PROSPECTUS SUPPLEMENT
(To Prospectus Dated April 27, 1998)
$651,375,200 (APPROXIMATE)
ASSET-BACKED CERTIFICATES, SERIES 1998-AQ1
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
AMERIQUEST MORTGAGE COMPANY
ORIGINATOR AND MASTER SERVICER
The Series 1998-AQ1 Certificates will consist of nineteen classes of
certificates (collectively, the "Certificates"), designated as: (i) the Class
A-1 Certificates, the Class A-2 Certificates, the Class A-3 Certificates, the
Class A-4 Certificates and the Class A-5 Certificates (collectively, the "Senior
Sequential Certificates"); (ii) the Class A-6 Certificates and the Class A-7
Certificates (together, the "Lockout Certificates", and collectively with the
Senior Sequential Certificates, the "Class A Certificates"); (iii) the Class
XS-N Certificates and the XS-T Certificates (together, the "Offered Class XS
Certificates"); (iv) the Class XS-S Certificates (together with the Offered
Class XS Certificates, the "Class XS Certificates"; the Class XS Certificates
and the Class A Certificates, together, the "Senior Certificates"); (v) the
Class B-1 Certificates, the Class B-2 Certificates, the Class B-3 Certificates,
the Class B-4 Certificates, the Class B-5 Certificates and the Class B-6
Certificates (collectively, the "Subordinate Certificates"); (vi) the Class P
Certificates and (vii) the Class R-I Certificates and the Class R-II
Certificates (together, the "Residual Certificates"). Only the Senior
Certificates (other than the Class XS-S Certificates), the Class B-1
Certificates, the Class B-2 Certificates, the Class B-3 Certificates and the
Residual Certificates (collectively, the "Offered Certificates") are offered
hereby.
(COVER CONTINUED ON NEXT PAGE)
-----------------------------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS"
BEGINNING ON PAGE S-26 OF THIS PROSPECTUS SUPPLEMENT AND "RISK FACTORS" IN THE
PROSPECTUS.
-----------------------------
THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN THE DEPOSITOR,
THE MASTER SERVICER, THE ORIGINATOR, THE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
INITIAL CERTIFICATE PASS-THROUGH INITIAL CERTIFICATE PASS-THROUGH
CLASS PRINCIPAL BALANCE(1) RATE CLASS PRINCIPAL BALANCE(1) RATE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A-1 $216,618,000 6.56% XS-N. . . . . . . $ 188,632,853(2) Variable(3)
A-2 $93,019,000 6.43% XS-T. . . . . . . $ 364,775,360(2) Variable(3)
A-3 $111,149,000 6.56% B-1 . . . . . . . $ 27,000,000 7.00%
A-4 $91,338,000 6.74% B-2 . . . . . . . $ 15,187,000 7.00%
A-5 $21,126,000 7.15% B-3 . . . . . . . . $ 8,438,000 7.00%
A-6 $30,000,000 6.63% R-I . . . . . . . $ 100 7.00%
A-7 $37,500,000 7.93% R-II . . . . . . . $ 100 7.00%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Approximate.
(2) Approximate Initial Notional Amount.
(3) Calculated as described herein.
- ------------
The Offered Certificates will be purchased by the Underwriter from the Depositor
and will be offered by the Underwriter from time to time to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the Depositor, will be
approximately 106.2374% of the initial Certificate Principal Balance of the
Offered Certificates (other than the Class XS Certificates), plus accrued
interest on the Offered Certificates.
The Offered Certificates are offered subject to receipt and acceptance by the
Underwriter, to prior sale and to the Underwriter's right to reject any order in
whole or in part and to withdraw, cancel or modify the offer without notice. It
is expected that delivery of the Book-Entry Certificates will be made through
the facilities of The Depository Trust Company, and that delivery of each other
class of the Offered Certificates will be made at the offices of Salomon
Brothers Inc, Seven World Trade Center, New York, New York 10048, in each case,
on or about May 29, 1998 (the "Closing Date").
SALOMON SMITH BARNEY The date of
this Prospectus Supplement is May 27, 1998.
<PAGE>
(COVER CONTINUED)
The Certificates represent in the aggregate the entire beneficial ownership
interest in a Trust Fund (the "Trust Fund") consisting primarily of a segregated
pool (the "Mortgage Pool") of conventional, one- to four-family,
fully-amortizing, first lien mortgage loans substantially all of which are
fixed-rate and having original terms to maturity of not greater than 30 years
(the "Mortgage Loans"). At the Closing Date, the Mortgage Loans in the Mortgage
Pool will consist of (i) Mortgage Loans having an aggregate principal balance as
of May 1, 1998 (the "Cut-off Date"), after application of scheduled payments due
whether or not received, of approximately $654,660,097 (the "Initial Mortgage
Loans"), subject to a permitted variance as described herein under "The Mortgage
Pool" and (ii) additional Mortgage Loans having an aggregate principal balance
as of the Cut-off Date not in excess of $22,000,000 (the "Additional Mortgage
Loans").
As more fully described herein, the Class A Certificates in the aggregate
evidence an initial undivided interest of approximately 89.00% in the Trust
Fund, and the Class B-1 Certificates, the Class B-2 Certificates and the Class
B-3 Certificates evidence initial undivided interests of approximately 4.00%,
approximately 2.25% and approximately 1.25%, respectively, in the Trust Fund.
All of the Mortgage Loans will be acquired by Salomon Brothers Mortgage
Securities VII, Inc. (the "Depositor") indirectly from Ameriquest Mortgage
Company (in such capacity, the "Originator").
The Class A Certificates initially will be registered in the name of CEDE & Co.,
as nominee of The Depository Trust Company ("DTC"). The interests of beneficial
owners of Certificates so registered (the "Book-Entry Certificates") will be
represented by book entries on the records of participating members of DTC.
Definitive Certificates will be available for the Book-Entry Certificates only
under the limited circumstances described herein. See "Description of the
Certificates--Registration of the Book-Entry Certificates" herein.
Distributions on the Certificates will be made on the 25th day of each month or,
if such day is not a business day, on the next succeeding business day,
beginning in June 1998 (each, a "Distribution Date"). As described more fully
herein, interest will accrue on the Offered Certificates based on the then
applicable Pass-Through Rates thereon (calculated as described herein) and the
then outstanding Certificate Principal Balances or Notional Amounts thereof. The
Pass-Through Rates will be variable for the Class XS Certificates and fixed for
all other classes of Offered Certificates. Distributions allocable to principal
of the Offered Certificates (other than the Class XS Certificates) will be made
on each Distribution Date in accordance with the priorities described herein.
The Class XS Certificates are not entitled to distributions allocable to
principal.
It is a condition of the issuance of the Certificates that the Class A
Certificates and the Residual Certificates be rated "AAA" by Standard & Poor's
Ratings Services ("Standard & Poor's"), "AAA" by Duff & Phelps Credit Rating Co.
("Duff & Phelps") and "AAA" by Fitch IBCA, Inc. ("Fitch"), that the Offered
Class XS Certificates be rated "AAAr" by Standard & Poor's, "AAA" by Duff &
Phelps and "AAA" by Fitch, that the Class B-1 Certificates be rated at least
"AA" by Standard & Poor's, "AA" by Duff & Phelps and "AA" by Fitch, that the
Class B-2 Certificates be rated at least "A" by Standard & Poor's, and that the
Class B-3 Certificates be rated at least "BBB" by Standard & Poor's.
The rights of the holders of the Senior Certificates to receive distributions in
respect of the Mortgage Loans (and the rights of the holders of the Residual
Certificates to receive distributions in respect of the initial Certificate
Principal Balances thereof on the first Distribution Date) will be senior to the
rights of the holders of the Subordinate Certificates, and the rights of holders
of the Subordinate Certificates with lower numerical class designations will be
senior to the rights of holders of the Subordinate Certificates with higher
numerical class designations, in each case to the extent described herein.
There is currently no secondary market for the Offered Certificates and there
can be no assurance that a secondary market for the Offered Certificates will
develop. Salomon Brothers Inc (the "Underwriter") intends to establish a market
in the Offered Certificates, but is not obligated to do so. There is no
assurance that any such market, if established, will continue. See "Secondary
Market" herein. The Subordinate Certificates and the Residual Certificates may
not be purchased by or transferred to a Plan (as defined herein) except upon the
delivery of a certification of facts or an opinion of counsel, as provided
herein. See "ERISA Considerations" and "Description of the
Certificates--Restrictions on Transfer of the Subordinate Certificates and the
Residual Certificates" herein.
