mortgage Loans", the Master Servicer will maintain or cause to be
maintained with respect to each Mortgage Loan, other than a Multifamily Loan, a
primary mortgage insurance policy in accordance with the underwriting standards
described herein and in the related Prospectus Supplement. Although the terms
and conditions of primary mortgage insurance policies differ, each primary
mortgage insurance policy will generally cover losses up to an amount equal to
the excess of the unpaid principal amount of a defaulted Mortgage Loan (plus
accrued and unpaid interest thereon and certain approved expenses) over a
specified percentage of the Value of the related Mortgaged Property.
As conditions precedent to the filing or payment of a claim under a primary
mortgage insurance policy, the insured will typically be required, in the event
of default by the borrower, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
insurer, real estate taxes, protection and preservation expenses and foreclosure
and related costs; (ii) in the event of any physical loss or damage to the
Mortgaged Property, have the Mortgaged Property restored to at least its
condition at the effective date of the primary mortgage insurance policy
(ordinary wear and tear excepted); and (iii) tender to the insurer good and
merchantable title to, and possession of, the Mortgaged Property.
PRIMARY HAZARD INSURANCE POLICIES
Each Agreement will require the Master Servicer to cause the borrower on
each Mortgage Loan to maintain a primary hazard insurance policy providing for
coverage of the standard form of fire insurance policy with extended coverage
customary in the state in which the Mortgaged Property is located. Unless
otherwise specified in the related Prospectus Supplement, such coverage will be
in general in an amount equal to the lesser of the principal balance owing on
such Mortgage Loan and the amount necessary to fully compensate for any damage
or loss to the improvements on the Mortgaged Property on a replacement cost
basis, but in either case not less than the amount necessary to avoid the
application of any co-insurance clause contained in the hazard insurance policy.
The ability of the Master Servicer to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any primary hazard insurance policy and under any flood insurance
policy referred to below, or upon the extent to which information in this regard
is furnished by borrowers. All amounts collected by the Master Servicer under
any such policy (except for amounts to be applied to the restoration or repair
of the Mortgaged Property or released to the borrower in accordance with the
Master Servicer's normal servicing procedures, subject to the terms and
conditions of the related Mortgage and Mortgage Note) will be deposited in the
Certificate Account. The Agreement provides that the Master Servicer may satisfy
its obligation to cause each borrower to maintain such a hazard insurance policy
by the Master Servicer's maintaining a blanket policy insuring against hazard
losses on the Mortgage Loans. If such blanket policy contains a deductible
clause, the Master Servicer will deposit in the Certificate Account all sums
that would have been deposited therein but for such clause. The Master Servicer
also is required to maintain a fidelity bond and errors and omissions policy
with respect to its officers and employees that provides coverage against losses
that may be sustained as a result of an officer's or employee's misappropriation
of funds or errors and omissions in failing to maintain insurance, subject to
certain limitations as to amount of coverage, deductible amounts, conditions,
exclusions and exceptions.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore
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will not contain identical terms and conditions, the basic terms thereof are
dictated by respective state laws, and most such policies typically do not cover
any physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mudflows), nuclear reactions, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all-inclusive. When a Mortgaged Property is
located at origination in a federally designated flood area, each Agreement
requires the Master Servicer to cause the borrower to acquire and maintain flood
insurance in an amount equal in general to the lesser of (i) the amount
necessary to fully compensate for any damage or loss to the improvements which
are part of the Mortgaged Property on a replacement cost basis and (ii) the
maximum amount of insurance available under the federal flood insurance program,
whether or not the area is participating in the program.
The hazard insurance policies covering the Mortgaged Properties typically
contain a co-insurance clause that in effect requires the insured at all times
to carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause generally provides that the insurer's
liability in the event of partial loss does not exceed the lesser of (i) the
replacement cost of the improvements less physical depreciation and (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
The Master Servicer will not require that a hazard or flood insurance
policy be maintained for any Cooperative Loan. Generally, the Cooperative is
responsible for maintenance of hazard insurance for the property owned by the
Cooperative, and the tenant-stockholders of that Cooperative do not maintain
individual hazard insurance policies. To the extent, however, that a Cooperative
and the related borrower on a Cooperative Note do not maintain such insurance or
do not maintain adequate coverage or any insurance proceeds are not applied to
the restoration of the damaged property, damage to such borrower's Cooperative
apartment or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Note.
Since the amount of hazard insurance the Master Servicer will cause to be
maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, in the event of partial loss hazard
insurance proceeds may be insufficient to restore fully the damaged property.
Under the terms of the Mortgage Loans, borrowers are required to present claims
to insurers under hazard insurance policies maintained on the Mortgaged
Properties. The Master Servicer, on behalf of the Trustee and Securityholders,
is obligated to present or cause to be presented claims under any blanket
insurance policy insuring against hazard losses on Mortgaged Properties.
However, the ability of the Master Servicer to present or cause to be presented
such claims is dependent upon the extent to which information in this regard is
furnished to the Master Servicer by borrowers.
FHA INSURANCE
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under The Housing Act and the United
States Housing Act of 1937, as amended.
There are two primary FHA insurance programs that are available for
multifamily mortgage loans. Sections 221(d)(3) and (d)(4) of the Housing Act
allow the Department of Housing and Urban Development ("HUD") to insure mortgage
loans that are secured by newly constructed and substantially rehabilitated
multifamily rental projects. Section 244 of the Housing Act provides for
co-insurance of such mortgage loans made under Sections 221(d)(3) and (d)(4) by
HUD/FHA and
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a HUD-approved co-insurer. Generally the term of such a mortgage loan may be up
to 40 years and the ratio of the loan amount to property replacement cost can be
up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans made
for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan to value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Presently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be obligated to purchase any such debenture
issued in satisfaction of a defaulted FHA insured Mortgage Loan serviced by it
for an amount equal to the principal amount of any such debenture.
The Master Servicer will be required to take such steps as are reasonably
necessary to keep FHA insurance in full force and effect.
VA GUARANTEES
The VA is an Executive Branch Department of the United States, headed by
the Secretary of Veterans Affairs. VA currently administers a variety of federal
assistance programs on behalf of eligible veterans and their dependents and
beneficiaries. VA administers a loan guaranty program pursuant to which VA
guarantees a portion of loans made to eligible veterans.
Under the VA loan guaranty program, a VA Loan may be made to any eligible
veteran by an approved private sector mortgage lender. VA guarantees payment to
the holder of that loan of a fixed percentage of the loan indebtedness, up to a
maximum dollar amount, in the event of default by the veteran borrower. When a
delinquency is reported to VA and no realistic alternative to foreclosure is
developed by the loan holder or through VA's supplemental servicing of the loan,
VA determines, through an economic analysis, whether VA will (a) authorize the
holder to convey the property securing the VA Loan to the Secretary of Veterans
Affairs following termination or (b) pay the loan guaranty amount to the holder.
The decision as to disposition of properties securing defaulted VA Loans is made
on a case-by-case basis using the procedures set forth in 38 U.S.C. Section
3732(c), as amended.
The Master Servicer will be required to take such steps as are reasonably
necessary to keep the VA guarantees in full force and effect.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of loans secured by residential properties. Because such legal aspects
are governed in part by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Mortgage Loans. See "The Trust Funds--The Mortgage Loans".
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GENERAL
All of the Mortgage Loans, except as described below, are loans to
homeowners and all of the Single-Family Loans and Multifamily Loans are
evidenced by notes or bonds and secured by instruments which may be mortgages,
deeds of trust, security deeds or deeds to secure debt, depending upon the type
of security instrument customary to grant a security interest in real property
in the state in which the Single-Family Property or Multifamily Property, as the
case may be, is located. If specified in the Prospectus Supplement relating to a
series of Securities, a Trust Fund may also contain (i) Cooperative Loans
evidenced by promissory notes secured by security interests in shares issued by
private cooperative housing corporations and in the related proprietary leases
or occupancy agreements granting exclusive rights to occupy specific dwelling
units in the related buildings or (ii) Contracts evidencing both (a) the
obligation of the obligor to repay the loan evidenced thereby and (b) the grant
of a security interest in the related Manufactured Home to secure repayment of
such loan. Any of the foregoing types of encumbrance will create a lien upon, or
grant a title interest in, the subject property, the priority of which will
depend on the terms of the particular security instrument as well as the order
of recordation or filing of the instrument in the appropriate public office.
Such a lien is not prior to the lien for real estate taxes and assessments.
SINGLE-FAMILY LOANS AND MULTIFAMILY LOANS
The Single-Family Loans and Multifamily Loans will be secured by either
mortgages, deeds of trust, security deeds or deeds to secure debt depending upon
the type of security instrument customary to grant a security interest according
to the prevailing practice in the state in which the property subject to a
Single-Family Loan or Multifamily Loan is located. The filing of a mortgage or a
deed of trust creates a lien upon or conveys title to the real property
encumbered by such instrument and represents the security for the repayment of
an obligation that is customarily evidenced by a promissory note. It is not
prior to the lien for real estate taxes and assessments. Priority with respect
to mortgages and deeds of trust depends on their terms and generally on the
order of recording with the applicable state, county or municipal office. There
are two parties to a mortgage, the mortgagor, who is the borrower/homeowner or
the land trustee (as described below), and the mortgagee, who is the lender.
Under the mortgage instrument, the mortgagor delivers to the mortgagee a note or
bond and the mortgage. (In the case of a land trust, title to the property is
held by a land trustee under a land trust agreement, while the
borrower/homeowner is the beneficiary of the land trust; at origination of a
mortgage loan, the borrower executes a separate undertaking to make payments on
the mortgage note.) Although a deed of trust is similar to a mortgage, a deed of
trust normally has three parties, the trustor (similar to a mortgagor), who may
or may not be the borrower, the beneficiary (similar to a mortgagee), who is the
lender, and the trustee, a third-party grantee. Under a deed of trust, the
trustor grants the property, irrevocably until the debt is paid, in trust,
generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The mortgagee's
authority under a mortgage and the trustee's authority under a deed of trust,
security deed or deed to secure debt are governed by the law of the state in
which the real property is located, the express provisions of the mortgage, deed
of trust, security deed or deed to secure debt and, in some cases, the
directions of the beneficiary.
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LEASES AND RENTS
Mortgages and deeds of trust which encumber Multifamily Property often
contain an assignment of rents and leases, pursuant to which the borrower
assigns its right, title and interest as landlord under each lease and the
income derived therefrom to the lender, while retaining a license to collect the
rents for so long as there is no default. If the borrower defaults, the license
terminates and the lender is entitled to collect the rents. Local law may
require that the lender take possession of the property and appoint a receiver
before becoming entitled to collect the rents.
Even after a foreclosure or the enforcement of an assignment of rents and
leases, the potential rent payments from the property may not be sufficient to
service the mortgage debt. For instance, the net income that would otherwise be
generated from the property may be insufficient to service the mortgage debt if
the leases on the property are at below-market rents, or as the result of
excessive maintenance, repair or other obligations inherited by the lender as
landlord. In the event of a borrower's default, the amount of rent the lender is
able to collect from the tenants can significantly affect the value of the
lender's security interest.
COOPERATIVE LOANS
The Cooperative owns or has a leasehold interest in all the real property
and owns in fee or leases the building and all separate dwelling units therein.
The Cooperative is directly responsible for project management and, in most
cases, payment of real estate taxes, other governmental impositions and hazard
and liability insurance. If there is a blanket mortgage on the cooperative
apartment building and/or underlying land, as is generally the case, or an
underlying lease of the land, as is the case in some instances, the Cooperative,
as project mortgagor, or lessee, as the case may be, is also responsible for
meeting these blanket mortgage or rental obligations. A blanket mortgage is
ordinarily incurred by the Cooperative in connection with either the
construction or purchase of the Cooperative's apartment building or the
obtaining of capital by the Cooperative. The interests of the occupants under
proprietary leases or occupancy agreements as to which the Cooperative is the
landlord are generally subordinate to the interests of the holder of the blanket
mortgage and to the interest of the holder of a land lease. If the Cooperative
is unable to meet the payment obligations (i) arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements or (ii) arising under its land lease, the holder of the landlord's
interest under the land lease could terminate it and all subordinate proprietary
leases and occupancy agreements. Also, the blanket mortgage on a Cooperative may
provide financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at final
maturity. The inability of the Cooperative to refinance this mortgage and its
consequent inability to make such final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either event,
foreclosure by the holder of the blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender that financed the purchase by an individual
tenant-stockholder of Cooperative shares or, in the case of the Trust Fund, the
collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant- stockholder's pro rata
share of the Cooperative's payments for its blanket mortgage, real property
taxes, maintenance expenses and other capital or ordinary expenses. An ownership
interest in a
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Cooperative and accompanying occupancy rights is financed through a Cooperative
share loan evidenced by a promissory note and secured by an assignment of and a
security interest in the occupancy agreement or proprietary lease and a security
interest in the related Cooperative shares. The lender generally takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the Cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of Cooperative shares. See "Foreclosure on Cooperative
Shares" below.