THE YIELD TO MATURITY ON EACH CLASS OF OFFERED CERTIFICATES, PARTICULARLY THE
CLASS XS CERTIFICATES, WILL BE SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL
PAYMENTS (INCLUDING PREPAYMENTS, REPURCHASES, DEFAULTS AND LIQUIDATIONS) ON THE
MORTGAGE LOANS, WHICH MAY FLUCTUATE SIGNIFICANTLY FROM TIME TO TIME. THE
MORTGAGE LOANS GENERALLY MAY BE PREPAID IN FULL OR IN PART AT ANY TIME; HOWEVER,
WITH RESPECT TO APPROXIMATELY 72.05% OF THE INITIAL 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"). A
SLOWER (FASTER) THAN ANTICIPATED RATE OF PRINCIPAL PREPAYMENTS ON THE MORTGAGE
LOANS WILL HAVE A NEGATIVE EFFECT ON THE YIELD TO MATURITY OF THE CLASS A
CERTIFICATES AND THE SUBORDINATE CERTIFICATES IF SUCH CERTIFICATES ARE PURCHASED
AT A DISCOUNT (PREMIUM). IN ADDITION, THE YIELD TO MATURITY ON EACH CLASS OF
SUBORDINATE CERTIFICATES WILL BE EXTREMELY SENSITIVE TO LOSSES DUE TO DEFAULTS
ON THE MORTGAGE LOANS (AND THE TIMING THEREOF) TO THE
S-2
<PAGE>
EXTENT THAT SUCH LOSSES ARE NOT COVERED BY A CLASS OF SUBORDINATE CERTIFICATES
WITH A HIGHER NUMERICAL CLASS DESIGNATION. INTEREST ON THE CLASS XS-N
CERTIFICATES WILL BE DEPENDENT ON THE AMOUNT OF INTEREST RECEIVED OR ADVANCED
WITH RESPECT TO MORTGAGE LOANS THAT DO NOT BY THEIR TERMS HAVE PREPAYMENT
CHARGES (WITH RESPECT TO THE CLASS XS-N CERTIFICATES, THE "RELATED MORTGAGE
LOANS"). THE YIELD TO MATURITY OF THE CLASS XS-N CERTIFICATES WILL BE NEGATIVELY
AFFECTED BY A RAPID RATE OF PRINCIPAL PREPAYMENTS ON THE RELATED MORTGAGE LOANS,
AND THE AMOUNT OF INTEREST PAYABLE ON THE CLASS XS-N CERTIFICATES WILL DECREASE
MORE SIGNIFICANTLY AS A RESULT OF PRINCIPAL PREPAYMENTS ON RELATED MORTGAGE
LOANS WITH RELATIVELY HIGH MORTGAGE RATES. INTEREST ON THE CLASS XS-T
CERTIFICATES AND THE CLASS XS-S CERTIFICATES WILL BE DEPENDENT ON THE AMOUNT OF
INTEREST RECEIVED OR ADVANCED WITH RESPECT TO MORTGAGE LOANS THAT BY THEIR TERMS
DO HAVE PREPAYMENT CHARGES (WITH RESPECT TO THE CLASS XS-T CERTIFICATES AND THE
CLASS XS-S CERTIFICATES, THE "RELATED MORTGAGE LOANS"). THE YIELD TO MATURITY OF
THE CLASS XS-T CERTIFICATES AND THE CLASS XS-S CERTIFICATES WILL BE NEGATIVELY
AFFECTED, TO VARYING DEGREES, BY A RAPID RATE OF PRINCIPAL PREPAYMENTS ON THE
RELATED MORTGAGE LOANS, AND THE AMOUNT OF INTEREST ACCRUING ON THE RELATED
MORTGAGE LOANS (AND THEREFORE THE AMOUNT OF INTEREST AVAILABLE FOR DISTRIBUTION
ON THE CLASS XS-T CERTIFICATES AND THE CLASS XS-S CERTIFICATES) WILL DECREASE
MORE SIGNIFICANTLY AS A RESULT OF PRINCIPAL PREPAYMENTS ON RELATED MORTGAGE
LOANS WITH RELATIVELY HIGH MORTGAGE RATES. PRINCIPAL PREPAYMENTS AND REALIZED
LOSSES ON THE RELATED MORTGAGE LOANS THAT REDUCE THE AGGREGATE PRINCIPAL BALANCE
OF SUCH MORTGAGE LOANS TO BELOW CERTAIN LEVELS DETERMINED AS PROVIDED HEREIN,
WILL REDUCE THE NOTIONAL AMOUNT OF THE CLASS XS-S CERTIFICATES PRIOR TO REDUCING
THE NOTIONAL AMOUNT OF THE CLASS XS-T CERTIFICATES. IF A RAPID RATE OF
PREPAYMENTS OR REALIZED LOSSES CAUSES THE NOTIONAL AMOUNT OF THE CLASS XS-S
CERTIFICATES TO BE REDUCED TO ZERO, THE YIELD TO MATURITY OF THE CLASS XS-T
CERTIFICATES WILL BECOME MORE SENSITIVE TO PREPAYMENTS AND REALIZED LOSSES ON
THE RELATED MORTGAGE LOANS, BECAUSE ALL REDUCTIONS OF THE AGGREGATE PRINCIPAL
BALANCE OF THE RELATED MORTGAGE LOANS WILL THEN BE ALLOCATED TO REDUCE THE
NOTIONAL AMOUNT OF THE CLASS XS-T CERTIFICATES. INVESTORS IN EACH CLASS OF THE
CLASS XS CERTIFICATES SHOULD CAREFULLY CONSIDER THE ASSOCIATED RISKS, INCLUDING
THE RISK THAT A RAPID RATE OF PRINCIPAL PREPAYMENTS ON THE RELATED MORTGAGE
LOANS COULD RESULT IN THE FAILURE OF INVESTORS IN SUCH CLASS OF THE CLASS XS
CERTIFICATES TO RECOVER FULLY THEIR INITIAL INVESTMENTS. SEE "SUMMARY OF THE
PROSPECTUS SUPPLEMENT--SPECIAL PREPAYMENT CONSIDERATIONS" AND "--SPECIAL YIELD
CONSIDERATIONS", "RISK FACTORS--PREPAYMENTS AND DEFAULTS" AND "YIELD ON THE
CERTIFICATES" HEREIN.
As described herein, two separate "real estate mortgage investment conduit"
("REMIC") elections will be made with respect to the Trust Fund for federal
income tax purposes. As described more fully herein and in the Prospectus, the
Class P Certificates, the Senior Certificates and the Subordinate Certificates
of each class will evidence the "regular interests" in the related REMIC and the
Residual Certificates of each class will be the sole class of "residual
interests" in the related REMIC. See "Certain Federal Income Tax Consequences"
herein and in the Prospectus. Transfer of the Residual Certificates to any
non-United States person will be prohibited, and any transfer of the Residual
Certificates will be subject to certain additional restrictions described under
"Certain Federal Income Tax Consequences--Special Tax Considerations Applicable
to the Residual Certificates" herein and "Certain Federal Income Tax
Consequences--REMICs--Tax on Transfers of REMIC Residual Certificates to CertaiN
Organizations" and "--Taxation of Owners of REMIC Residual
Certificates--Noneconomic REMIC Residual Certificates" in the Prospectus.
To the extent that the statements contained herein do not relate to historical
or current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect distributions to be made on, or the yield of, the Certificates,
which risks and uncertainties are discussed under "Risk Factors" and "Yield on
the Certificates" herein. As a consequence, no assurance can be given as to the
actual distributions on, or the yield of, the Certificates.
-----------------------------
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT WILL CONSTITUTE A
SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE DEPOSITOR PURSUANT TO ITS
PROSPECTUS DATED APRIL 27, 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...........................Asset-Backed Certificates, Series
1998-AQ1 (the "Certificates"). The
Certificates represent in the
aggregate the entire beneficial
ownership interest in a Trust Fund
consisting primarily of a pool (the
"Mortgage Pool") of conventional, one-
to four-family, fixed-rate,
fully-amortizing, first lien mortgage
loans (and six adjustable-rate
mortgage loans having an aggregate
principal balance as of the Cut-off
Date of approximately $473,927, which
mortgage loans provide for semi-annual
adjustment to the Mortgage Rate
thereon based on six-month London
interbank offered rates for United
States dollar deposits) (the "Mortgage
Loans"). At the Closing Date, the
Mortgage Loans in the Mortgage Pool
will consist of (i) Mortgage Loans
having an aggregate principal balance
as of May 1, 1998 (the "Cut-off
Date"), after application of scheduled
payments due whether or not received,
of approximately $654,660,097 (the
"Initial Mortgage Loans"), subject to
a permitted variance of plus or minus
5% and (ii) additional Mortgage Loans
having an aggregate principal balance
as of the Cut-off Date not in excess
of $22,000,000 (the "Additional
Mortgage Loans"). The Certificates
will consist of nineteen classes of
certificates (collectively, the
"Certificates"), designated as: (i)
the Class A-1 Certificates, the Class
A-2 Certificates, the Class A-3
Certificates, the Class A-4
Certificates and the Class A-5
Certificates (collectively, the
"Senior Sequential Certificates");
(ii) the Class A-6 Certificates and
the Class A-7 Certificates (together,
the "Lockout Certificates", and
collectively with the Senior
Sequential Certificates, the "Class A
Certificates"), (iii) the Class XS-N
Certificates and the XS-T Certificates
(together, the "Offered Class XS
Certificates"); (iv) the Class XS-S
Certificates (together with the
Offered Class XS Certificates, the
"Class XS Certificates"; the Class XS
Certificates and the Class A
Certificates, together, the "Senior
Certificates"); (v) the Class B-1
Certificates, the Class B-2
Certificates, the Class B-3
Certificates, the Class B-4
Certificates, the Class B-5
Certificates and the Class B-6
Certificates (collectively, the
"Subordinate Certificates"); (vi) the
Class P Certificates; and (vii) the
Class R-I Certificates and the Class
R-II Certificates (together, the
"Residual Certificates"). The
Certificates
S-4
<PAGE>
will be issued pursuant to a Pooling
and Servicing Agreement, to be dated
as of May 1, 1998 (the "Agreement"),
among the Depositor, the Master
Servicer and the Trustee.
Offered Certificates......................Only the Senior Certificates (other
than the Class XS-S Certificates), the
Class B-1 Certificates, the Class B-2
Certificates, the Class B-3
Certificates and the Residual
Certificates (collectively, the
"Offered Certificates") are offered
hereby. The Class XS Certificates are
stripped interest certificates (which
are sometimes referred to in the
Prospectus as "Strip Certificates").
Each class of the Offered Certificates
will have the approximate initial
Certificate Principal Balance or
Notional Amount, as applicable, as set
forth on the cover hereof and will
have the Pass-Through Rate determined
as provided herein under
"--Pass-Through Rate".
The Certificate Principal Balance of a
Certificate (other than a Class XS
Certificate) outstanding at any time
represents the then maximum amount
that the holder thereof is entitled to
receive as distributions allocable to
principal from the cash flow on the
Mortgage Loans and the other assets in
the Trust Fund. The Residual
Certificates also represent the right
to receive distributions in respect of
the Trust Fund on any Distribution
Date after all required payments of
principal and interest have been made
on such date in respect of the Senior
Certificates, the Subordinate
Certificates and the Class P
Certificates; however, it is not
anticipated that there will be any
significant amounts remaining for any
such distribution.
The Notional Amount of the Class XS-N
Certificates as of any date of
determination is equal to the
aggregate principal balance of the
then outstanding Mortgage Loans that
do not by their terms have Prepayment
Charges (with respect to the Class
XS-N Certificates, the "related
Mortgage Loans"). The aggregate
Notional Amount of the Class XS-T
Certificates and the Class XS-S
Certificates as of any date of
determination is equal to the
aggregate principal balance of the
then outstanding Mortgage Loans that
by their terms do have Prepayment
Charges (with respect to the Class
XS-T Certificates and the Class XS-S
Certificates, the "related Mortgage
Loans"). The initial Notional Amount
of the Class XS-T Certificates is
shown on the cover hereof and the
initial Notional Amount of the Class
XS-S Certificates is approximately
$121,591,787, and each will be reduced
from time to time as follows: on each
Distribution Date,
S-5
<PAGE>
reductions of the aggregate principal
balance of the related Mortgage Loans
(whether as a result of collections of
principal on such Mortgage Loans or as
a result of Realized Losses incurred
on such Mortgage Loans) that occurred
during the related Due Period or
Prepayment Period, as applicable, will
be deemed to be allocated (i) first,
in reduction of the Notional Amount of
the Class XS-T Certificates, until the
Notional Amount of such class has been
reduced to the Targeted Notional
Amount (as defined herein) for such
Distribution Date, (ii) second, in
reduction of the Notional Amount of
the Class XS-S Certificates, until the
Notional Amount of such class has been
reduced to zero, and (iii) third, in
reduction of the Notional Amount of
the Class XS-T Certificates, until the
Notional Amount of such class has been
reduced to zero. Reference to the
Notional Amount of each class of Class
XS Certificates is solely for
convenience in certain calculations
and does not represent the right to
receive any distributions allocable to
principal.
As more fully described herein, the
Class A Certificates in the aggregate
evidence an initial undivided interest
of approximately 89.00% in the Trust
Fund, and the Class B-1 Certificates,
the Class B-2 Certificates and the
Class B-3 Certificates evidence
initial undivided interests of
approximately 4.00%, approximately
2.25% and approximately 1.25%,
respectively, in the Trust Fund. The
Offered Certificates are subject to
various priorities for payment of
interest and principal as described
herein under "--Interest
Distributions" and "--Principal
Distributions" and under "Description
of the Certificates--Principal
Distributions on the Senior
Certificates" and "--Principal
Distributions on the Subordinate
Certificates".
Transfer of the Subordinate
Certificates and the Residual
Certificates will be subject to
certain restrictions, and transfer of
the Residual Certificates to any
non-United States person will be
prohibited, in each case as described
under "Description of the
Certificates--Restrictions on Transfer
of the Subordinate Certificates and
the Residual Certificates", "ERISA
Considerations" and "Certain Federal
Income Tax Consequences--Special Tax
Considerations Applicable to the
Residual Certificates" herein and
"Certain Federal Income Tax
Consequences--REMICs--Tax on Transfers
of REMIC ResiduaL Certificates to
Certain Organizations" and "--Taxation
of Owners of Residual
S-6
<PAGE>
Certificates--Noneconomic REMIC
Residual Certificates" in the
Prospectus.
Class B-4 Certificates, Class
B-5 Certificates and Class
Certificates............................The Class B-4 Certificates, the Class
B-5 Certificates and the Class B-6
Certificates have in the aggregate an
initial Certificate Principal Balance
of approximately $23,624,700,
evidencing an aggregate initial
undivided interest in the Trust Fund
of approximately 3.50%. The Class B-4
Certificates, the Class B-5
Certificates and the Class B-6
Certificates, which are not being
offered hereby, will be sold by the
Depositor to Salomon Brothers Inc on
the Closing Date.
Class P Certificates......................The Class P Certificates will have an
initial Certificate Principal Balance
of $100 and will not be entitled to
distributions in respect of interest.
The Class P Certificates will be
entitled to all Prepayment Charges
received in respect of the Mortgage
Loans. See "The Mortgage
Pool--General" and "Description of the
Certificates--Principal Distribution
on the Subordinate Certificates"
herein. The Class P Certificates,
which are not being offered hereby,
will be sold by the Depositor to
Salomon Brothers Inc on the Closing
Date.
Class XS-S Certificates...................The Class XS-S Certificates will have
an initial Notional Amount of
approximately $121,591,787 and an
initial variable Pass-Through Rate of
approximately 2.8479% per annum. The
Class XS-S Certificates, which are not
being offered hereby, will be sold by
the Depositor to Salomon Brothers Inc
on the Closing Date.
Cut-off Date..............................May 1, 1998.
Closing Date..............................On or about May 29, 1998.
Depositor of Mortgage Loans...............Salomon Brothers Mortgage Securities
VII, Inc., an indirect wholly-owned
subsidiary of Salomon Smith Barney
Holdings Inc. and an affiliate of
Salomon Brothers Inc. See "The
Depositor" in the Prospectus.
Mortgage Loan Seller......................Salomon Brothers Realty Corp., an
indirect wholly owned subsidiary of
Salomon Smith Barney Holdings Inc. and
an affiliate of the Depositor and
Salomon Brothers Inc.
Originator and Master Servicer............Ameriquest Mortgage Company (formerly
known as Long Beach Mortgage Company).
See "The Mortgage Pool-- Underwriting
Standards; Representations" and
"Pooling and Servicing Agreement--The
Originator and Master Servicer"
herein.
S-7
<PAGE>
Trustee...................................Norwest Bank Minnesota, National
Association, a national banking
association. See "Pooling and
Servicing Agreement--The Trustee"
herein.
The Mortgage Pool.........................The Mortgage Pool will initially
consist of 7,764 conventional, one- to
four-family, fixed-rate,
fully-amortizing Mortgage Loans and 6
conventional, one- to four-family,
adjustable-rate, fully-amortizing
Mortgage Loans (the "Initial Mortgage
Loans") secured by first liens on
residential real properties (the
"Mortgaged Properties"). The Mortgage
Loans have original terms to maturity
of not greater than 30 years. The
Initial Mortgage Loans will have a
weighted average remaining term to
stated maturity of approximately 27
years and 11 months as of the Cut-off
Date. The Initial Mortgage Loans have
interest rates thereon ("Mortgage
Rates") ranging from approximately
7.75% per annum to approximately
16.25% per annum, with a weighted
average Mortgage Rate of approximately
10.172% per annum as of the Cut-off
Date. The Initial Mortgage Loans that
do not by their terms have Prepayment
Charges have Mortgage Rates ranging
from approximately 8.00% per annum to
approximately 16.25% per annum, with a
weighted average Mortgage Rate of
approximately 10.443% per annum as of
the Cut-off Date. The Initial Mortgage
Loans that by their terms do have
Prepayment Charges have Mortgage Rates
ranging from approximately 7.75% per
annum to approximately 16.25% per
annum, with a weighted average
Mortgage Rate of approximately 10.067%
per annum as of the Cut-off Date. See
"The Mortgage Pool" herein.
Additional Mortgage Loans.................The Additional Mortgage Loans will
also be included in the Trust Fund on
the Closing Date. The aggregate
principal balance of the Additional
Mortgage Loans as of the Cut-off Date
will not exceed $22,000,000. Inclusion
in the Trust Fund of the Additional
Mortgage Loans will be subject to the
requirements described herein under
"The Mortgage Pool--Additional
Mortgage Loans". The "Additional
Mortgage Loans" and the "Initial
Mortgage Loans" together are referred
to as the "Mortgage Loans". See "Risk
Factors--Additional Mortgage Loans"
herein.
Pass-Through Rate.........................The Pass-Through Rate applicable to
the calculation of the Interest
Distribution Amounts (as defined
below) for each class of Class A
Certificates is fixed and is set forth
on the cover hereof.
S-8
<PAGE>
The Pass-Through Rate applicable to
the calculation of the Interest
Distribution Amount for the Class XS-N
Certificates for any Distribution Date
is equal to (A) the weighted average
of the Net Mortgage Rates, for the
related Due Period, on each of the
Mortgage Loans that does not by its
terms have a Prepayment Charge minus
(B) the weighted average of the
Pass-Through Rates, for such
Distribution Date, on the Certificates
(other than the Class XS
Certificates). The Pass-Through Rate
applicable to the calculation of the
Interest Distribution Amount for the
Class XS-T Certificates and the Class
XS-S Certificates for any Distribution
Date is equal to (A) the weighted
average of the Net Mortgage Rates, for
the related Due Period, on each of the
Mortgage Loans that by its terms has a
Prepayment Charge minus (B) the
weighted average of the Pass-Through
Rates, for such Distribution Date, on
the Certificates (other than the Class
XS Certificates). The Net Mortgage
Rate for any Mortgage Loan is equal to
the Mortgage Rate for such Mortgage
Loan minus the sum of the Servicing
Fee Rate and the Trustee's Fee Rate
for such Mortgage Loan. The Servicing
Fee Rate for each Mortgage Loan is
equal to 0.50% per annum. The
Trustee's Fee Rate for each Mortgage
Loan is equal to 0.007% per annum. The
initial variable Pass-Through Rates
for the Class XS-N Certificates and
the Class XS-T Certificates are
approximately 3.2240% per annum and
approximately 2.8479% per annum,
respectively.