CONTRACTS
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the state or
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for manufactured homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC which has been adopted by all states. Such financing statements are
effective for five years and must be renewed at the end of each five years. The
certificate of title laws adopted by the majority of states provide that
ownership of motor vehicles and manufactured housing shall be evidenced by a
certificate of title issued by the motor vehicles department (or a similar
entity) of such state. In the states that have enacted certificate of title
laws, a security interest in a unit of manufactured housing, so long as it is
not attached to land in so permanent a fashion as to become a fixture, is
generally perfected by the recording of such interest on the certificate of
title to the unit in the appropriate motor vehicle registration office or by
delivery of the required documents and payment of a fee to such office,
depending on state law.
The Master Servicer will be required under the related Agreement to effect
such notation or delivery of the required documents and fees, and to obtain
possession of the certificate of title, as appropriate under the laws of the
state in which any Manufactured Home is registered. In the event the Master
Servicer fails, due to clerical errors or otherwise, to effect such notation or
delivery, or files the security interest under the wrong law (for example, under
a motor vehicle title statute rather than under the UCC, in a few states), the
Trustee may not have a first priority security interest in the Manufactured Home
securing a Contract. As manufactured homes have become larger and often have
been attached to their sites without any apparent intention by the borrowers to
move them, courts in many states have held that manufactured homes may, under
certain circumstances, become subject to real estate title and recording laws.
As a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the home
under applicable state real estate law. In order to perfect a security interest
in a manufactured home under real estate laws, the holder of the security
interest must file either a "fixture filing" under the provisions of the UCC or
a real estate mortgage under the real estate laws of the state where the home is
located. These filings must be made in the real estate records office of the
county where the home is located. Generally, Contracts will contain provisions
prohibiting the obligor from permanently attaching the Manufactured Home to its
site. So long as the obligor does not violate this agreement, a security
interest in the Manufactured Home will be governed by the certificate of title
laws or the UCC, and the notation of the security interest on the certificate of
title or the filing of a UCC financing statement will be effective to maintain
the priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to its site, other parties could
obtain an interest in the Manufactured Home that is prior to the security
interest originally retained by the seller and transferred to the Depositor.
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The Depositor will assign or cause to be assigned a security interest in
the Manufactured Homes to the Trustee, on behalf of the Securityholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Depositor,
the Master Servicer nor the Trustee will amend the certificates of title to
identify the Trustee, on behalf of the Securityholders, as the new secured party
and, accordingly, the Depositor or the Mortgage Loan Seller will continue to be
named as the secured party on the certificates of title relating to the
Manufactured Homes. In most states, such assignment is an effective conveyance
of such security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to the Depositor's
rights as the secured party. However, in some states there exists a risk that,
in the absence of an amendment to the certificate of title, such assignment of
the security interest might not be held effective against creditors of the
Depositor or Mortgage Loan Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Depositor on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Trustee against the rights of subsequent purchasers of
a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the Depositor
has failed to perfect or cause to be perfected the security interest assigned to
the Trust Fund, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the Trustee, on
behalf of the Securityholders, as the new secured party on the certificate of
title that, through fraud or negligence, the security interest of the Trustee
could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and re-register
the Manufactured Home in such state, and if the Depositor did not take steps to
re-perfect its security interest in such state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a Manufactured Home;
accordingly, the Depositor must surrender possession if it holds the certificate
of title to such Manufactured Home or, in the case of Manufactured Homes
registered in states that provide for notation of lien, the Depositor would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the Depositor would have the
opportunity to re- perfect its security interest in the Manufactured Home in the
state of relocation. In states that do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under each related Agreement, the Master Servicer will be obligated to
take such steps, at the Master Servicer's expense, as are necessary to maintain
perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Depositor will obtain the representation of the Mortgage Loan Seller that it has
no knowledge of any such liens with respect to any Manufactured Home securing a
Contract. However, such liens could arise at any time during the term of a
Contract. No notice will be given to the Trustee or Securityholders in the event
such a lien arises.
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FORECLOSURE ON MORTGAGES
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust, which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In some states, the trustee must record a
notice of default and send a copy to the borrower-trustor and to any person who
has recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any junior lienholder. The
trustor, borrower, or any person having a junior encumbrance on the real estate,
may, during a reinstatement period, cure the default by paying the entire amount
in arrears plus the costs and expenses incurred in enforcing the obligation.
Generally, state law controls the amount of foreclosure expenses and costs,
including attorneys' fees, that may be recovered by a lender. If the deed of
trust is not reinstated, a notice of sale must be posted in a public place and,
in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property, recorded and sent to all parties having an
interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage and in the mortgaged
property. It is regulated by statutes and rules and subject throughout to the
court's equitable powers. Generally, a mortgagor is bound by the terms of the
mortgage note and the mortgage as made and cannot be relieved from its own
default. However, since a foreclosure action is equitable in nature and is
addressed to a court of equity, the court may relieve a mortgagor of a default
and deny the mortgagee foreclosure on proof that the mortgagor's default was
neither willful nor in bad faith and that the mortgagee's action was such as to
establish a waiver, or fraud, bad faith, oppressive or unconscionable conduct as
to warrant a court of equity to refuse affirmative relief to the mortgagee.
Under certain circumstances a court of equity may relieve the mortgagor from an
entirely technical default where such default was not willful.
A foreclosure action or sale pursuant to a power of sale is subject to most
of the delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring up to several years to complete. Moreover,
recent judicial decisions suggest that a non-collusive, regularly conducted
foreclosure sale or sale pursuant to a power of sale may be challenged as a
fraudulent conveyance, regardless of the parties' intent, if a court determines
that the sale was for less than fair consideration and such sale occurred while
the mortgagor was insolvent and within one year (or within the state statute of
limitations if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law) of the filing of bankruptcy. Similarly, a suit
against the debtor on the mortgage note may take several years.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is a public sale.
However, because of the difficulty potential third party purchasers at the sale
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee for an amount equal to the principal amount of the mortgage or deed of
trust plus accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burdens of ownership, including obtaining
casualty insurance, paying taxes and making such repairs at its own expense as
are necessary to render the property suitable for sale. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss may be reduced by the receipt of
any mortgage insurance proceeds.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or
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undertake the obligation to make payments on the senior mortgages in the event
the mortgagor is in default thereunder, in either event adding the amounts
expended to the balance due on the junior loan, and may be subrogated to the
rights of the senior mortgagees. In addition, in the event that the foreclosure
of a junior mortgage triggers the enforcement of a "due-on-sale" clause in a
senior mortgage, the junior mortgagee may be required to pay the full amount of
the senior mortgages to the senior mortgagees. Accordingly, with respect to
those Mortgage Loans which are junior mortgage loans, if the lender purchases
the property, the lender's title will be subject to all senior liens and claims
and certain governmental liens. The proceeds received by the referee or trustee
from the sale are applied first to the costs, fees and expenses of sale and then
in satisfaction of the indebtedness secured by the mortgage or deed of trust
under which the sale was conducted. Any remaining proceeds are generally payable
to the holders of junior mortgages or deeds of trust and other liens and claims
in order of their priority, whether or not the borrower is in default. Any
additional proceeds are generally payable to the mortgagor or trustor. The
payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgagee or may require the institution of
separate legal proceeds.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
a lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower's failure to adequately maintain the property or
the borrower's execution of a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily-prescribed minimums. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protection to the borrower.
FORECLOSURE ON COOPERATIVE SHARES
The Cooperative shares and proprietary lease or occupancy agreement owned
by the tenant- stockholder and pledged to the lender are, in almost all cases,
subject to restrictions on transfer as set forth in the Cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease or
occupancy agreement, and may be cancelled by the Cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by such
tenant- stockholder, including mechanics' liens against the Cooperative
apartment building incurred by such tenant-stockholder. Typically, rent and
other obligations and charges arising under a proprietary lease or occupancy
agreement that are owed to the Cooperative are made liens upon the shares to
which the proprietary lease or occupancy agreement relates. In addition, the
proprietary lease or occupancy agreement generally permits the Cooperative to
terminate such lease or agreement in the event the tenant-stockholder fails to
make payments or defaults in the performance of covenants required thereunder.
Typically, the lender and the Cooperative enter into a recognition agreement
that, together with any lender protection provisions contained in the
proprietary lease, establishes the rights and obligations of both parties in the
event of a default by the tenant-stockholder on its obligations under the
proprietary lease or occupancy agreement. A default by the tenant-stockholder
under the proprietary lease or occupancy agreement will usually constitute a
default under the security agreement between the lender and the
tenant-stockholder.
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The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the Cooperative
apartment, subject, however, to the Cooperative's right to sums due under such
proprietary lease or occupancy agreement or that have become liens on the shares
relating to the proprietary lease or occupancy agreement. The total amount owed
to the Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the Cooperative Loan and accrued and unpaid
interest thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
Under the laws applicable in most states, foreclosure on the Cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to those shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner.
Whether a foreclosure sale has been conducted in a "commercially reasonable"
manner will depend on the facts in each case. In determining commercial
reasonableness, a court will look to the notice given the debtor and the method,
manner, time, place and terms of the foreclosure. Generally, a sale conducted
according to the usual practice of banks selling similar collateral will be
considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti- Deficiency Legislation and
Other Limitations on Lenders" below.
REPOSSESSION WITH RESPECT TO CONTRACTS
Repossession of manufactured housing is governed by state law. A few states
have enacted legislation that requires that the debtor be given an opportunity
to cure its default (typically 30 days to bring the account current) before
repossession can commence. So long as a manufactured home has not become so
attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in the
event of a default by the obligor will generally be governed by the UCC (except
in Louisiana). Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing. While the UCC as adopted by the various
states may vary in certain small particulars, the general repossession procedure
established by the UCC is as follows:
(i) Except in those states where the debtor must receive
notice of the right to cure a default, repossession can commence
immediately upon default without prior notice. Repossession may be
effected either through self-help (peaceable retaking without court
order), voluntary repossession or through judicial process
(repossession pursuant to court- issued writ of replevin). The
self-help and/or voluntary repossession methods are more commonly
employed, and are accomplished simply by retaking possession of the
manufactured home. In cases in which the debtor objects or raises a
defense to repossession, a court order must be obtained from the
appropriate state court, and the manufactured home
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must then be repossessed in accordance with that order. Whether the
method employed is self- help, voluntary repossession or judicial
repossession, the repossession can be accomplished either by an actual
physical removal of the manufactured home to a secure location for
refurbishment and resale or by removing the occupants and their
belongings from the manufactured home and maintaining possession of the
manufactured home on the location where the occupants were residing.
Various factors may affect whether the manufactured home is physically
removed or left on location, such as the nature and term of the lease
of the site on which it is located and the condition of the unit. In
many cases, leaving the manufactured home on location is preferable, in
the event that the home is already set up, because the expenses of
retaking and redelivery will be saved. However, in those cases where
the home is left on location, expenses for site rentals will usually be
incurred.
(ii) Once repossession has been achieved, preparation for the
subsequent disposition of the manufactured home can commence. The
disposition may be by public or private sale provided the method,
manner, time, place and terms of the sale are commercially reasonable.