The Pass-Through Rate applicable to
the calculation of the Interest
Distribution Amount for each class of
Subordinate Certificates for any
Distribution Date is fixed and is
equal to 7.00% per annum.
Registration of the Book-Entry
Certificates............................The Class A Certificates will
initially be represented by one or
more global certificates registered in
the name of CEDE & Co., as nominee of
The Depository Trust Company ("DTC").
No person acquiring an interest (a
"Certificate Owner") in the Class A
Certificates of any class so
registered (the "Book-Entry
Certificates") will be entitled to
receive a Certificate in fully
registered, certificated form (a
"Definitive Certificate"), except
under the limited circumstances
described herein. See "Description of
the Certificates--Definitive
Certificates" herein. Instead, DTC
will effect payments and transfers by
means of its electronic record keeping
services, acting through certain
participating organizations
("Participants"). This may result in
certain delays in receipt of
distributions by an investor and may
restrict an investor's ability to
pledge its securities. All references
S-9
<PAGE>
herein to Certificateholders of the
Book-Entry Certificates will reflect
the rights of Certificate Owners, as
such rights may be exercised through
DTC and its Participants, except as
otherwise specified herein. See
"Description of the
Certificates--Registration of the
Book-Entry Certificates" herein.
Distributions--General....................Holders of the Certificates will be
entitled to receive the following
distributions on each Distribution
Date: (i) to the holders of each class
of the Senior Certificates on each
Distribution Date, and to the holders
of the Residual Certificates on the
first Distribution Date, distributions
in respect of interest in an aggregate
amount equal to the Senior Interest
Distribution Amount for such
Distribution Date, (ii) to the holders
of each class of the Senior
Certificates (other than the Class XS
Certificates) then entitled to
distributions in respect of principal,
and to the holders of the Residual
Certificates on the first Distribution
Date, distributions in respect of
principal in an aggregate amount equal
to the Senior Principal Distribution
Amount for such Distribution Date,
(iii) to the holders of each class of
the Subordinate Certificates on each
Distribution Date, distributions in
respect of interest in an aggregate
amount equal to the Subordinate
Interest Distribution Amount for such
Distribution Date and (iv) to the
holders of the Subordinate
Certificates on each Distribution
Date, distributions in respect of
principal in an aggregate amount equal
to the Subordinate Principal
Distribution Amount for such
Distribution Date, in each case as
defined herein and as allocated among
the classes of Certificates as
provided herein. Distributions on each
Distribution Date will be made to the
extent of the Available Distribution
Amount for such Distribution Date.
The Available Distribution Amount for
any Distribution Date generally
includes scheduled payments on the
Mortgage Loans due during the related
Due Period and received on or prior to
the related Determination Date,
prepayments and other unscheduled
collections received on the Mortgage
Loans during the related Prepayment
Period, any P&I Advances (as defined
herein) made by the Master Servicer
for such Distribution Date and with
respect to each Mortgage Loan with a
first payment date occurring in July
1998, a cash amount equal to interest
on such Mortgage Loan, net of fees
payable to the Master Servicer and the
Trustee and certain amounts
reimbursable to the Master Servicer,
the Depositor and the Trustee as
provided in the Agreement.
S-10
<PAGE>
The Due Period with respect to any
Distribution Date commences on the
second day of the month immediately
preceding the month in which such
Distribution Date occurs and ends on
the first day of the month in which
such Distribution Date occurs. The
Prepayment Period with respect to any
Distribution Date is the calendar
month immediately preceding the month
in which such Distribution Date
occurs. The Determination Date with
respect to any Distribution Date is
the 15th day of the month in which
such Distribution Date occurs or, if
such day is not a business day, then
on the immediately preceding business
day. See "Description of the
Certificates--General" herein.
Interest Distributions..................Distributions on each Distribution
Date in respect of interest on the
Certificates will be based upon
interest accrued on such Certificates
during the related Interest Accrual
Period. The Interest Accrual Period
for each class of Certificates for any
Distribution Date is the one-month
period preceding the month in which
such Distribution Date occurs. All
distributions of interest will be
based on a 360-day year consisting of
twelve 30-day months.
Distributions in respect of interest
on each Distribution Date will be made
(i) to the holders of the Senior
Certificates and, on the first
Distribution Date, to the holders of
the Residual Certificates, in an
aggregate amount equal to the Senior
Interest Distribution Amount and (ii)
to the holders of the Subordinate
Certificates, in an aggregate amount
equal to the Subordinate Interest
Distribution Amount, to the extent of
the portion of the Available
Distribution Amount remaining after
the distribution on such date of the
Senior Interest Distribution Amount
and the Senior Principal Distribution
Amount. The Senior Interest
Distribution Amount on each
Distribution Date is equal to the
aggregate of the Interest Distribution
Amounts for such Distribution Date on
all of the Senior Certificates and,
for the first Distribution Date, on
the Residual Certificates. The
Subordinate Interest Distribution
Amount on each Distribution Date is
equal to the aggregate of the Interest
Distribution Amounts for such
Distribution Date on all of the
Subordinate Certificates.
The Interest Distribution Amount for
the Certificates of any class on any
Distribution Date is equal to interest
accrued during the related Interest
Accrual Period on the Certificate
Principal Balance or Notional Amount,
as applicable, of such Certificates
immediately prior to such Distribution
Date at the then applicable
Pass-Through
S-11
<PAGE>
Rate for such class, plus, in the case
of each such class, any such amount
remaining unpaid from previous
Distribution Dates, and reduced (to
not less than zero), in the case of
each such class, by the allocable
share for such class of shortfalls in
collections of interest resulting from
mortgagor prepayments ("Prepayment
Interest Shortfalls") to the extent
not covered by compensating interest
paid by the Master Servicer,
shortfalls resulting from the
application of the Relief Act and
certain other interest shortfalls not
covered by the subordination provided
by more subordinate classes of
Certificates. See "Description of the
Certificates--Interest Distributions"
and "--Allocation of Losses;
Subordination" herein.
Principal Distributions.................Distributions in respect of principal
on each Distribution Date will be made
to the holders of the class or classes
of the Class A Certificates then
entitled to distributions in respect
of principal, and to the holders of
the Residual Certificates on the first
Distribution Date, in an aggregate
amount equal to the Senior Principal
Distribution Amount.
With respect to each Distribution
Date, the Senior Principal
Distribution Amount is equal to the
lesser of (i) the portion of the
Available Distribution Amount
remaining after distribution of the
Senior Interest Distribution Amount
and (ii) the sum of (x) the Senior
Percentage (as defined below) of
scheduled principal payments due on
the Mortgage Loans during the related
Due Period, whether or not received,
and of the principal portion of any
unscheduled collections (other than
amounts described in clauses (y) or
(z) hereof) received during the
related Prepayment Period, including
repurchases of the Mortgage Loans,
insurance proceeds and liquidation
proceeds, (y) the Senior Prepayment
Percentage (as defined below) of
principal prepayments on the Mortgage
Loans received during the related
Prepayment Period and (z) with respect
to the principal portion of net
liquidation proceeds received during
the related Prepayment Period in
connection with the final liquidation
of a Mortgage Loan during the related
Prepayment Period, the lesser of the
Senior Percentage of the scheduled
principal balance of such Mortgage
Loan and the Senior Prepayment
Percentage of such net liquidation
proceeds. The Senior Principal
Distribution Amount will be
distributed as principal payments on
each Distribution Date on the class or
classes of Class A Certificates then
entitled to distributions in respect
of principal, and on the first
S-12
<PAGE>
Distribution Date on the Residual
Certificates, in the priority
described herein under "Description of
the Certificates--Principal
Distributions on the Senior
Certificates".
The holders of the Class XS
Certificates are not entitled to
receive any distributions allocable to
principal.
Distributions in respect of principal
on each Distribution Date will be made
to the holders of the Subordinate
Certificates in an aggregate amount
equal to the Subordinate Principal
Distribution Amount.
With respect to each Distribution
Date, the Subordinate Principal
Distribution Amount is equal to the
lesser of (i) the portion of the
Available Distribution Amount
remaining after distribution of the
Senior Interest Distribution Amount,
the Senior Principal Distribution
Amount and the Subordinate Interest
Distribution Amount on such
Distribution Date and (ii) the portion
of scheduled principal payments on the
Mortgage Loans due during the related
Due Period and unscheduled collections
received on the Mortgage Loans during
the related Prepayment Period that is
not required to be distributed on such
Distribution Date on the Senior
Certificates and, in the case of the
first Distribution Date, the Residual
Certificates. On each Distribution
Date, the Subordinate Principal
Distribution Amount will be
distributed among the classes of
Subordinate Certificates in the
priority described herein under
"Description of the
Certificates--Principal Distributions
on the Subordinate Certificates".
The Senior Percentage initially will
be approximately 89.00%, and will be
recalculated after each Distribution
Date as described herein to reflect
the entitlement of the holders of the
Class A Certificates to subsequent
distributions allocable to principal.
For each Distribution Date occurring
prior to the Distribution Date in June
2003, the Senior Prepayment Percentage
will equal 100%, and until the earlier
of such date and the date on which the
Class A Certificates are paid in full,
no distributions based on principal
prepayments or, in certain instances,
net liquidation proceeds, on the
Mortgage Loans will be distributed to
the Subordinate Certificates.
Thereafter, as further described
herein, during certain periods,
subject to certain loss and
delinquency criteria described herein,
the Senior Prepayment Percentage may
continue to be 100% or otherwise
disproportionately large (relative to
the Senior Percentage) and the
percentage of principal
S-13
<PAGE>
prepayments payable to the Subordinate
Certificates may continue to be 0% or
otherwise disproportionately small.
See "Description of the
Certificates--Principal Distributions
on the Senior Certificates" and
"--Principal Distributions on the
Subordinate Certificates" herein.
Allocation of Losses;
Subordination...........................Subject to the limitations set forth
below, Realized Losses on the Mortgage
Loans (other than Excess Losses) and
any Extraordinary Trust Fund Expenses
will be allocated first to the Class
B-6 Certificates until the Certificate
Principal Balance of such class has
been reduced to zero, then to the
Class B-5 Certificates, the Class B-4
Certificates, the Class B-3
Certificates, the Class B-2
Certificates and the Class B-1
Certificates, in that order, until the
Certificate Principal Balance of each
such class has been reduced to zero.
Thereafter, such Realized Losses and
any Extraordinary Trust Fund Expenses
will be allocable to the Class A
Certificates on a PRO rata basis. The
subordination provided (i) to the
Senior Certificates by the Subordinate
Certificates and (ii) to the
Subordinate Certificates by
Subordinate Certificates with a higher
numerical class designation is
intended to cover Realized Losses on
the Mortgage Loans, including Fraud
Losses, Bankruptcy Losses and Special
Hazard Losses (each as defined
herein), and any Extraordinary Trust
Fund Expenses. The aggregate amounts
of Realized Losses which may be
allocated by means of subordination to
cover Fraud Losses, Bankruptcy Losses
and Special Hazard Losses, however, is
initially limited to approximately
$20,250,000, $219,000 and $6,750,000,
respectively, and each of such amounts
is subject to periodic reduction as
described herein under "Description of
the Certificates--Allocation of
Losses; Subordination".
Any Fraud Losses, Bankruptcy Losses
and Special Hazard Losses in excess of
the respective amounts of coverage
therefor and any Extraordinary Losses
(collectively, "Excess Losses") will
be allocable to all Certificates,
other than the Class XS Certificates
and the Class P Certificates, on a PRO
RATA basis.
P&I Advances..............................The Master Servicer is required to
make advances in respect of delinquent
payments of principal and interest,
subject to the limitations described
herein. See "Description of the
Certificates--P&I Advances" herein and
"Description of the
Certificates--Advances in respect of
Delinquencies" in the Prospectus.
S-14
<PAGE>
Denominations.............................The Book-Entry Certificates will be
issued, maintained and transferred on
the book-entry records of DTC and its
Participants in minimum denominations
of $10,000 and integral multiples of
$1.00 in excess thereof. The Class XS
Certificates and the Subordinate
Certificates will be issued in
registered, certificated form, in
minimum percentage interests
corresponding to initial Certificate
Principal Balances or Notional
Amounts, as applicable, of $10,000 and
integral multiples of $1,000 in excess
thereof, except that one Certificate
of each such class may be issued
evidencing an amount equal to either
(i) the sum of an otherwise authorized
denomination thereof plus the
remainder of the aggregate initial
Certificate Principal Balance or
Notional Amount, as applicable, for
such class or (ii) such remainder. The
Residual Certificates will be offered
in registered, certificated form, in
minimum denominations of $20 and
integral multiples thereof.
Record Date...............................The record date for each Distribution
Date will be the close of business on
the last business day of the month
preceding the month in which such
Distribution Date occurs. See
"Description of the
Certificates--General" herein.
Optional Termination......................At its option, but only with the
consent of 100% of the holders of each
class of Class XS Certificates, the
Master Servicer may purchase all of
the Mortgage Loans in the Trust Fund,
together with any properties in
respect thereof acquired by the
Trustee on any Distribution Date on
which the aggregate principal balance
of such Mortgage Loans and such
properties remaining in the Trust Fund
is reduced to less than 10% of the
aggregate principal balance of the
Mortgage Loans as of the Cut-off Date;
provided, however, that on any
Distribution Date on which the
aggregate principal balance of such
Mortgage Loans and such properties
remaining in the Trust Fund is reduced
2% or less of the aggregate principal
balance of the Mortgage Loans as of
the Cut-off Date, such consent will no
longer be required. See "Pooling and
Servicing Agreement--Termination"
herein and "Description of the
Certificates--Termination" in the
Prospectus.
Special Prepayment
Considerations..........................Therate and timing of distributions
allocable to principal on the Offered
Certificates (other than the Class XS
Certificates) will depend, in general,
on the rate and timing of principal
payments (including prepayments and
collections upon defaults,
liquidations and repurchases) on the
Mortgage Loans and the allocation
thereof to pay
S-15
<PAGE>
principal on the Offered Certificates
as provided herein. As is the case
with mortgage pass-through
certificates generally, the Offered
Certificates are subject to
substantial inherent cash-flow
uncertainties because the Mortgage
Loans may be prepaid at any time;
however, with respect to approximately
72.05% of the Initial 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.
Generally, when prevailing interest
rates are increasing, prepayment rates
on mortgage loans tend to decrease; a
decrease in the prepayment rates on
the Mortgage Loans will result in a
reduced rate of return of principal to
investors in the Offered Certificates
(other than the Class XS Certificates)
at a time when reinvestment at such
higher prevailing rates would be
desirable. Conversely, when prevailing
interest rates are declining,
prepayment rates on mortgage loans
tend to increase; an increase in the
prepayment rates on the Mortgage Loans
will result in a greater rate of
return of principal to investors in
the Offered Certificates (other than
the Class XS Certificates) at a time
when reinvestment at comparable yields
may not be possible.
Except as otherwise described herein,
distributions of principal will be
made to the classes of Class A
Certificates according to the
priorities described herein, rather
than on a PRO RATA basis among such
classes. The timing of commencement of
principal distributions and the
weighted average life of each such
class of Certificates will be affected
by the rates of prepayment on the
Mortgage Loans experienced both before
and after the commencement of
principal distributions on such class.
During certain periods, no principal
payments or a disproportionately small
portion of the Senior Principal
Distribution Amount will be
distributed on the Lockout
Certificates. During certain other
periods, a disproportionately large
portion of the Senior Principal
Distribution Amount will be
distributed on the Lockout
Certificates. Unless the Certificate
Principal Balances of the Class A
Certificates (other than the Lockout
Certificates) have been reduced to
zero, the Lockout Certificates will
not be entitled to receive any
distributions of principal payments
prior to the Distribution Date in June
2001.
As described herein, during certain
periods all or a disproportionately
large percentage of principal
S-16
<PAGE>
prepayments on the Mortgage Loans will
be allocated among the Senior
Certificates (other than the Class XS
Certificates). To the extent that no
prepayments or a disproportionately
small percentage of such prepayments
are distributed on the Subordinate
Certificates, the subordination
afforded the Senior Certificates by
the Subordinate Certificates, in the
absence of offsetting Realized Losses
allocated thereto, will be increased.
The allocation among the classes of
Subordinate Certificates of the
portion of principal prepayments and,
in certain instances, net liquidation
proceeds, on the Mortgage Loans that
is not distributable to holders of the
Senior Certificates will be governed
by certain loss and delinquency
criteria described herein.
See "Description of the
Certificates--Principal Distributions
on the Senior Certificates",
"--Principal Distributions on the
Subordinate Certificates" and "Yield
on the Certificates" herein, and
"Maturity and Prepayment
Considerations" in the Prospectus. For
further information regarding the
effect of principal prepayments on the
weighted average lives of the Class A
Certificates and the Subordinate
Certificates, see "Yield on the
Certificates" herein and the table
entitled "Percent of Initial
Certificate Principal Balance
Outstanding at the Following
Percentages of the Prepayment
Assumption" therein.
Special Yield Considerations..............The yield to maturity on each class of
the Offered Certificates, particularly
the Class XS Certificates, will
depend, in general, on the rate and
timing of principal payments
(including prepayments and collections
upon defaults, liquidations and
repurchases) on the Mortgage Loans and
the allocation thereof to reduce the
Certificate Principal Balance or
Notional Amount, as applicable, of
such Certificates, as well as other
factors, such as interest at the
related Pass-Through Rate (as such
Pass-Through Rate will change from
time to time in the case of each class
of Class XS Certificates), and the
purchase price for such Certificates.
The yield to investors on any class of
Offered Certificates will be adversely
affected by any allocation thereto of
interest shortfalls on the Mortgage
Loans.
In general, if a class of Offered
Certificates (other than the Class XS
Certificates) is purchased at a
premium and principal distributions
thereon occur at a rate faster than
anticipated at the time of purchase,
the investor's actual yield to
maturity will be lower than that
assumed
S-17
<PAGE>
at the time of purchase. Conversely,
in general, if a class of Offered
Certificates (other than the Class XS
Certificates) is purchased at a
discount and principal distributions
thereon occur at a rate slower than
that assumed at the time of purchase,
the investor's actual yield to
maturity will be lower than that
originally anticipated.
The proceeds to the Depositor from the
sale of the Offered Certificates were
determined based on a number of
assumptions, including a prepayment
assumption of 100% of the Prepayment
Vector (as defined herein) and
weighted average lives corresponding
thereto. No representation is made
that the Mortgage Loans will prepay at
that rate or at any other rate. The
yield assumptions for the Offered
Certificates will vary as determined
at the time of sale.
The multiple class structure of the
Offered Certificates causes the yield
of certain classes to be particularly
sensitive to changes in the rates of
prepayment of the Mortgage Loans and
other factors, as described as
follows:
CLASS A CERTIFICATES. Because
distributions of principal will be
made to the classes of Class A
Certificates according to the
priorities described herein, the
yield to maturity on the
Certificates of any such class will
be sensitive to the rates of
prepayment on the Mortgage Loans
experienced both before and after
the commencement of principal
distributions on such class.