(iii) Sale proceeds are to be applied first to repossession
expenses (expenses incurred in retaking, storage, preparing for sale to
include refurbishing costs and selling) and then to satisfaction of the
indebtedness. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale do not cover the
full amount of the indebtedness, the remainder may be sought from the
debtor in the form of a deficiency judgment in those states that do not
prohibit or limit such judgments. The deficiency judgment is a personal
judgment against the debtor for the shortfall. Occasionally, after
resale of a manufactured home and payment of all expenses and
indebtedness, there is a surplus of funds. In that case, the UCC
requires the party suing for the deficiency judgment to remit the
surplus to the debtor. Because the defaulting owner of a manufactured
home generally has very little capital or income available following
repossession, a deficiency judgment may not be sought in many cases or,
if obtained, will be settled at a significant discount in light of the
defaulting owner's strained financial condition.
LOUISIANA LAW
Any contract secured by a manufactured home located in Louisiana will be
governed by Louisiana law rather than Article 9 of the UCC. Louisiana laws
provide similar mechanisms for perfection and enforcement of security interests
in manufactured housing used as collateral for an installment sale contract or
installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently affixed
to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the
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lender obtained an appraisal of the manufactured home prior to the sale and the
property was sold for at least two-thirds of its appraised value.
RIGHTS OF REDEMPTION WITH RESPECT TO SINGLE-FAMILY PROPERTIES AND MULTIFAMILY
PROPERTIES
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and certain foreclosed junior lienors are
given a statutory period in which to redeem the property from the foreclosure
sale. The right of redemption should be distinguished from the equity of
redemption, which is a nonstatutory right that must be exercised prior to the
foreclosure sale. In some states, redemption may occur only upon payment of the
entire principal balance of the loan, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The right of redemption would defeat the title of any purchaser
acquired at a public sale. Consequently, the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership and maintenance of the property until the redemption period has
expired. In some states, there is no right to redeem property after a trustee's
sale under a deed of trust.
NOTICE OF SALE; REDEMPTION RIGHTS WITH RESPECT TO MANUFACTURED HOMES
While state laws do not usually require notice to be given to debtors prior
to repossession, many states do require delivery of a notice of default and of
the debtor's right to cure defaults before repossession. The law in most states
also requires that the debtor be given notice of sale prior to the resale of the
home so that the owner may redeem at or before resale. In addition, the sale
must comply with the requirements of the UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon collateral and/or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, the filing of a
petition acts as a stay against the enforcement of remedies of collection of a
debt. Moreover, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 13 rehabilitative plan to cure a monetary default
with respect to a mortgage loan on a debtor's residence by paying arrearages
within a reasonable time period and reinstating the original mortgage loan
payment schedule even though the lender accelerated the mortgage loan and final
judgment of a foreclosure had been entered in state court (provided no sale of
the property had yet occurred) prior to the filing of the debtor's Chapter 13
petition. Some courts with federal bankruptcy
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jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a mortgage loan default by
paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified if
the borrower has filed a petition under Chapter 13. These courts have suggested
that such modifications may include reducing the amount of each monthly payment,
changing the rate of interest, altering the repayment schedule and reducing the
lender's security interest to the value of the residence, thus leaving the
lender a general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan. Federal bankruptcy law and
limited case law indicate that the foregoing modifications could not be applied
to the terms of a loan secured by property that is the principal residence of
the debtor. In all cases, the secured creditor is entitled to the value of its
security plus post-petition interest, attorneys' fees and costs to the extent
the value of the security exceeds the debt.
The Bankruptcy Reform Act of 1994 established the National Bankruptcy
Review Commission ("NBRC") for purposes of analyzing the nation's bankruptcy
laws and making recommendations to Congress for legislative changes to the
bankruptcy laws. A similar commission was involved in developing the Bankruptcy
Code. The NBRC delivered its report to Congress, the President of the United
States and the Chief Justice of the Supreme Court on October 20, 1997. Among
other topics, high leverage loans were addressed in the NBRC's report. Despite
certain ambiguities, the NBRC's report appears to recommend that Congress amend
Bankruptcy Code section 1322(b)(2) by treating a claim secured only by a junior
security interest in a debtor's principal residence as protected only to the
extent that the claim was secured when the security interest was made if the
value of the property securing the junior security interest is less than such
amount. However, the express language of the report implies that a claim secured
only by a junior security interest in a debtor's principal residence may not be
modified to reduce such claim below the appraised value of the property at the
time the security interest was made. A strong dissent by certain members of the
NBRC recommends that the protections of Bankruptcy Code section 1322(b)(2) be
extended to creditors principally secured by the debtor's principal residence.
Additionally, the NBRC's report recommends that a creditor's secured claim in
real property should be determined by the property's fair market value, less
hypothetical costs of sale. The standard advocated by this recommendation would
not apply to mortgages on the primary residence of a Chapter 11 or 13 debtor who
retains the residence if such mortgages are protected from modification such as
those senior mortgages not subject to modification pursuant to Bankruptcy Code
Sections 1322(b)(2) and 1123(b)(5). The final NBRC report may ultimately lead to
substantive changes to the existing Bankruptcy Code, such as reducing
outstanding loan balances to the appraised value of a debtor's principal
residence at the time the security interest in the property was taken, which
could affect the Mortgage Loans and the enforcement of rights therein.
Certain tax liens arising under the Code, may in certain circumstances
provide priority over the lien of a mortgage or deed of trust. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of single family mortgage loans by numerous
federal and some state consumer protection laws. These laws include the Federal
Truth-in-Lending Act, Regulation "Z", Real Estate Settlement Procedures Act,
Regulation "X", Equal Credit Opportunity Act, Regulation "B", Fair Credit
Billing Act, Fair Credit Housing Act, Fair Credit Reporting Act and related
statutes. These federal laws impose specific statutory liabilities upon lenders
who originate mortgage loans and who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the mortgage loans.
In particular, the originators' failure to comply with certain requirements of
the Federal Truth-in-Lending Act, as implemented by Regulation Z, could subject
both originators and assignees of such obligations to monetary penalties and
could result in obligors' rescinding loans against either originators or
assignees.
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In addition, certain of the Mortgage Loans are also subject to the Home
Ownership and Equity Protection Act of 1994 (the "Homeownership Act") (such
mortgage loans, "High Cost Loans"), if such Mortgage Loans were originated on or
after October 1, 1995, are not mortgage loans made to finance the purchase of
the mortgaged property and have interest rates or origination costs in excess of
certain prescribed levels. The Homeownership Act requires certain additional
disclosures, specifies the timing of such disclosures and limits or prohibits
inclusion of certain provisions in mortgages subject to the Homeownership Act.
Remedies available to the mortgagor include monetary penalties, as well as
recission rights if the appropriate disclosures were not given as required or if
the particular mortgage includes provisions prohibited by law. The Homeownership
Act also provides that any purchaser or assignee of a mortgage covered by the
Homeownership Act is subject to all of the claims and defenses to loan payment,
whether under the Federal Truth-in-Lending Act, as amended by the Homeownership
Act or other law, which the borrower could assert against the original lender
unless the purchaser or assignee did not know and could not with reasonable
diligence have determined that the Mortgage Loan was subject to the provisions
of the Homeownership Act. The maximum damages that may be recovered under the
Homeownership Act from an assignee is the remaining amount of indebtedness plus
the total amount paid by the borrower in connection with the Mortgage Loan.
FOR COOPERATIVE LOANS
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are junior to senior mortgages or deeds of trust which are not part
of the Trust Fund. The rights of the Securityholders as the holders of a junior
deed of trust or a junior mortgage are subordinate in lien priority and in
payment priority to those of the holder of the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or beneficiary to receive and
apply hazard insurance and condemnation proceeds and, upon default of the
mortgagor, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage or the sale
pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's
lien will be extinguished unless the junior lienholder satisfies the defaulted
senior loan or asserts its subordinate interest in a property in foreclosure
proceedings. See "--Foreclosure on Mortgages" herein.
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a senior mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
Federal Truth-in-Lending Act,
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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.
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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
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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
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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
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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
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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.
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REPORTING AND OTHER ADMINISTRATIVE MATTERS
Solely for purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and REMIC Residual Certificateholders will be
treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Trustee will file REMIC federal income tax returns on behalf of
the related REMIC, and under the terms of the related Agreement, will be
irrevocably appointed by the holders of the largest percentage interest in the
related REMIC Residual Certificates as their agent to perform all of the duties
of the "tax matters person" with respect to the REMIC in all respects.
The Trustee, as the tax matters person or as agent for the tax matters
person, subject to certain notice requirements and various restrictions and
limitations, generally will have the authority to act on behalf of the REMIC and
the REMIC Residual Certificateholders in connection with the administrative and
judicial review of items of income, deduction, gain or loss of the REMIC, as
well as the REMIC's classification. REMIC Residual Certificateholders generally
will be required to report such REMIC items consistently with their treatment on
the REMIC's tax return and may in some circumstances be bound by a settlement
agreement between the Trustee, as the tax matters person or as agent for the tax
matters person, and the IRS concerning any such REMIC item. Adjustments made to
the REMIC tax return may require a REMIC Residual Certificateholder to make
corresponding adjustments on its return, and an audit of the REMIC's tax return,
or the adjustments resulting from such an audit, could result in an audit of a
REMIC Residual Certificateholder's return. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
the REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other non-individuals will be provided interest
and original issue discount income information and the information set forth in
the following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC Regular Certificate issued with original issue discount to
disclose on its face the amount of original issue discount and the issue date,
and requiring such information to be reported to the IRS. Reporting with respect
to the REMIC Residual Certificates, including income, excess inclusions,
investment expenses and relevant information regarding qualification of the
REMIC's assets will be made as required under the Treasury regulations,
generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount."
Unless otherwise specified in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the Trustee.
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BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES
Payments of interest and principal, as well as payments of proceeds from
the sale of REMIC Certificates, may be subject to the "backup withholding tax"
under Section 3406 of the Code at a rate of 31% if recipients of such payments
fail to furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax. Furthermore,
certain penalties may be imposed by the IRS on a recipient of payments that is
required to supply information but that does not do so in the proper manner.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new regulations (the "New Withholding
Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Withholding
Regulations attempt to unify certification requirements and modify reliance
standards. The New Withholding Regulations will generally be effective for
payments made after December 31, 1999, subject to certain transition rules.
Prospective investors are urged to consult their tax advisors regarding the New
Withholding Regulations.
FOREIGN INVESTORS IN REMIC CERTIFICATES
A REMIC Regular Certificateholder that is not a "United States person" (as
defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not, unless otherwise disclosed in the
related Prospectus Supplement, be subject to United States federal income or
withholding tax in respect of a distribution on a REMIC Regular Certificate,
provided that the holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States person and providing the name and
address of such Certificateholder). For these purposes, "United States person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in, or under the laws of, the United States or
any political subdivision thereof (except, in the case of a partnership, to the
extent provided in regulations), or an estate whose income is subject to United
States federal income tax regardless of its source, or a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. To the extent
prescribed in regulations by the Secretary of the Treasury, which regulations
have not yet been issued, a trust which was in existence on August 20, 1996
(other than a trust treated as owned by the grantor under subpart E of part I of
subchapter J of chapter 1 of the Code), and which was treated as a United States
person on August 19, 1996, may elect to continue to be treated as a United
States person notwithstanding the previous sentence. It is possible that the IRS
may assert that the foregoing tax exemption should not apply with respect to a
REMIC Regular Certificate held by a REMIC Residual Certificateholder that owns
directly or indirectly a 10% or greater interest in the REMIC Residual
Certificates. If the holder does not qualify for exemption, distributions of
interest, including distributions in respect of accrued original issue discount,
to such holder may be subject to a tax rate of 30%, subject to reduction under
any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
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Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States persons will
be prohibited under the related Pooling and Servicing Agreement.
NOTES
On or prior to the date of the related Prospectus Supplement with respect
to the proposed issuance of each series of Notes, Thacher Proffitt & Wood,
counsel to the Depositor, will deliver its opinion to the effect that, assuming
compliance with all provisions of the Indenture, Owner Trust Agreement and
certain related documents and upon issuance of the Notes, for federal income tax
purposes (i) the Notes will be treated as indebtedness and (ii) the Issuer, as
created pursuant to the terms and conditions of the Owner Trust Agreement, will
not be characterized as an association (or publicly traded partnership) taxable
as a corporation or as a taxable mortgage pool. The following discussion is
based in part upon the OID Regulations. The OID Regulations do not adequately
address certain issues relevant to, and in some instances provide that they are
not applicable to, securities such as the Notes. For purposes of this tax
discussion, references to a "Noteholder" or a "holder" are to the beneficial
owner of a Note.