LOCKOUT CERTIFICATES. Because the
Lockout Certificates do not receive
(unless the Certificate Principal
Balances of the Class A
Certificates, other than the Lockout
Certificates, have been reduced to
zero) any portion of principal
payments prior to the Distribution
Date occurring in June 2001 and will
receive (unless the Certificate
Principal Balances of the Class A
Certificates, other than the Lockout
Certificates, have been reduced to
zero) a disproportionately small or
large portion of the Senior
Principal Distribution Amount
thereafter, the weighted average
life of the Lockout Certificates
will be longer or shorter than would
otherwise be the case, and the
effect on the market value of the
Lockout Certificates of changes in
market interest rates or market
yields for similar securities may be
greater or lesser than for the other
classes of Class A Certificates
entitled to principal distributions.
S-18
<PAGE>
CLASS XS CERTIFICATES. Prospective
investors should consider fully the
risks associated with an investment in
the Class XS Certificates, including
the risk that a rapid rate of
principal payments on the related
Mortgage Loans will have a materially
negative effect on the yield to
investors in the Class XS Certificates
and may result in the failure of
investors in the Class XS Certificates
to recover fully their initial
investment. See "Risk
Factors--Prepayments and Defaults" and
"Yield on the Certificates",
especially "--Yield Sensitivity of the
Class XS Certificates" herein.
CLASS XS-N CERTIFICATES. Interest on
the Class XS-N Certificates will be
dependent on the amount of interest
received or advanced with respect to
Mortgage Loans that do not by their
terms have Prepayment Charges (with
respect to the Class XS-N
Certificates, the "related Mortgage
Loans"). The yield to maturity on
the Class XS-N Certificates will be
extremely sensitive to the rate of
principal payments (including
prepayments and collections upon
defaults, liquidations and
repurchases) on the related Mortgage
Loans, which may fluctuate
significantly from time to time.
Moreover, the amount of interest
payable on the Class XS-N
Certificates will decrease more
significantly as a result of
principal prepayments on related
Mortgage Loans with relatively high
Mortgage Rates.
CLASS XS-T CERTIFICATES AND CLASS
XS-S CERTIFICATES. Interest on the
Class XS-T Certificates and the
Class XS-S Certificates will be
dependent on the amount of interest
received or advanced with respect to
Mortgage Loans that by their terms
do have Prepayment Charges (with
respect to the Class XS-T
Certificates and Class XS-S
Certificates, the "related Mortgage
Loans"). The yield to maturity on
the Class XS-T Certificates and the
Class XS-S Certificates will be
extremely sensitive to the rate of
principal payments (including
prepayments and collections upon
defaults, liquidations and
repurchases) on the related Mortgage
Loans, which may fluctuate
significantly from time to time.
Moreover, the amount of interest
accruing on the related Mortgage
Loans (and therefore the amount of
interest available for distribution
on the Class XS-T Certificates and
the Class XS-S Certificates) will
decrease more significantly as a
result of principal prepayments on
related Mortgage Loans with
relatively high Mortgage Rates.
S-19
<PAGE>
The Class XS-T Certificates have
been structured so that reductions
of Notional Amount thereof will
adhere to the Targeted Notional
Amount schedule described herein
assuming, among other things, that
prepayments on the related Mortgage
Loans occur each month at 100% of
the Prepayment Vector and that no
Realized Losses are incurred on the
related Mortgage Loans. However, as
discussed herein, actual reductions
of the aggregate principal balance
of the related Mortgage Loans
(whether as a result of collections
of principal on such Mortgage Loans
or as a result of Realized Losses
incurred on such Mortgage Loans) may
be greater or less than would be
necessary and sufficient for the
Notional Amount of the Class XS-T
Certificate to adhere to the
Targeted Notional Amount schedule.
If prepayments on the related
Mortgage Loans occur at a constant
level below or above 100% of the
Prepayment Vector, or Realized
Losses on the related Mortgage Loans
are not as assumed, then reductions
of the Notional Amount of the Class
XS-T Certificates may deviate from
the Targeted Notional Amount
schedule, with a corresponding
positive or negative effect on the
yield to maturity of the Class XS-T
Certificates. If on any Distribution
Date, as a result of the allocation
of reductions of the aggregate
principal balance of the related
Mortgage Loans that occurred during
the related Due Period or Prepayment
Period, as applicable, the Notional
Amount of the Class XS-T
Certificates has been reduced to the
applicable Targeted Notional Amount,
then any excess reductions of the
aggregate principal balance of the
related Mortgage Loans (whether as a
result of collections of principal
on such Mortgage Loans or as a
result of Realized Losses incurred
on such Mortgage Loans) relating to
such Distribution Date will be
allocated to reduce the Notional
Amount of the Class XS-S
Certificates. If a rapid rate of
prepayments or Realized Losses
causes the Notional Amount of the
Class XS-S Certificates to be
reduced to zero, the yield to
maturity of the Class XS-T
Certificates will become more
sensitive to prepayments and
Realized Losses on the related
Mortgage Loans, because all
reductions of the aggregate
principal balance of the related
Mortgage Loans will then be
allocated to reduce the Notional
Amount of the Class XS-T
Certificates, regardless of the
Targeted Notional Amount schedule.
S-20
<PAGE>
SUBORDINATE CERTIFICATES. The yield
to maturity on Subordinate
Certificates will be extremely
sensitive to losses due to defaults
on the Mortgage Loans (and the
timing thereof), to the extent such
losses are not covered by
Subordinate Certificates with higher
numerical class designations.
Furthermore, as described herein,
the timing of receipt of principal
and interest by any class of
Subordinate Certificates may be
adversely affected by losses even if
such class does not ultimately bear
such loss.
RESIDUAL CERTIFICATES: Holders of
the Residual Certificates are
entitled to receive distributions of
principal and interest as described
herein, but are not expected to
receive any distributions after the
first Distribution Date; however,
holders of such Certificates will
have tax liabilities with respect to
their Certificates during the early
years of the term of the related
REMIC that substantially exceed the
principal and interest payable
thereon during or prior to such
periods. See "Yield on the
Certificates--Additional Yield
Considerations Applicable Solely to
the Residual Certificates" herein
and "Certain Federal Income Tax
Consequences" herein and in the
Prospectus.
Certain Federal Income Tax
Consequences............................Two separate elections will be made to
treat designated portions of the Trust
Fund as real estate mortgage
investment conduits ("REMIC I" and
"REMIC II", respectively, and each a
"REMIC") for federal income tax
purposes. Upon the issuance of the
Offered Certificates, Thacher Proffitt
& Wood, counsel to the Depositor, will
deliver its opinion generally to the
effect that, assuming compliance with
all provisions of the Agreement, for
federal income tax purposes, each of
REMIC I and REMIC II will qualify as a
REMIC under Sections 860A through 860G
of the Internal Revenue Code of 1986
(the "Code").
For federal income tax purposes, (i)
the Class R-I Certificates will be the
sole class of "residual interests" in
REMIC I, (ii) separate
non-certificated regular interests in
REMIC I will be issued and will be the
"regular interests" in REMIC I, (iii)
the Class R-II Certificates will be
the sole class of "residual interests"
in REMIC II and (iv) the Senior
Certificates, the Subordinate
Certificates and the Class P
Certificates will evidence the
"regular interests" in, and will be
treated as debt instruments of, REMIC
II.
S-21
<PAGE>
The Offered Certificates will be
treated as assets described in Section
7701(a)(19)(C) of the Code and "real
estate assets" under Section
856(c)(4)(A) of the Code, generally in
the same proportion that the assets in
the Trust Fund would be so treated. In
addition, interest on the Offered
Certificates will be treated as
"interest on obligations secured by
mortgages on real property" under
Section 856(c)(3)(B) of the Code
generally to the extent that such
Offered Certificates are treated as
"real estate assets" under Section
856(c)(4)(A) of the Code. The Offered
Certificates, other than the Residual
Certificates, also will be treated as
"qualified mortgages" under Section
860G(a)(3) of the Code. See "Certain
Federal Income Tax
Consequences--Characterization of
Investments in REMIC Certificates"
herein and in the Prospectus.
For federal income tax reporting
purposes, the Offered Class XS
Certificates will, and the Class A
Certificates, the Class B-1
Certificates, the Class B-2
Certificates and the Class B-3
Certificates will not, be treated as
having been issued with original issue
discount. Certain classes of the
Offered Certificates may be treated as
having been issued at a premium. The
prepayment assumption that will be
used in determining the rate of
accrual of original issue discount,
premium and market discount, if any,
for federal income tax purposes is
100% of the Prepayment Vector. No
representation is made that the
Mortgage Loans will prepay at that
rate or at any other rate. See "Yield
on the Certificates" herein.
Under the REMIC Regulations (as
defined herein), the Residual
Certificates will constitute
"noneconomic" residual interests.
Transfers of the Residual Certificates
will be restricted under the Agreement
to United States persons (as defined
in the Prospectus) in a manner
designed to prevent a transfer of a
noneconomic residual interest from
being disregarded under the REMIC
Regulations. See "Certain Federal
Income Tax Consequences--
REMICs--Special Tax Considerations
Applicable to the Residual
Certificates" herein and "--Taxation
of Owners of REMIC Residual
Certificates--Excess Inclusions" and
"--Noneconomic REMIC Residual
Certificates" in the Prospectus.
Transfer of the Residual Certificates
will also be subject to additional
restrictions described under
"Description of the
Certificates--Restrictions on Transfer
of the Subordinate Certificates and
the Residual Certificates" and "ERISA
Considerations" herein.