STATUS AS REAL PROPERTY LOANS
Notes held by a domestic building and loan association will not constitute
"loans . . . secured by an interest in real property" within the meaning of Code
section 7701(a)(19)(C)(v); and (ii) Notes held by a real estate investment trust
will not constitute "real estate assets" within the meaning of Code section
856(c)(4)(A) and interest on Notes will not be considered "interest on
obligations secured by mortgages on real property" within the meaning of Code
section 856(c)(3)(B).
TAXATION OF NOTEHOLDERS
Notes generally will be subject to the same rules of taxation as REMIC
Regular Certificates issued by a REMIC, as described above, except that (i)
income reportable on the Notes is not required to be reported under the accrual
method unless the holder otherwise used the accrual method and (ii) the special
rule treating a portion of the gain on sale or exchange of a REMIC Regular
Certificate as ordinary income is inapplicable to the Notes. See "--REMICs
- --Taxation of Owners of REMIC Regular Certificates" and "-- Sales of REMIC
Certificates."
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
On or prior to the date of the related Prospectus Supplement with respect
to the proposed issuance of each series of Grantor Trust Certificates, Thacher
Proffitt & Wood, counsel to the Depositor, will deliver its opinion to the
effect that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement and upon issuance of such Grantor Trust Certificates, the
related Grantor Trust Fund will be classified as a grantor trust under subpart
E, part I of subchapter J of the Code and not as a partnership or an association
taxable as a corporation.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate." A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees and any Spread) and interest paid to the
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holders of Grantor Trust Fractional Interest Certificates issued with respect to
such Grantor Trust Fund will be referred to as a "Grantor Trust Strip
Certificate." A Grantor Trust Strip Certificate may also evidence a nominal
ownership interest in the principal of the Mortgage Loans constituting the
related Grantor Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
In the case of Grantor Trust Fractional Interest Certificates, unless
otherwise disclosed in the related Prospectus Supplement and subject to the
discussion below with respect to Buydown Mortgage Loans, counsel to the
Depositor will deliver an opinion that, in general, Grantor Trust Fractional
Interest Certificates will represent interests in (i) "loans . . . secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code; (ii) "obligation[s] (including any participation or Certificate of
beneficial ownership therein) which . . .[are] principally secured by an
interest in real property" within the meaning of Section 860G(a)(3) of the Code;
and (iii) "real estate assets" within the meaning of Section 856(c)(4)(A) of the
Code, in each case to the extent the Mortgage Loans qualify for such treatment.
In addition, counsel to the Depositor will deliver an opinion that interest on
Grantor Trust Fractional Interest Certificates will to the same extent be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Section 856(c)(3)(B) of the
Code.
The assets constituting certain Grantor Trust Funds may include Buydown
Mortgage Loans. The characterization of an investment in Buydown Mortgage Loans
will depend upon the precise terms of the related Buydown Agreement, but to the
extent that such Buydown Mortgage Loans are secured by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. No directly applicable precedents exist
with respect to the federal income tax treatment or the characterization of
investments in Buydown Mortgage Loans. Accordingly, holders of Grantor Trust
Certificates should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Grantor Trust Fund that includes Buydown Mortgage Loans.
GRANTOR TRUST STRIP CERTIFICATES
Even if Grantor Trust Strip Certificates evidence an interest in a Grantor
Trust Fund consisting of Mortgage Loans that are "loans . . . secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code, and "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code, and the interest on which is "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code, it is unclear whether the Grantor Trust Strip Certificates, and the income
therefrom, will be so characterized. However, the policies underlying such
sections (namely, to encourage or require investments in mortgage loans by
thrift institutions and real estate investment trusts) may suggest that such
characterization is appropriate. Counsel to the Depositor will not deliver any
opinion on these questions. Prospective purchasers to which such
characterization of an investment in Grantor Trust Strip Certificates is
material should consult their tax advisors regarding whether the Grantor Trust
Strip Certificates, and the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which . . .[are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
Holders of a particular series of Grantor Trust Fractional Interest
Certificates generally will be required to report on their federal income tax
returns their shares of the entire income from the
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Mortgage Loans (including amounts used to pay reasonable servicing fees and
other expenses) and will be entitled to deduct their shares of any such
reasonable servicing fees and other expenses. Because of stripped interests,
market or original issue discount, or premium, the amount includible in income
on account of a Grantor Trust Fractional Interest Certificate may differ
significantly from the amount distributable thereon representing interest on the
Mortgage Loans. Under Section 67 of the Code, an individual, estate or trust
holding a Grantor Trust Fractional Interest Certificate directly or through
certain pass-through entities will be allowed a deduction for such reasonable
servicing fees and expenses only to the extent that the aggregate of such
holder's miscellaneous itemized deductions exceeds two percent of such holder's
adjusted gross income. In addition, Section 68 of the Code provides that the
amount of itemized deductions otherwise allowable for an individual whose
adjusted gross income exceeds a specified amount will be reduced by the lesser
of (i) 3% of the excess of the individual's adjusted gross income over such
amount or (ii) 80% of the amount of itemized deductions otherwise allowable for
the taxable year. The amount of additional taxable income reportable by holders
of Grantor Trust Fractional Interest Certificates who are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Further, Certificateholders (other than corporations) subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining such
holder's alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple classes of Grantor Trust
Certificates (including Grantor Trust Strip Certificates) are issued, such fees
and expenses should be allocated among the classes of Grantor Trust Certificates
using a method that recognizes that each such class benefits from the related
services. In the absence of statutory or administrative clarification as to the
method to be used, it currently is intended to base information returns or
reports to the IRS and Certificateholders on a method that allocates such
expenses among classes of Grantor Trust Certificates with respect to each period
based on the distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates or
(ii) the Depositor or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on the Mortgage Loans. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees for various
types of mortgages the IRS has established certain "safe harbors." The servicing
fees paid with respect to the Mortgage Loans for certain series of Grantor Trust
Certificates may be higher than the "safe harbors" and, accordingly, may not
constitute reasonable servicing compensation. The related Prospectus Supplement
will include information regarding servicing fees paid to the Master Servicer,
any subservicer or their respective affiliates necessary to determine whether
the preceding "safe harbor" rules apply.
IF STRIPPED BOND RULES APPLY
If the stripped bond rules apply, each Grantor Trust Fractional Interest
Certificate will be treated as having been issued with "original issue discount"
within the meaning of Section 1273(a) of the Code, subject, however, to the
discussion below regarding the treatment of certain stripped bonds as market
discount bonds and the discussion regarding de minimis market discount. See
"--Taxation of Owners of Grantor Trust Fractional Interest Certificates-Market
Discount" below. Under the stripped bond rules, the holder of a Grantor Trust
Fractional Interest Certificate (whether a cash or accrual method taxpayer) will
be required to report interest income from its Grantor Trust Fractional Interest
Certificate for each month in an amount equal to the income that accrues on such
Certificate in that month calculated under a constant yield method, in
accordance with the rules of the Code relating to original issue discount.
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The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified stated
interest," if any, as well as such Certificate's share of reasonable servicing
fees and other expenses. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates-If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest." In general, the amount of such income that accrues
in any month would equal the product of such holder's adjusted basis in such
Grantor Trust Fractional Interest Certificate at the beginning of such month
(see "Sales of Grantor Trust Certificates") and the yield of such Grantor Trust
Fractional Interest Certificate to such holder. Such yield would be computed at
the rate (compounded based on the regular interval between payment dates) that,
if used to discount the holder's share of future payments on the Mortgage Loans,
would cause the present value of those future payments to equal the price at
which the holder purchased such Certificate. In computing yield under the
stripped bond rules, a Certificateholder's share of future payments on the
Mortgage Loans will not include any payments made in respect of any ownership
interest in the Mortgage Loans retained by the Depositor, the Master Servicer,
any subservicer or their respective affiliates, but will include such
Certificateholder's share of any reasonable servicing fees and other expenses.
To the extent the Grantor Trust Fractional Interest Certificates represent
an interest in any pool of debt instruments the yield on which may be affected
by reason of prepayments, for taxable years beginning after August 5, 1997,
Section 1272(a)(6) of the Code requires (i) the use of a reasonable prepayment
assumption in accruing original issue discount and (ii) adjustments in the
accrual of original issue discount when prepayments do not conform to the
prepayment assumption. It is unclear whether those provisions would be
applicable to the Grantor Trust Fractional Interest Certificates that do not
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, or for taxable years beginning prior to
August 5, 1997, whether use of a reasonable prepayment assumption may be
required or permitted without reliance on these rules. It is also uncertain, if
a prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any holder, at the
time of purchase of the Grantor Trust Fractional Interest Certificate by that
holder. Certificateholders are advised to consult their own tax advisors
concerning reporting original issue discount with respect to Grantor Trust
Fractional Interest Certificates and, in particular, whether a prepayment
assumption should be used in reporting original issue discount.
In the case of a Grantor Trust Fractional Interest Certificate acquired at
a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or loss
equal to the difference between the portion of the prepaid principal amount of
the Mortgage Loan that is allocable to such Certificate and the portion of the
adjusted basis of such Certificate that is allocable to such Certificateholder's
interest in the Mortgage Loan. If a prepayment assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue
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discount on REMIC Regular Certificates. See "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Original Issue Discount." It is unclear whether any
other adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments.
It is currently intended to base information reports or returns to the IRS
and Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Depositor nor the Trustee will make any representation that the
Mortgage Loans will in fact prepay at a rate conforming to such Prepayment
Assumption or any other rate and Certificateholders should bear in mind that the
use of a representative initial offering price will mean that such information
returns or reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial Certificateholders of each series
who bought at that price.
Under Treasury regulation Section 1.1286-1, certain stripped bonds are to
be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the Mortgage Loans, the related Prospectus Supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the Mortgage Loans, then such original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "--Taxation of Owners of Grantor
Trust Fractional Interest Certificates-If Stripped Bond Rules Do Not Apply" and
"--Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY
Subject to the discussion below on original issue discount, if the stripped
bond rules do not apply to a Grantor Trust Fractional Interest Certificate, the
Certificateholder will be required to report its share of the interest income on
the Mortgage Loans in accordance with such Certificateholder's normal method of
accounting. The original issue discount rules will apply to a Grantor Trust
Fractional Interest Certificate to the extent it evidences an interest in
Mortgage Loans issued with original issue discount.
The original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of such Mortgage Loans and their
issue price. Under the OID Regulations, the stated redemption price is equal to
the total of all payments to be made on such Mortgage Loan other than "qualified
stated interest." "Qualified stated interest" is interest that is
unconditionally payable at least annually at a single fixed rate, or at a
"qualified floating rate," an "objective rate," a combination of a single fixed
rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on such
Mortgage Loan. In general, the issue price of a Mortgage Loan will be the amount
received by the borrower from the lender under the terms of the Mortgage Loan,
less any "points" paid by the borrower, and the stated
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redemption price of a Mortgage Loan will equal its principal amount, unless the
Mortgage Loan provides for an initial below-market rate of interest or the
acceleration or the deferral of interest payments. The determination as to
whether original issue discount will be considered to be de minimis will be
calculated using the same test described in the REMIC discussion. See --Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount" above.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Mortgage Loans by the Master
Servicer or the Trustee in preparing information returns to
the Certificateholders and the IRS.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. Section
1272(a)(6) of the Code requires that a prepayment assumption be made in
computing yield with respect to any pool of debt instruments the yield on which
may be affected by reason of prepayments. Accordingly, for certificates backed
by such pools, it is intended to base information reports and returns to the IRS
and Certificateholders for taxable years beginning after August 5, 1997, on the
use of a prepayment assumption. However, in the case of certificates not backed
by such pools or with respect to taxable years beginning prior to August 5,
1997, it currently is not intended to base such reports and returns on the use
of a prepayment assumption. Certificateholders are advised to consult their own
tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related Prospectus
Supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to Mortgage Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will also
be required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage Loans
held in the related Trust Fund, approximately in proportion to the ratio such
excess bears to such Certificate's allocable portion of the aggregate original
issue discount remaining to be accrued on such Mortgage Loans. The adjusted
issue price of a Mortgage Loan on any given day equals the sum of (i) the
adjusted issue price (or, in the case of the first accrual period, the issue
price) of such Mortgage Loan at the beginning of the accrual period that
includes such day and (ii) the daily portions of original issue discount for all
days during such accrual period prior to such day. The adjusted issue price of a
Mortgage Loan at the beginning of any accrual period will equal the issue price
of such Mortgage Loan, increased by the aggregate amount of original issue
discount with respect to such Mortgage Loan that accrued in prior accrual
periods, and reduced by the amount of any payments made on such Mortgage Loan in
prior accrual periods of amounts included in its stated redemption price.