S-22
<PAGE>
The holders of the Class R-II
Certificates will be required to
report an amount of taxable income
with respect to the early years of
REMIC II's term that significantly
exceeds distributions on the Class
R-II Certificates during such period,
with corresponding tax deductions or
losses deferred until the later years
of REMIC II's term. Accordingly, on a
present value basis, the tax
detriments occurring in the earlier
years will substantially exceed the
sum of any tax benefits in the later
years. As a result, such holders'
after-tax rate of return may be zero
or negative, even if their pre-tax
rate of return is positive. See "Yield
on the Certificates--Additional Yield
Considerations Applicable Solely to
the Residual Certificates" and
"Certain Federal Income Tax
Consequences--Special Tax
Considerations Applicable to the
Residual Certificates" herein.
For further information regarding the
federal income tax consequences of
investing in the Offered Certificates,
see "Certain Federal Income Tax
Consequences" herein and in the
Prospectus.
Ratings...................................It is a condition of the issuance of
the Certificates that the Class A
Certificates and the Residual
Certificates be rated "AAA" by
Standard & Poor's Ratings Services
("Standard & Poor's"), "AAA" by Duff &
Phelps Credit Rating Co. ("Duff &
Phelps") and "AAA" by Fitch IBCA, Inc.
("Fitch"), that the Offered Class XS
Certificates be rated "AAAr" by
Standard & Poor's, "AAA" by Duff &
Phelps and "AAA" by Fitch, that the
Class B-1 Certificates be rated at
least "AA" by Standard & Poor's, "AA"
by Duff & Phelps and "AA" by Fitch,
that the Class B-2 Certificates be
rated at least "A" by Standard &
Poor's, and that the Class B-3
Certificates be rated at least "BBB"
by Standard & Poor's. The Depositor
has not requested that any rating
agency rate any class of the Offered
Certificates other than as stated
above. If another rating agency were
to rate any class of the Offered
Certificates, such rating agency may
assign a rating different from the
ratings described above. A security
rating is not a recommendation to buy,
sell or hold securities and may be
subject to revision or withdrawal at
any time by the assigning rating
organization. A security rating does
not address the frequency of
prepayments on the Mortgage Loans, the
corresponding effect on yield to
investors or whether investors in the
Class XS Certificates may fail to
recover fully their initial
investment. The "r" symbol in certain
Standard & Poor's ratings is attached
to highlight certificates that
Standard & Poor's believes may
S-23
<PAGE>
experience high volatility or high
variability in expected returns due to
non-credit risks. The absence of an
"r" symbol should not be taken as an
indication that a certificate will
exhibit no volatility or variability
in total return. See "Yield on the
Certificates" and "Ratings" herein and
"Yield Considerations" in the
Prospectus.
Legal Investment..........................The Senior Certificates and the Class
B-1 Certificates will constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984
("SMMEA") for so long as they are
rated not lower than the second
highest rating category by a Rating
Agency (as defined in the Prospectus)
and, as such, will be legal
investments for certain entities to
the extent provided in SMMEA. SMMEA,
however, provides for state limitation
on the authority of such entities to
invest in "mortgage related
securities", provided that such
restricting legislation was enacted
prior to October 3, 1991. The Class
B-2 Certificates and the Class B-3
Certificates 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 Offered
Certificates, particularly the Class
XS Certificates and the Residual
Certificates. Any such institution
should consult with their own legal
advisors in determining whether and to
what extent the Offered Certificates
constitute legal investments or are
subject to restrictions on investment.
See "Legal Investment" herein and in
the Prospectus.
ERISA Considerations......................The U.S. Department of Labor has
issued an individual exemption,
Prohibited Transaction Exemption 89-89
(the "Exemption"), to the Underwriter
that generally exempts from the
application of certain of the
prohibited transaction provisions of
Section 406 of the Employee Retirement
Income Security Act of 1974, as
amended ("ERISA"), and the excise
taxes imposed on such prohibited
transactions by Section 4975(a) and
(b) of the Code and Section 502(i) of
ERISA, transactions relating to the
purchase, sale and holding of
pass-through certificates underwritten
by the Underwriter such as the Senior
Certificates, and the servicing and
operation of asset pools such as the
Mortgage Pool, provided that certain
conditions are satisfied. Because the
Exemption will not apply to the
Subordinate Certificates and the
Residual Certificates, such
Certificates may not be acquired by or
on behalf of, or with the assets of, a
Plan unless the party acquiring such
Subordinate or Residual
S-24
<PAGE>
Certificates provides the Depositor,
the Trustee and the Master Servicer
with an opinion of counsel, or a
certification in lieu of such opinion
of counsel, that the purchase of such
Certificates is permissible under
applicable law, will not constitute or
result in any non-exempt prohibited
transaction under ERISA or Section
4975 of the Code and will not subject
the Depositor, the Master Servicer,
the Trustee or the Trust Fund to any
obligation in addition to those
undertaken in the Agreement. A
fiduciary of any employee benefit plan
subject to ERISA or the Code should
carefully review with its legal
advisors whether the purchase, sale or
holding of Certificates could give
rise to a transaction that is
prohibited or not otherwise
permissible under ERISA and the Code.
See "ERISA Considerations" herein and
in the Prospectus.
S-25
<PAGE>
RISK FACTORS
In addition to the matters described elsewhere in this Prospectus
Supplement and the Prospectus, prospective investors should carefully consider
the following factors before deciding to invest in the Offered Certificates.
PREPAYMENTS AND DEFAULTS
The yield to maturity on each class of Offered Certificates, particularly
the Class XS Certificates, will be sensitive to the rate and timing of principal
payments (including prepayments, repurchases, defaults and liquidations) on the
Mortgage Loans, which may fluctuate significantly from time to time. The
Mortgage Loans generally may be prepaid in full or in part at any time; however,
with respect to approximately 72.05% of the Initial 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"). A
slower (faster) than anticipated rate of principal prepayments on the Mortgage
Loans will have a negative effect on the yield to maturity of the Class A
Certificates and the Subordinate Certificates if such Certificates are purchased
at a discount (premium). In addition, the yield to maturity on each class of
Subordinate Certificates will be extremely sensitive to losses due to defaults
on the Mortgage Loans (and the timing thereof) to the extent that such losses
are not covered by a class of Subordinate Certificates with a higher numerical
class designation.
CLASS XS CERTIFICATES
Investors in each class of the Class XS Certificates should carefully
consider the associated risks as more fully described in the following
paragraphs, including the risk that a rapid rate of principal prepayments on the
related Mortgage Loans could result in the failure of investors in such class of
the Class XS Certificates to recover fully their initial investments. See
"Summary of the Prospectus Supplement--Special Prepayment Considerations" and
"--Special Yield Considerations" and "Yield on the Certificates" herein.
CLASS XS-N CERTIFICATES
Interest on the Class XS-N Certificates will be dependent on the amount
of interest received or advanced with respect to Mortgage Loans that do not by
their terms have Prepayment Charges (with respect to the Class XS-N
Certificates, the "related Mortgage Loans"). The yield to maturity of the Class
XS-N Certificates will be negatively affected by a rapid rate of principal
prepayments on the related Mortgage Loans, and the amount of interest payable on
the Class XS-N Certificates will decrease more significantly as a result of
principal prepayments on related Mortgage Loans with relatively high Mortgage
Rates.
CLASS XS-T CERTIFICATES AND CLASS XS-S CERTIFICATES
Interest on the Class XS-T Certificates and the Class XS-S Certificates
will be dependent on the amount of interest received or advanced with respect to
Mortgage Loans that by their terms do have Prepayment Charges (with respect to
the Class XS-T Certificates and the Class XS-S Certificates, the "related
Mortgage Loans"). The yield to maturity of the Class XS-T Certificates and the
Class XS-S Certificates will be negatively affected, to varying degrees, by a
rapid rate of principal prepayments on the related Mortgage Loans, and the
amount of interest accruing on the related Mortgage Loans (and therefore the
amount of interest available for distribution on the Class XS-T Certificates and
the Class XS-S Certificates) will decrease more significantly as a result of
principal prepayments on related Mortgage Loans with relatively high Mortgage
Rates. If on any Distribution Date, as a result of the allocation of reductions
of the aggregate principal balance of the related Mortgage Loans that occurred
during the related Due Period or Prepayment Period, as applicable, the Notional
Amount of the Class XS-T Certificates has been reduced to the applicable
Targeted Notional Amount, then any excess reductions of the aggregate principal
balance of the related Mortgage Loans (whether as a result of collections of
principal on such Mortgage Loans or as a result of Realized Losses incurred on
such
S-26
<PAGE>
Mortgage Loans) relating to such Distribution Date will be allocated to
reduce the Notional Amount of the Class XS-S Certificates. If a rapid rate of
prepayments or Realized Losses causes the Notional Amount of the Class XS-S
Certificates to be reduced to zero, the yield to maturity of the Class XS-T
Certificates will become more sensitive to prepayments and Realized Losses on
the related Mortgage Loans, because all reductions of the aggregate principal
balance of the related Mortgage Loans will then be allocated to reduce the
Notional Amount of the Class XS-T Certificates, regardless of the Targeted
Notional Amount schedule.