In addition to its regular reports, the Master Servicer or the Trustee,
except as provided in the related Prospectus Supplement, will provide to any
holder of a Grantor Trust Fractional Interest Certificate such information as
such holder may reasonably request from time to time with respect to original
issue discount accruing on Grantor Trust Fractional Interest Certificates. See
"Grantor Trust Reporting" below.
MARKET DISCOUNT
If the stripped bond rules do not apply to the Grantor Trust Fractional
Interest Certificate, a Certificateholder may be subject to the market discount
rules of Sections 1276 through 1278 of the
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Code to the extent an interest in a Mortgage Loan is considered to have been
purchased at a "market discount," that is, in the case of a Mortgage Loan issued
without original issue discount, at a purchase price less than its remaining
stated redemption price (as defined above, or in the case of a Mortgage Loan
issued with original issue discount, at a purchase price less than its adjusted
issue price (as defined above). If market discount is in excess of a de minimis
amount (as described below), the holder generally will be required to include in
income in each month the amount of such discount that has accrued (under the
rules described in the next paragraph) through such month that has not
previously been included in income, but limited, in the case of the portion of
such discount that is allocable to any Mortgage Loan, to the payment of stated
redemption price on such Mortgage Loan that is received by (or, in the case of
accrual basis Certificateholders, due to) the Trust Fund in that month. A
Certificateholder may elect to include market discount in income currently as it
accrues (under a constant yield method based on the yield of the Certificate to
such holder) rather than including it on a deferred basis in accordance with the
foregoing under rules similar to those described in "--Taxation of Owners of
REMIC Regular Certificates--Market Discount" above.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report will apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
Certificateholder's option: (i) on the basis of a constant yield method, (ii) in
the case of a Mortgage Loan issued without original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the Mortgage Loan as of the beginning of the accrual period, or
(iii) in the case of a Mortgage Loan issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
original issue discount accrued in the accrual period bears to the total
original issue discount remaining at the beginning of the accrual period. The
prepayment assumption, if any, used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. The effect
of using a prepayment assumption could be to accelerate the reporting of such
discount income. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a Mortgage Loan purchased at a discount in the
secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans may be considered to be de
minimis and, if so, will be includible in income under de minimis rules similar
to those described in "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above, with the exception that it is less
likely that a prepayment assumption will be used for purposes of such rules with
respect to the Mortgage Loans.
Further, under the rules described in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount," above, any discount that is not
original issue discount and exceeds a de minimis amount may require the deferral
of interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues.
PREMIUM
If a Certificateholder is treated as acquiring the underlying Mortgage
Loans at a premium, that is, at a price in excess of their remaining stated
redemption price, such Certificateholder may elect
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under Section 171 of the Code to amortize using a constant yield method the
portion of such premium allocable to Mortgage Loans originated after September
27, 1985. Amortizable premium is treated as an offset to interest income on the
related debt instrument, rather than as a separate interest deduction. However,
premium allocable to Mortgage Loans originated before September 28, 1985 or to
Mortgage Loans for which an amortization election is not made, should be
allocated among the payments of stated redemption price on the Mortgage Loan and
be allowed as a deduction as such payments are made (or, for a Certificateholder
using the accrual method of accounting, when such payments of stated redemption
price are due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss, equal to the difference between
the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a prepayment assumption
is used to amortize such premium, it appears that such a loss would be
unavailable. Instead, if a prepayment assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption used, and the actual rate of prepayments.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES
The "stripped coupon" rules of Section 1286 of the Code will apply to the
Grantor Trust Strip Certificates. Except as described above in "--Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules
Apply," no regulations or published rulings under Section 1286 of the Code have
been issued and some uncertainty exists as to how it will be applied to
securities such as the Grantor Trust Strip Certificates. Accordingly, holders of
Grantor Trust Strip Certificates should consult their own tax advisors
concerning the method to be used in reporting income or loss with respect to
such Certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "Possible Application of Contingent Payment Rules" and assumes
that the holder of a Grantor Trust Strip Certificate will not own any Grantor
Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Grantor
Trust Strip Certificate at the beginning of such month and the yield of such
Grantor Trust Strip Certificate to such holder. Such yield would be calculated
based on the price paid for that Grantor Trust Strip Certificate by its holder
and the payments remaining to be made thereon at the time of the purchase, plus
an allocable portion of the servicing fees and expenses to be paid with respect
to the Mortgage Loans. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates-If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be made
in the amount and rate of accrual of such discount when prepayments do not
conform to such prepayment assumption. To the extent the Grantor
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Trust Strip Certificates represent an interest in any pool of debt instruments
the yield on which may be affected by reason of prepayments, those provisions
will apply to the Grantor Trust Strip Certificates for taxable years beginning
after August 5, 1997. It is unclear whether those provisions would be applicable
to the Grantor Trust Strip Certificates that do not represent an interest in any
such pool or for taxable years beginning prior to August 5, 1997, or whether use
of a prepayment assumption may be required or permitted in the absence of such
provisions. It is also uncertain, if a prepayment assumption is used, whether
the assumed prepayment rate would be determined based on conditions at the time
of the first sale of the Grantor Trust Strip Certificate or, with respect to any
subsequent holder, at the time of purchase of the Grantor Trust Strip
Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. It currently is intended to base
information returns or reports to the IRS and Certificateholders on the
Prepayment Assumption disclosed in the related Prospectus Supplement and on a
constant yield computed using a representative initial offering price for each
class of Certificates. However, neither the Depositor nor the Trustee will make
any representation that the Mortgage Loans will in fact prepay at a rate
conforming to the Prepayment Assumption or at any other rate and
Certificateholders should bear in mind that the use of a representative initial
offering price will mean that such information returns or reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders of each series who bought at that price.
Prospective purchasers of the Grantor Trust Strip Certificates should consult
their own tax advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Mortgage Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete Mortgage Loans, or if the Prepayment
Assumption is not used, then when a Mortgage Loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the Grantor Trust Strip Certificate that
is allocable to such Mortgage Loan.
POSSIBLE APPLICATION OF CONTINGENT PAYMENT RULES
The coupon stripping rules' general treatment of stripped coupons is to
regard them as newly issued debt instruments in the hands of each purchaser. To
the extent that payments on the Grantor Trust Strip Certificates would cease if
the Mortgage Loans were prepaid in full, the Grantor Trust Strip Certificates
could be considered to be debt instruments providing for contingent payments.
Under the OID Regulations, debt instruments providing for contingent payments
are not subject to the same rules as debt instruments providing for
noncontingent payments. Regulations were promulgated on June 14, 1996, regarding
contingent payment debt instruments (the "Contingent Payment Regulations"), but
it appears that Grantor Trust Strip Certificates, to the extent subject to
Section 1272(a)(6) of the Code as described above due to their similarity to
other mortgage-backed securities (such as REMIC regular interests and debt
instruments subject to Section 1272(a)(6) of the Code) that are expressly
excepted from the application of the Contingent Payment Regulations, are or may
be excepted from such regulations. Like the OID Regulations, the Contingent
Payment Regulations do not specifically address securities, such as the Grantor
Trust Strip Certificates, that are subject to the stripped bond rules of Section
1286 of the Code.
If the contingent payment rules under the Contingent Payment Regulations
were to apply, the holder of a Grantor Trust Strip Certificate would be required
to apply the "noncontingent bond method". Under the "noncontingent bond method",
the issuer of a Grantor Trust Strip Certificate
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determines a projected payment schedule on which interest will accrue. Holders
of Grantor Trust Strip Certificates are bound by the issuer's projected payment
schedule. The projected payment schedule consists of all noncontingent payments
and a projected amount for each contingent payment based on the projected yield
(as described below) of the Grantor Trust Strip Certificate.
The projected amount of each payment is determined so that the projected
payment schedule reflects the projected yield. The projected amount of each
payment must reasonably reflect the relative expected values of the payments to
be received by the holders of a Grantor Trust Strip Certificate. The projected
yield referred to above is a reasonable rate, not less than the "applicable
Federal rate" that, as of the issue date, reflects general market conditions,
the credit quality of the issuer, and the terms and conditions of the Mortgage
Loans. The holder of a Grantor Trust Strip Certificate would be required to
include as interest income in each month the adjusted issue price of the Grantor
Trust Strip Certificate at the beginning of the period multiplied by the
projected yield, and would add to, or subtract from, such income any variation
between the payment actually received in such month and payment originally
projected to be made in such month.
Assuming that a prepayment assumption were used, if the Contingent Payment
Regulations or their principles were applied to Grantor Trust Strip
Certificates, the amount of income reported with respect thereto would be
substantially similar to that described under "Taxation of Owners of Grantor
Trust Strip Certificates". Certificateholders should consult their tax advisors
concerning the possible application of the contingent payment rules to the
Grantor Trust Strip Certificates.
SALES OF GRANTOR TRUST CERTIFICATES
Any gain or loss equal to the difference between the amount realized on the
sale or exchange of a Grantor Trust Certificate and its adjusted basis,
recognized on such sale or exchange of a Grantor Trust Certificate by an
investor who holds such Grantor Trust Certificate as a capital asset, will be
capital gain or loss, except to the extent of accrued and unrecognized market
discount, which will be treated as ordinary income, and (in the case of banks
and other financial institutions) except as provided under Section 582(c) of the
Code. The adjusted basis of a Grantor Trust Certificate generally will equal its
cost, increased by any income reported by the seller (including original issue
discount and market discount income) and reduced (but not below zero) by any
previously reported losses, any amortized premium and by any distributions with
respect to such Grantor Trust Certificate.
Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in certain circumstances. Gain attributable
to accrued and unrecognized market discount will be treated as ordinary income,
as will gain or loss recognized by banks and other financial institutions
subject to Section 582(c) of the Code. Furthermore, a portion of any gain that
might otherwise be capital gain may be treated as ordinary income to the extent
that the Grantor Trust Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the taxpayer's
net investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction. Finally, a
taxpayer may elect to have net capital gain taxed at ordinary income rates
rather than capital gains rates in order to include such net capital gain in
total net investment income for that taxable year, for purposes of the rule that
limits the deduction of interest on indebtedness incurred to purchase or carry
property held for investment to a taxpayer's net investment income.
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GRANTOR TRUST REPORTING
Except as set forth in the related Prospectus Supplement, the Master
Servicer or the Trustee will furnish to each holder of a Grantor Trust
Fractional Interest Certificate with each distribution a statement setting forth
the amount of such distribution allocable to principal on the underlying
Mortgage Loans and to interest thereon at the related Pass-Through Rate. In
addition, the Master Servicer or the Trustee will furnish, within a reasonable
time after the end of each calendar year, to each holder of a Grantor Trust
Certificate who was such a holder at any time during such year, information
regarding the amount of servicing compensation received by the Master Servicer
and sub-servicer (if any) and such other customary factual information as the
Master Servicer or the Trustee deems necessary or desirable to enable holders of
Grantor Trust Certificates to prepare their tax returns and will furnish
comparable information to the IRS as and when required by law to do so. Because
the rules for accruing discount and amortizing premium with respect to the
Grantor Trust Certificates are uncertain in various respects, there is no
assurance the IRS will agree with the Trust Fund's information reports of such
items of income and expense. Moreover, such information reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders that bought their Certificates at the
representative initial offering price used in preparing such reports.
Except as disclosed in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the Master Servicer or the Trustee.
BACKUP WITHHOLDING
In general, the rules described in "--REMICS--Backup Withholding with
Respect to REMIC Certificates" will also apply to Grantor Trust Certificates.
FOREIGN INVESTORS
In general, the discussion with respect to REMIC Regular Certificates in
"REMICS--Foreign Investors in REMIC Certificates--REMIC Regular Certificates"
applies to Grantor Trust Certificates except that Grantor Trust Certificates
will, except as disclosed in the related Prospectus Supplement, be eligible for
exemption from U.S. withholding tax, subject to the conditions described in such
discussion, only to the extent the related Mortgage Loans were originated after
July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
Certificateholder's trade or business in the United States, such Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
non-resident alien individual.
PARTNERSHIP TRUST FUNDS
CLASSIFICATION OF PARTNERSHIP TRUST FUNDS
With respect to each series of Partnership Certificates or Debt
Certificates, Thacher Proffitt & Wood, counsel to the Depositor, will deliver
its opinion that the Trust Fund will not be a taxable mortgage pool or an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the related Pooling and Servicing Agreement and related documents
will be complied with, and on counsel's conclusions that (1) the Trust Fund will
not have certain characteristics necessary for a business trust to be classified
as an association taxable as a corporation and (2) the nature of the income
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of the Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income on the
related Mortgage Loans, possibly reduced by its interest expense on the Debt
Certificates. Any such corporate income tax could materially reduce cash
available to make payments on the Debt Certificates and distributions on the
Partnership Certificates and Certificateholders could be liable for any such tax
that is unpaid by the Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN PARTNERSHIP CERTIFICATES AND DEBT
CERTIFICATES.
For federal income tax purposes, (i) Partnership Certificates and Debt
Certificates held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans ... secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v); (ii) interest on
Debt Certificates held by a real estate investment trust will not be treated as
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B), and Debt
Certificates held by a real estate investment trust will not constitute "real
estate assets" or "Government securities" within the meaning of Code Section
856(c)(4)(A), but Partnership Certificates held by a real estate investment
trust will qualify under those sections based on the real estate investments
trust's proportionate interest in the assets of the Partnership Trust Fund based
on capital accounts; and (iii) Partnership Certificates and Debt Certificates
held by a regulated investment company will not constitute "Government
securities" within the meaning of Code Section 851(b)(4)(A)(i).
TAXATION OF DEBT CERTIFICATEHOLDERS
TREATMENT OF THE DEBT CERTIFICATES AS INDEBTEDNESS.
The Depositor will agree, and the Certificateholders will agree by their
purchase of Debt Certificates, to treat the Debt Certificates as debt for
federal income tax purposes. No regulations, published rulings, or judicial
decisions exist that discuss the characterization for federal income tax
purposes of securities with terms substantially the same as the Debt
Certificates. However, with respect to each series of Debt Certificates, Thacher
Proffitt & Wood, counsel to the Depositor, will deliver its opinion that the
Debt Certificates will be classified as indebtedness for federal income tax
purposes. The discussion below assumes this characterization of the Debt
Certificates is correct.
If, contrary to the opinion of counsel, the IRS successfully asserted that
the Debt Certificates were not debt for federal income tax purposes, the Debt
Certificates might be treated as equity interests in the Partnership Trust. If
so, the Partnership Trust Fund might be taxable as a corporation with the
adverse consequences described above (and the taxable corporation would not be
able to deduct interest on the Debt Certificates).
Debt Certificates generally will be subject to the same rules of taxation
as REMIC Regular Certificates issued by a REMIC, as described above, except that
(i) income reportable on Debt Certificates is not required to be reported under
the accrual method unless the holder otherwise uses the accrual method and (ii)
the special rule treating a portion of the gain on sale or exchange of a REMIC
Regular Certificate as ordinary income is inapplicable to Debt Certificates. See
"-- REMICs -- Taxation of Owners of REMIC Regular Certificates" and "--Sales of
REMIC Certificates."
TAXATION OF OWNERS OF PARTNERSHIP CERTIFICATES
TREATMENT OF THE PARTNERSHIP TRUST FUND AS A PARTNERSHIP.
If so specified in the applicable Prospectus Supplement, the Depositor will
agree, and the Certificateholders will agree by their purchase of Certificates,
to treat the Partnership Trust Fund
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as a partnership for purposes of federal and state income tax, franchise tax and
any other tax measured in whole or in part by income, with the assets of the
partnership being the assets held by the Partnership Trust Fund, the partners of
the partnership being the Certificateholders (including the Depositor), and the
Debt Certificates (if any) being debt of the partnership. However, the proper
characterization of the arrangement involving the Partnership Trust Fund, the
Partnership Certificates, the Debt Certificates, and the Depositor is not clear,
because there is no authority on transactions closely comparable to that
contemplated herein.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Certificates have certain
features characteristic of debt, the Partnership Certificates might be
considered debt of the Depositor or the Partnership Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Partnership Certificates as equity in a partnership, described below. The
following discussion assumes that the Partnership Certificates represent equity
interests in a partnership.
PARTNERSHIP TAXATION.
As a partnership, the Partnership Trust Fund will not be subject to federal
income tax. Rather, each Certificateholder will be required to separately take
into account such holder's allocated share of income, gains, losses, deductions
and credits of the Partnership Trust Fund. It is anticipated that the
Partnership Trust Fund's income will consist primarily of interest earned on the
Mortgage Loans (including appropriate adjustments for market discount, original
issue discount and bond premium) as described above under "-- Grantor Trust
Funds -- Taxation of Owners of Grantor Trust Fractional Interest Certificates -
If Stripped Bond Ruled Do Not Apply--", "-- Market Discount" and "--Premium")
and any gain upon collection or disposition of Mortgage Loans. The Partnership
Trust Fund's deductions will consist primarily of interest accruing with respect
to the Debt Certificates, servicing and other fees, and losses or deductions
upon collection or disposition of Debt Certificates.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Pooling and Servicing Agreement and related documents). The Pooling and
Servicing Agreement will provide, in general, that the Certificateholders will
be allocated taxable income of the Partnership Trust Fund for each Due Period
equal to the sum of (i) the interest that accrues on the Partnership
Certificates in accordance with their terms for such Due Period, including
interest accruing at the applicable pass-through rate for such Due Period and
interest on amounts previously due on the Partnership Certificates but not yet
distributed; (ii) any Partnership Trust Fund income attributable to discount on
the Mortgage Loans that corresponds to any excess of the principal amount of the
Partnership Certificates over their initial issue price; and (iii) any other
amounts of income payable to the Certificateholders for such Due Period. Such
allocation will be reduced by any amortization by the Partnership Trust Fund of
premium on Mortgage Loans that corresponds to any excess of the issue price of
Partnership Certificates over their principal amount. All remaining taxable
income of the Partnership Trust Fund will be allocated to the Depositor. Based
on the economic arrangement of the parties, this approach for allocating
Partnership Trust Fund income should be permissible under applicable Treasury
regulations, although no assurance can be given that the IRS would not require a
greater amount of income to be allocated to Certificateholders. Moreover, even
under the foregoing method of allocation, Certificateholders may be allocated
income equal to the entire pass-through rate plus the other items described
above even though the Trust Fund might not have sufficient cash to make current
cash distributions of such amount. Thus, cash basis holders will in effect be
required to report income from the Partnership Certificates on the accrual basis
and Certificateholders may become liable for taxes on Partnership Trust Fund
income even if they have not received cash from the Partnership Trust Fund to
pay such taxes.
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All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the
Code.
A share of expenses of the Partnership Trust Fund (including fees of the
Master Servicer but not interest expense) allocable to an individual, estate or
trust Certificateholder would be miscellaneous itemized deductions subject to
the limitations described above under "--Grantor Trust Funds -- Taxation of
Owners of Grantor Trust Fractional Interest Certificates." Accordingly, such
deductions might be disallowed to the individual in whole or in part and might
result in such holder being taxed on an amount of income that exceeds the amount
of cash actually distributed to such holder over the life of the Partnership
Trust Fund.
Discount income or premium amortization with respect to each Mortgage Loan
would be calculated in a manner similar to the description above under "--
Grantor Trust Funds -- Taxation of Owners of Grantor Trust Fractional Interest
Certificates - If Stripped Bond Rules Do Not Apply." Notwithstanding such
description, it is intended that the Partnership Trust Fund will make all tax
calculations relating to income and allocations to Certificateholders on an
aggregate basis with respect to all Mortgage Loans held by the Partnership Trust
Fund rather than on a Mortgage Loan-by-Mortgage Loan basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Partnership Trust Fund might be required to incur additional expense, but it is
believed that there would not be a material adverse effect on
Certificateholders.
DISCOUNT AND PREMIUM.
Unless indicated otherwise in the applicable Prospectus Supplement, it is
not anticipated that the Mortgage Loans will have been issued with original
issue discount and, therefore, the Partnership Trust Fund should not have
original issue discount income. However, the purchase price paid by the
Partnership Trust Fund for the Mortgage Loans may be greater or less than the
remaining principal balance of the Mortgage Loans at the time of purchase. If
so, the Mortgage Loans will have been acquired at a premium or discount, as the
case may be. See "--Grantor Trust Funds -- Taxation of Owners of Grantor Trust
Fractional Interest Certificates -- Market Discount" and "Premium." (As
indicated above, the Partnership Trust Fund will make this calculation on an
aggregate basis, but might be required to recompute it on a Mortgage
Loan-by-Mortgage Loan basis).
If the Partnership Trust Fund acquires the Mortgage Loans at a market
discount or premium, the Partnership Trust Fund will elect to include any such
discount in income currently as it accrues over the life of the Mortgage Loans
or to offset any such premium against interest income on the Mortgage Loans. As
indicated above, a portion of such market discount income or premium deduction
may be allocated to Certificateholders.
SECTION 708 TERMINATION.
Under Section 708 of the Code, the Partnership Trust Fund will be deemed to
terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, the Partnership Trust Fund will
be considered to distribute its assets to the partners, who would then be
treated as recontributing those assets to the Partnership Trust Fund, as a new
partnership. The Partnership Trust Fund will not comply with certain technical
requirements that might apply when such a constructive termination occurs. As a
result, the Partnership Trust Fund may be subject to certain tax penalties and
may incur additional expenses if it is required to comply with those
requirements. Furthermore, the Partnership Trust Fund might not be able to
comply due to lack of data. Under proposed Treasury regulations, the foregoing
treatment would be replaced by a new regime under which a 50% or greater
transfer, as described above, would cause a deemed contribution of the assets of
a Partnership Trust Fund (the "old partnership") to a new Partnership
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Trust Fund (the "new partnership") in exchange for interests in the new
partnership. Such interests would be deemed distributed to the partners of the
old partnership in liquidation thereof, which would not constitute a sale or
exchange. It is not known when or whether such proposed Treasury
regulations will be adopted in final (or temporary) form.
DISPOSITION OF CERTIFICATES.
Generally, capital gain or loss will be recognized on a sale of Partnership
Certificates in an amount equal to the difference between the amount realized
and the seller's tax basis in the Partnership Certificates sold. A
Certificateholder's tax basis in an Partnership Certificate will generally equal
the holder's cost increased by the holder's share of Partnership Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Partnership Certificate. In addition, both the tax basis in the
Partnership Certificates and the amount realized on a sale of an Partnership
Certificate would include the holder's share of the Debt Certificates and other
liabilities of the Partnership Trust Fund. A holder acquiring Partnership
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Partnership Certificates, and, upon sale or other
disposition of some of the Partnership Certificates, allocate a portion of such
aggregate tax basis to the Partnership Certificates sold (rather than
maintaining a separate tax basis in each Partnership Certificate for purposes of
computing gain or loss on a sale of that Partnership Certificate).
Any gain on the sale of an Partnership Certificate attributable to the
holder's share of unrecognized accrued market discount on the Mortgage Loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Partnership Certificates that exceeds the
aggregate cash distributions with respect thereto, such excess will generally
give rise to a capital loss upon the retirement of the Partnership
Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES.
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will be
apportioned among the Certificateholders in proportion to the principal amount
of Partnership Certificates owned by them as of the close of the last day of
such Due Period. As a result, a holder purchasing Partnership Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
The use of such a Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the Certificateholders.
The Depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
SECTION 731 DISTRIBUTIONS.
In the case of any distribution to a Certificateholder, no gain will be
recognized to that Certificateholder to the extent that the amount of any money
distributed with respect to such Certificate exceeds the adjusted basis of such
Certificateholder's interest in the Certificate. To the extent that the amount
of money distributed exceeds such Certificateholder's adjusted basis, gain will
be currently recognized. In the case of any distribution to a Certificateholder,
no loss will be
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recognized except upon a distribution in liquidation of a Certificateholder's
interest. Any gain or loss recognized by a Certificateholder will be capital
gain or loss.
SECTION 754 ELECTION.
In the event that a Certificateholder sells its Partnership Certificates at
a profit (loss), the purchasing Certificateholder will have a higher (lower)
basis in the Partnership Certificates than the selling Certificateholder had.
The tax basis of the Partnership Trust Fund's assets would not be adjusted to
reflect that higher (or lower) basis unless the Partnership Trust Fund were to
file an election under Section 754 of the Code. In order to avoid the
administrative complexities that would be involved in keeping accurate
accounting records, as well as potentially onerous information reporting
requirements, the Partnership Trust Fund will not make such election. As a
result, Certificateholder might be allocated a greater or lesser amount of
Partnership Trust Fund income than would be appropriate based on their own
purchase price for Partnership Certificates.
ADMINISTRATIVE MATTERS.
The Trustee is required to keep or have kept complete and accurate books of
the Partnership Trust Fund. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Partnership Trust Fund and will report each Certificateholder's
allocable share of items of Partnership Trust Fund income and expense to holders
and the IRS on Schedule K-1. The Trustee will provide the Schedule K-1
information to nominees that fail to provide the Partnership Trust Fund with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Partnership
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Partnership Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Certificates as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership
Certificates so held. Such information includes (i) the name, address and
taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly-owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Partnership Certificates that were held, bought or sold on behalf of such person
throughout the year. In addition, brokers and financial institutions that hold
Partnership Certificates through a nominee are required to furnish directly to
the Trustee information as to themselves and their ownership of Partnership
Certificates. A clearing agency registered under Section 17A of the Exchange Act
is not required to furnish any such information statement to the Partnership
Trust Fund. The information referred to above for any calendar year must be
furnished to the Partnership Trust Fund on or before the following January 31.
Nominees, brokers and financial institutions that fail to provide the
Partnership Trust Fund with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in the Pooling
and Servicing Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may be
precluded from separately litigating a proposed adjustment to the items of the
Partnership Trust
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Fund. An adjustment could also result in an audit of a Certificateholder's
returns and adjustments of items not related to the income and losses of the
Partnership Trust Fund.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS.
It is not clear whether the Partnership Trust Fund would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to non-U.S. persons, because there is no clear
authority dealing with that issue under facts substantially similar to those
described herein. Although it is not expected that the Partnership Trust Fund
would be engaged in a trade or business in the United States for such purposes,
the Partnership Trust Fund will withhold as if it were so engaged in order to
protect the Partnership Trust Fund from possible adverse consequences of a
failure to withhold. The Partnership Trust Fund expects to withhold on the
portion of its taxable income that is allocable to foreign Certificateholders
pursuant to Section 1446 of the Code, as if such income were effectively
connected to a U.S. trade or business, at a rate of 35% for foreign holders that
are taxable as corporations and 39.6% for all other foreign holders. Amounts
withheld will be deemed distributed to the foreign certificateholders.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Partnership Trust Fund to change
its withholding procedures. In determining a holder's withholding status, the
Partnership Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Partnership Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit that
number to the Partnership Trust Fund on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign holder generally would be entitled to
file with the IRS a claim for refund with respect to taxes withheld by the
Partnership Trust Fund, taking the position that no taxes were due because the
Partnership Trust Fund was not engaged in a U.S. trade or business. However,
interest payment made (or accrued) to a Certificateholder who is a foreign
person generally will be considered guaranteed payments to the extent such
payments are determined without regard to the income of the Partnership Trust
Fund. If these interest payments are properly characterized as guaranteed
payments, then the interest will not be considered "portfolio interest." As a
result, Certificateholders who are foreign persons will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
BACKUP WITHHOLDING.
Distributions made on the Partnership Certificates and proceeds from the
sale of the Partnership Certificates will be subject to a "backup" withholding
tax of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A CERTIFICATEHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF REMIC CERTIFICATES, GRANTOR TRUST CERTIFICATES, PARTNERSHIP
CERTIFICATES AND DEBT CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "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
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under Section 410(d) of the Code, and any entity whose underlying assets include
Plan Assets by reason of a Plan's investment in the entity. In addition, the DOL
Regulations provide that the term "equity interest" means any interest in an
entity other than an instrument which is treated as indebtedness under
applicable local law and which has no "substantial equity features". Under the
DOL Regulations, Plan Assets will be deemed to include an interest in the
instrument evidencing the equity interest of a Plan (such as a Certificate or a
Note with "substantial equity features"), and, because of the factual nature of
certain of the rules set forth in the DOL Regulations, Plan Assets may be deemed
to include an interest in the underlying assets of the entity in which a Plan
acquires an interest (such as the Trust Fund). Without regard to whether the
Notes are characterized as equity interests, the purchase, sale and holding of
Notes by or on behalf of a Plan could be considered to give rise to a prohibited
transaction if the Issuer, the Trustee or any of their respective affiliates is
or becomes a Party in Interest with respect to such Plan. Neither Plans nor
persons investing Plan Assets should acquire or hold Securities in reliance upon
the availability of any exception under the DOL Regulations.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. Any person who has discretionary authority or control with
respect to the management or disposition of Plan Assets and any person who
provides investment advice with respect to such Plan Assets for a fee is a
fiduciary of the investing Plan. If the Mortgage Loans, Agency Securities,
Private Mortgage-Backed Securities, Funding Agreements and other assets included
in the Trust Fund were to constitute Plan Assets, then any party exercising
management or discretionary control with respect to those Plan Assets may be
deemed to be a Plan "fiduciary," and thus subject to the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to any investing Plan. In
addition, the acquisition or holding of Securities by or on behalf of a Plan or
with Plan Assets, as well as the operation of the Trust Fund, may constitute or
involve a prohibited transaction under ERISA and the Code unless a statutory or
administrative exemption is available.
The DOL issued an individual exemption, Prohibited Transaction Exemption
91-23 (56 Fed. Reg. 15936, April 18, 1991) (the "Exemption"), to Salomon Smith
Barney Inc. (formerly known as Smith Barney Inc.) which generally exempts from
the application of the prohibited transaction provisions of Section 406 of
ERISA, and the excise taxes imposed on such prohibited transactions pursuant to
Section 4975(a) and (b) of the Code, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the initial
purchase, holding and subsequent resale of mortgage pass-through certificates
underwritten by an Underwriter (as hereinafter defined), provided that certain
conditions set forth in the Exemption are satisfied. For purposes of this
Section "ERISA Considerations", the term "Underwriter" shall include (a) Salomon
Smith Barney Inc, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with Salomon
Smith Barney Inc and (c) any member of the underwriting syndicate or selling
group of which a person described in (a) or (b) is a manager or co-manager with
respect to a class of Certificates.
The Exemption sets forth six general conditions which must be satisfied for
the Exemption to apply. First, the acquisition of Certificates by a Plan or with
Plan Assets must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
Exemption only applies to Certificates evidencing rights and interests that are
not subordinated to the rights and interests evidenced by other Certificates of
the same trust. Third, the Certificates at the time of acquisition by a Plan or
with Plan Assets must be rated in one of the three highest generic rating
categories by Standard & Poor's Structured Rating Group, Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc.
(collectively, the "Exemption Rating Agencies"). Fourth, the Trustee cannot be
an affiliate of any member of the "Restricted Group" which consists of any
Underwriter, the Depositor, the Trustee, the Master Servicer, any Sub-Servicer
and any obligor with respect to assets included in the Trust Fund
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constituting more than 5% of the aggregate unamortized principal balance of the
assets in the Trust Fund as of the date of initial issuance of the Certificates.
Fifth, the sum of all payments made to and retained by the Underwriter(s) must
represent not more than reasonable compensation for underwriting the
Certificates; the sum of all payments made to and retained by the Depositor
pursuant to the assignment of the assets to the related Trust Fund must
represent not more than the fair market value of such obligations; and the sum
of all payments made to and retained by the Master Servicer and any Sub-Servicer
must represent not more than reasonable compensation for such person's services
under the related Agreement and reimbursement of such person's reasonable
expenses in connection therewith. Sixth, the Exemption states that the investing
Plan or Plan Asset investor must be an "accredited investor" as defined in Rule
501(a)(1) of Regulation D of the Commission under the Securities Act of 1933, as
amended.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) Certificates evidencing
interests in such other investment pools must have been rated in one of the
three highest generic categories of one of the Exemption Rating Agencies for at
least one year prior to the acquisition of the Certificates by or on behalf of a
Plan or with Plan Assets; and (iii) Certificates evidencing interests in such
other investment pools must have been purchased by investors other than Plans
for at least one year prior to any acquisition of the Certificates by or on
behalf of a Plan or with Plan Assets.
Any transferee of the Certificates will be deemed to have represented that
either (a) such transferee is not a Plan and is not purchasing such Certificates
by or on behalf of or with "Plan Assets" of any Plan or (b) the purchase of any
such Certificate by or on behalf of or with "Plan Assets" of any Plan is
permissible under applicable law, will not result in any non-exempt prohibited
transaction under ERISA or Section 4975 of the Code and will not subject the
Master Servicer, the Depositor or the Trustee to any obligation in addition to
those undertaken in the related Agreement. A fiduciary of a Plan or any person
investing Plan Assets to purchase a Certificate must make its own determination
that the conditions set forth above will be satisfied with respect to such
Certificate.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA, and the excise taxes imposed by Sections 4975(a) and (b) of the Code
by reason of Sections 4975(c)(1)(A) through (D) of the Code, in connection with
the direct or indirect sale, exchange or transfer of Certificates in the initial
issuance of such Certificates or the direct or indirect acquisition or
disposition in the secondary market of Certificates by a Plan or with Plan
Assets or the continued holding of a Certificate acquired by a Plan or with Plan
Assets pursuant to either of the foregoing. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for
the acquisition or holding of a Certificate on behalf of an "Excluded Plan" by
any person who has discretionary authority or renders investment advice with
respect to the assets of such Excluded Plan. For purposes of the Certificates,
an Excluded Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA, and the excise taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code, in
connection with (1) the direct or indirect sale, exchange or transfer of
Certificates in the initial issuance of Certificates between the Depositor or an
Underwriter and a Plan when the person who has discretionary authority or
renders investment advice with respect to the investment of Plan Assets in the
Certificates is (a) a mortgagor with respect to 5% or less of the fair market
value of the Trust Fund Assets or (b) an affiliate of such a person, (2) the
direct or indirect acquisition or disposition in the secondary market of
Certificates by a Plan or with Plan Assets and
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(3) the continued holding of Certificates acquired by a Plan or with Plan Assets
pursuant to either
of the foregoing.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 of ERISA, and the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code for
transactions in connection with the servicing, management and operation of the
Trust Fund. The Depositor expects that the specific conditions of the Exemption
required for this purpose will be satisfied with respect to the Certificates so
that the Exemption would provide an exemption from the restrictions imposed by
Sections 406(a) and (b) of ERISA (as well as the excise taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code)
for transactions in connection with the servicing, management and operation of
the Trust Fund, provided that the general conditions of the Exemption are
satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the excise taxes imposed by Section
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code if such restrictions are deemed to otherwise apply merely because a
person is deemed to be a Party in Interest with respect to an investing Plan by
virtue of providing services to the Plan (or by virtue of having certain
specified relationships to such a person) solely as a result of the Plan's
ownership of Certificates.
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Exemption, which will extend exemptive relief to certain mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. With respect to the Certificates, the
amendment will generally allow Mortgage Loans supporting payments to
Certificateholders, and having a value equal to no more than 25% of the total
principal amount of the Certificates being offered by a Trust Fund, to be
transferred to such Trust Fund within a period no longer than 90 days or three
months following the Closing Date ("Pre-Funding Period") instead of requiring
that all such Mortgage Loans be either identified or transferred on or before
the Closing Date. In general, the relief applies to the purchase, sale and
holding of Certificates which otherwise qualify for the Exemption, provided that
the following general conditions are met:
(1) the ratio of the amount allocated to the Pre-Funding Account to the
total principal amount of the Certificates being offered ("Pre-Funding
Limit") must be less than or equal to: (i) 40% for transactions occurring
on or after January 1, 1992 but prior to May 23, 1997 and (ii) 25% for
transactions occurring on or after May 23, 1997;
(2) all additional Mortgage Loans transferred to the related Trust Fund
after the Closing Date ("Subsequent Mortgage Loans") must meet the same
terms and conditions for eligibility as the original Mortgage Loans used to
create the Trust Fund, which terms and conditions have
been approved by one of the Exemption Rating Agencies;
(3) the transfer of such Subsequent Mortgage Loans to the Trust Fund
during the Pre- Funding Period must not result in the Certificates to be
covered by the Exemptions receiving a lower credit rating from an Exemption
Rating Agency upon termination of the Pre-Funding Period than the rating
that was obtained at the time of the initial issuance of the Certificates
by the Trust Fund;
(4) solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "Average Interest Rate") for all of
the Mortgage Loans and Subsequent Mortgage Loans in the Trust Fund at the
end of the Pre-Funding Period must not be more than 100 basis points lower
than the Average Interest Rate for the Mortgage Loans which were
transferred to the Trust Fund on the Closing Date;
(5) for transactions occurring on or after May 23, 1997, either:
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(i) the characteristics of the Subsequent Mortgage Loans must be
monitored by an insurer or other credit support provider which is
independent of the Depositor; or
(ii)an independent accountant retained by the Depositor must
provide the Depositor with a letter (with copies provided to the Exemption
Rating Agency rating the Certificates, the Underwriter and the Trustee)
stating whether or not the characteristics of the Subsequent Mortgage Loans
conform to the characteristics described in the Prospectus or Prospectus
Supplement and/or Agreement. In preparing such letter, the independent
accountant must use the same type of procedures as were applicable to the
Mortgage Loans which were transferred to the Trust Fund as of the Closing
Date;
(6) the Pre-Funding Period must end no later than three months or 90
days after the Closing Date or earlier in certain circumstances if the
Pre-Funding Account falls below the minimum level specified in the
Agreement or an event of default occurs;
(7) amounts transferred to any Pre-Funding Account and/or capitalized
interest account used in connection with the pre-funding may be invested
only in investments which are permitted by the Exemption Rating Agencies
rating the Certificates and must:
(i) be direct obligations of, or obligations fully guaranteed as
to timely payment of principal and interest by, the United States or any
agency or instrumentality thereof (provided that such obligations are
backed by the full faith and credit of the United States); or
(ii)have been rated (or the obligor has been rated) in one of the
three highest generic rating categories by one of the Exemption Rating
Agencies ("ERISA Permitted
Investments");
(8) the Prospectus or Prospectus Supplement must describe the duration
of the Pre- Funding Period;
(9) the Trustee (or any agent with which the Trustee contracts to
provide trust services) must be a substantial financial institution or
trust company experienced in trust activities and familiar with its duties,
responsibilities and liabilities with ERISA. The Trustee, as legal owner of
the Trust Fund, must enforce all the rights created in favor of
Certificateholders of the Trust Fund, including employee benefit plans
subject to ERISA.
In addition to the Exemption, a Plan fiduciary or other Plan Asset investor
should consider the availability of certain class exemptions granted by the DOL
("Class Exemptions"), which may provide relief from certain of the prohibited
transaction provisions of ERISA and the related excise tax provisions of the
Code, including Prohibited Transaction Class Exemption ("PTCE") 83-1, regarding
transactions involving mortgage pool investment trusts; PTCE 84-14, regarding
transactions effected by a "qualified professional asset manager"; PTCE 90-1,
regarding transactions by insurance company pooled separate accounts; PTCE
91-38, regarding investments by bank collective investment funds; PTCE 95-60,
regarding transactions by insurance company general accounts; and PTCE 96-23,
regarding transactions effected by an "in-house asset manager."
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Securities by an insurance company general account,
the Small Business Job Protection Act of 1996 added a new Section 401(c) to
ERISA, which provides certain exemptive relief from the provisions of Part 4 of
Title I of ERISA and Section 4975 of the Code, including the prohibited
transaction restrictions imposed by ERISA and the related excise taxes imposed
by the Code, for transactions involving an insurance company general account.
Pursuant to Section 401(c) of ERISA, the DOL is required to issue final
regulations ("401(c) Regulations") no later than December 31, 1997 which are to
provide guidance for the purpose of determining, in cases where insurance
policies supported by an insurer's general account are issued to or for the
benefit of a Plan on or before December 31, 1998, which general account assets
constitute Plan Assets. Section 401(c) of ERISA generally provides that, until
the date which is 18 months after the 401(c)
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Regulations become final, no person shall be subject to liability under Part 4
of Title I of ERISA and Section 4975 of the Code on the basis of a claim that
the assets of an insurance company general account constitute Plan Assets,
unless (i) as otherwise provided by the Secretary of Labor in the 401(c)
Regulations to prevent avoidance of the regulations or (ii) an action is brought
by the Secretary of Labor for certain breaches of fiduciary duty which would
also constitute a violation of federal or state criminal law. Any assets of an
insurance company general account which support insurance policies issued to a
Plan after December 31, 1998 or issued to Plans on or before December 31, 1998
for which the insurance company does not comply with the 401(c) Regulations may
be treated as Plan Assets. In addition, because Section 401(c) does not relate
to insurance company separate accounts, separate account assets are still
treated as Plan Assets of any Plan invested in such separate account. Insurance
companies contemplating the investment of general account assets in the
Securities should consult with their legal counsel with respect to the
applicability of Section 401(c) of ERISA, including the general account's
ability to continue to hold the Securities after the date which is 18 months
after the date the 401(c) Regulations become final.
REPRESENTATION FROM PLANS INVESTING IN NOTES WITH "SUBSTANTIAL EQUITY FEATURES"
OR CERTAIN SECURITIES
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not apply to the purchase, sale or
holding of certain Securities, such as Notes with "substantial equity features,"
Subordinate Securities, REMIC Residual Certificates, any Securities which are
not rated in one of the three highest generic rating categories by the Exemption
Rating Agencies, transfers of any such Securities to a Plan, to a trustee or
other person acting on behalf of any Plan, or to any other person investing Plan
Assets to effect such acquisition will not be registered by the Trustee unless
the transferee provides the Depositor, the Trustee and the Master Servicer with
an opinion of counsel satisfactory to the Depositor, the Trustee and the Master
Servicer, which opinion will not be at the expense of the Depositor, the Trustee
or the Master Servicer, that the purchase of such Securities by or on behalf of
such Plan is permissible under applicable law, will not constitute or result in
any non-exempt prohibited transaction under ERISA or Section 4975 of the Code
and will not subject the Depositor, the Trustee or the Master Servicer to any
obligation in addition to those undertaken in the related Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Securities by or
on behalf of such Plan is permissible under applicable law, will not constitute
or result in any non-exempt prohibited transaction under ERISA or Section 4975
of the Code and will not subject the Depositor, the Trustee or the Master
Servicer to any obligation in addition to those undertaken in the Agreement and
the following statements are correct: (i) the transferee is an insurance
company; (ii) the source of funds used to purchase such Securities is an
"insurance company general account" (as such term is defined in PTCE 95-60);
(iii) the conditions set forth in PTCE 95-60 have been satisfied; and (iv) there
is no Plan with respect to which the amount of such general account's reserves
and liabilities for contracts held by or on behalf of such Plan and all other
Plans maintained by the same employer (or any "affiliate" thereof, as defined in
PTCE 95-60) or by the same employee organization exceed 10% of the total of all
reserves and liabilities of such general account (as determined under PTCE
95-60) as of the date of the acquisition of such Securities.
An opinion of counsel or certification will not be required with respect to
the purchase of DTC registered Securities. Any purchaser of a DTC registered
Security will be deemed to have represented by such purchase that either (a)
such purchaser is not a Plan and is not purchasing such Securities on behalf of,
or with Plan Assets of, any Plan or (b) the purchase of any such Security by or
on behalf of, or with Plan Assets of, any Plan is permissible under applicable
law, will not result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code and will not subject the Depositor, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the related
Agreement.
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TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax-Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusion" of a REMIC allocated to a REMIC Residual Certificate and held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to federal
income tax. See "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
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contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
On April 23, 1998, the Federal Financial Institutions Examination
Council issued a revised supervisory policy statement (the "1998 Policy
Statement") applicable to all depository institutions, setting forth guidelines
for investments in "high-risk mortgage securities". The 1998 Policy Statement
has been adopted by the Federal Reserve Board, the Office of the Comptroller of
the Currency, the FDIC, the National Credit Union Administration (the "NCUA")
and the Office of Thrift Supervision (the "OTS") with an effective date of May
26, 1998. The 1998 Policy Statement rescinds a 1992 policy statement that had
required, prior to purchase, a depository institution to determine whether a
mortgage derivative product that it is considering acquiring is high-risk, and,
if so, that the proposed acquisition would reduce the institution's overall
interest rate risk. The 1998 Policy Statement eliminates former constraints on
investing in certain "high-risk" mortgage derivative products and substitutes
broader guidelines for evaluating and monitoring investment risk.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps," which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Securities. The OTS is, however, proposing to adopt revised requirements based
on the 1998 Policy Statement. In addition, the NCUA has issued regulations
governing federal credit union investments which prohibit investment in certain
specified types of securities, which may include certain classes of Securities.
Similar policy statements have been issued by regulators having jurisdiction
over other types of depository institutions.
Prospective investors in the Securities, including in particular the
classes of Securities that do not constitute "mortgage related securities" for
purposes of SMMEA should consider the matters discussed in the following
paragraph.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS IN DETERMINING WHETHER
AND TO WHAT EXTENT THE SECURITIES CONSTITUTE LEGAL INVESTMENTS FOR SUCH
INVESTORS OR ARE SUBJECT TO INVESTMENT, CAPITAL OR OTHER RESTRICTIONS, AND, IF
APPLICABLE, WHETHER SMMEA HAS BEEN OVERRIDDEN IN ANY JURISDICTION RELEVANT TO
SUCH INVESTOR.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the Supplements to this Prospectus
will be offered in series. The distribution of the Securities may be effected
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Securities will be
distributed in a firm commitment
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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.
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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
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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
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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>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO
NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH SOLICITATION.
_______________
TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
Summary of Prospectus Supplement.............................. S-4
Risk Factors.................................................. S-23
The Mortgage Pool............................................. S-27
Yield on the Notes............................................ S-55
Description of the Notes...................................... S-61
The Issuer.................................................... S-75
The Seller.................................................... S-75
The Wilshire SPE.............................................. S-75
The Owner Trustee............................................. S-75
The Indenture Trustee......................................... S-76
The Servicing Agreements...................................... S-76
The Indenture and Owner Trust Agreement....................... S-85
Certain Federal Income Tax Consequences....................... S-88
Method of Distribution........................................ S-89
Secondary Market.............................................. S-90
Legal Opinions................................................ S-90
Ratings....................................................... S-90
Legal Investment.............................................. S-91
ERISA Considerations.......................................... S-91
Annex I....................................................... I-1
PROSPECTUS
Summary of Prospectus......................................... 5
Risk Factors.................................................. 16
The Trust Funds............................................... 24
Use of Proceeds............................................... 38
Yield Considerations.......................................... 38
Maturity and Prepayment Considerations........................ 39
The Depositor................................................. 40
Mortgage Loan Program......................................... 40
Description of the Securities................................. 45
Description of Credit Support................................. 69
Description of Primary Insurance Policies..................... 76
Certain Legal Aspects of Mortgage Loans....................... 79
Certain Federal Income Tax Consequences....................... 97
State and Other Tax Consequences.............................. 133
ERISA Considerations.......................................... 133
Legal Investment.............................................. 139
Methods of Distribution....................................... 140
Legal Matters................................................. 141
Financial Information......................................... 141
Index of Principal Definitions................................ 142
_______________
UNTIL DECEMBER 28, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN WHICH IT RELATES. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTION.
$374,189,000 (APPROXIMATE)
ASSET-BACKED FLOATING RATE
NOTES, SERIES 1998-1
WILSHIRE REIT TRUST SERIES 1998-1
Issuer
SALOMON BROTHERS MORTGAGE
SECURITIES VII, INC.
Depositor
WILSHIRE REAL ESTATE INVESTMENT
TRUST INC.
Seller
WILSHIRE SERVICING CORPORATION
Master Servicer
SALOMON SMITH BARNEY
Prospectus Supplement
Dated September 29,1998