UNDERWRITING STANDARDS AND POTENTIAL DELINQUENCIES
THE ORIGINATOR'S UNDERWRITING STANDARDS ARE PRIMARILY INTENDED TO ASSESS
THE VALUE OF THE MORTGAGED PROPERTY AND TO EVALUATE THE ADEQUACY OF SUCH
PROPERTY AS COLLATERAL FOR THE MORTGAGE LOAN. THE ORIGINATOR PROVIDES LOANS
PRIMARILY TO BORROWERS WHO DO NOT QUALIFY FOR LOANS CONFORMING TO FNMA AND FHLMC
GUIDELINES BUT WHO HAVE SUBSTANTIAL EQUITY IN THEIR PROPERTY. WHILE THE
ORIGINATOR'S PRIMARY CONSIDERATION IN UNDERWRITING A MORTGAGE LOAN IS THE VALUE
OF THE MORTGAGED PROPERTY, THE ORIGINATOR ALSO CONSIDERS, AMONG OTHER THINGS, A
MORTGAGOR'S CREDIT HISTORY, REPAYMENT ABILITY AND DEBT SERVICE-TO-INCOME RATIO,
AS WELL AS THE TYPE AND USE OF THE MORTGAGED PROPERTY. THE ORIGINATOR'S
UNDERWRITING STANDARDS DO NOT PROHIBIT A MORTGAGOR FROM OBTAINING SECONDARY
FINANCING FROM OTHER SOURCES AT THE TIME OF ORIGINATION OF THE ORIGINATOR'S
FIRST LIEN. ANY SUCH SECONDARY FINANCING WOULD REDUCE THE EQUITY THE MORTGAGOR
WOULD OTHERWISE HAVE IN THE RELATED MORTGAGED PROPERTY THAT IS INDICATED IN THE
ORIGINATOR'S LOAN-TO-VALUE RATIO DETERMINATION.
AS A RESULT OF THE ORIGINATOR'S UNDERWRITING STANDARDS, THE MORTGAGE LOANS
ARE LIKELY TO EXPERIENCE RATES OF DELINQUENCY, FORECLOSURE AND BANKRUPTCY THAT
ARE HIGHER, AND THAT MAY BE SUBSTANTIALLY HIGHER, THAN THOSE EXPERIENCED BY
MORTGAGE LOANS UNDERWRITTEN IN A MORE TRADITIONAL MANNER.
Furthermore, changes in the values of Mortgaged Properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Mortgage Loans than on mortgage loans originated in a more traditional
manner. No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at the levels in effect on the dates of origination
of the related Mortgage Loans.
ADDITIONAL RISKS ASSOCIATED WITH THE MORTGAGE LOANS
As of the Cut-off Date, approximately 1.37% of the Initial Mortgage
Loans, by aggregate principal balance as of the Cut-off Date, were thirty days
or more but less than sixty days delinquent in their monthly payments. As of the
Cut-off Date, 0.01% of the Initial Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, were sixty days or more delinquent in their
monthly payments. However, approximately 37.87% of the Initial Mortgage Loans,
by aggregate principal balance as of the Cut-off 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 Cut-off Date.
Approximately 10.33% of the Initial Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, had a Loan-to-Value Ratio at origination in
excess of 80% but will not be covered by a primary mortgage insurance policy. No
Initial Mortgage Loan will have a Loan-to-Value Ratio exceeding 85% at
origination. Mortgage Loans with higher Loan-to-Value Ratios may present a
greater risk of loss. There can be no assurance that the Loan-to-Value Ratio of
any Mortgage Loan determined at any time after origination is less than or equal
to its original Loan-to-Value Ratio. See "The Mortgage Pool--General" herein.
Approximately 23.74% of the Initial Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, are secured by Mortgaged Properties located in
the State of California. The aggregate principal balance of Initial Mortgage
Loans in the California zip code with the largest amount of
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<PAGE>
Mortgage Loans, by aggregate principal balance as of the Cut-off Date, was
approximately $1,499,811. If the California residential real estate market
should experience an overall decline in property values after the dates of
origination of the Mortgage Loans, the rates of delinquencies, foreclosures,
bankruptcies and losses on the Mortgage Loans may be expected to increase, and
may increase substantially. In addition, federal emergency aid has been made
available to property owners in several areas of California as a result of
recent flooding, ice storms and landslides. None of the Mortgage Loan Seller,
the Originator or the Depositor has undertaken the physical inspection of any
Mortgaged Property in such affected areas and, as a result, there can be no
assurance that material damage to any Mortgaged Property in such affected areas
has not occurred. However, the Originator will represent that as of the Closing
Date, to the best of the Originator's knowledge, each Mortgaged Property is free
of material damage and is in average repair. In the event of a breach of such
representation, the Originator will be obligated to cure such breach or
repurchase or replace the related Mortgage Loan in the manner described in the
Prospectus.
ADDITIONAL MORTGAGE LOANS
The Additional Mortgage Loans may have characteristics different from those
of the Initial Mortgage Loans. However, each Additional Mortgage Loan must
satisfy the eligibility criteria referred to herein under "The Mortgage
Pool--Additional Mortgage Loans" at the Closing Date and be underwritten in
accordance with the criteria set forth under "The Mortgage Pool--Underwriting
Standards; Representations" herein.
LIMITED OBLIGATIONS
The Offered Certificates will not represent an interest in or
obligation of the Depositor, the Master Servicer, the Originator, the Trustee or
any of their respective affiliates. The only obligations of the foregoing
entities with respect to the Certificates or any Mortgage Loan will be the
obligations of the Depositor, of the Mortgage Loan Seller and of the Master
Servicer (in its capacity as Originator) pursuant to certain limited
representations and warranties made with respect to the Mortgage Loans and of
the Master Servicer with respect to its servicing obligations under the
Agreement (including the limited obligation to make certain P&I Advances).
Neither the Certificates nor the underlying Mortgage Loans will be guaranteed or
insured by any governmental agency or instrumentality, or by the Depositor, the
Master Servicer, the Originator, the Trustee or any of their respective
affiliates. Proceeds of the assets included in the Trust Fund (including the
Mortgage Loans) will be the sole source of payments on the Offered Certificates,
and there will be no recourse to the Depositor, the Master Servicer, the
Originator, the Trustee or any other entity in the event that such proceeds are
insufficient or otherwise unavailable to make all payments provided for under
the Offered Certificates.
OTHER LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosure, and require licensing of the Originator. 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;
(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
S-28
<PAGE>
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws, policies
and principles may limit the ability of the Trust Fund 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
Originator to damages and administrative enforcement.
The Originator 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 Originator will be obligated
to cure such breach or repurchase or replace the affected Mortgage Loan in the
manner described in the Prospectus.
THE MORTGAGE POOL
GENERAL
The Mortgage Pool will initially consist of 7,764 conventional, one- to
four-family, fixed-rate, fully-amortizing Mortgage Loans and 6 conventional,
one- to four-family, adjustable-rate, fully-amortizing Mortgage Loans (the
"Initial Mortgage Loans") secured by first liens on residential real properties
(the "Mortgaged Properties") and having an aggregate principal balance as of May
1, 1998 (the "Cut-off Date") of approximately $654,660,097, after application of
scheduled payments due on or before the Cut-off Date whether or not received and
subject to a permitted variance of plus or minus 5%. The Mortgage Loans have
original terms to maturity of not greater than 30 years.
The statistical information presented in this Prospectus Supplement
describes only the Initial Mortgage Loans and does not include any additional
mortgage loans (the "Additional Mortgage Loans") to be included in the Trust
Fund on the Closing Date. References to percentages of the Mortgage Loans,
unless otherwise noted, are calculated based on the aggregate principal balance
of the Initial Mortgage Loans as of the Cut-off Date and do not include any
Additional Mortgage Loans.
Additional Mortgage Loans, with an aggregate principal balance as of the
Cut-off Date not in excess of $22,000,000, are intended to be included in the
Trust Fund on the Closing Date. The Additional Mortgage Loans, if available,
will be purchased by the Depositor and deposited in the Trust Fund on the
Closing Date together with the Initial Mortgage Loans.
The Mortgage Loans are secured by first mortgages or deeds of trust or
other similar security instruments creating first liens on one- to four-family
residential properties consisting of one- to four-family dwelling units,
townhouses, individual condominium units and individual units in planned unit
developments. The Mortgage Loans to be included in the Mortgage Pool will be
acquired by the Depositor indirectly from the Originator. See "--Underwriting
Standards; Representations" herein. The Originator will act as the master
servicer for the Mortgage Loans pursuant to the Agreement (in such capacity, the
"Master Servicer").
Three Mortgage Loans, representing 0.03% of the Initial Mortgage Loans,
have a first payment date occurring in July 1998. With respect to such Initial
Mortgage Loans (and any Additional Mortgage Loans with a first payment date
occurring in July 1998), no principal amortization payments will be distributed
in June 1998 unless principal payments thereon are received in the Prepayment
Period applicable to the Distribution Date occurring in June 1998. On the
Closing Date, however, cash will be deposited with the Trustee in an amount
equal to interest accrued on such Mortgage Loans, for the related Interest
Accrual Period for distribution (net of the related Servicing Fee and Trustee's
Fee, each as defined herein) to the holders of the Offered Certificates on the
first Distribution Date.
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<PAGE>
All of the Mortgage Loans have scheduled monthly payments due on the first
day of the month (with respect to each Mortgage Loan, a "Due Date"). Each
Mortgage Loan will contain a customary "due-on-sale" clause.
Approximately 72.05% of the Initial Mortgage Loans provide for payment by
the mortgagor of a Prepayment Charge on certain voluntary prepayments in full.
Generally, each such Mortgage Loan provides for payment of a Prepayment Charge
on certain voluntary prepayments in full made within one to five years from the
date of origination of such Mortgage Loan. The amount of the Prepayment Charge
is as provided in the related Mortgage Note. The holders of the Class P
Certificates will be entitled to all Prepayment Charges received on the Mortgage
Loans, and such amounts will not be available for distribution on the other
classes of Certificates. Under certain instances, as described in the Agreement,
the Master 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.
None of the Initial Mortgage Loans are Buydown Mortgage Loans.
The average principal balance of the Initial Mortgage Loans at origination
was approximately $84,392. No Initial Mortgage Loan had a principal balance at
origination of greater than approximately $495,000 or less than approximately
$10,000. The average principal balance of the Initial Mortgage Loans as of the
Cut-off Date was approximately $84,255. No Initial Mortgage Loan had a principal
balance as of the Cut-off Date of greater than approximately $494,183 or less
than approximately $7,322.
As of the Cut-off Date, the Initial Mortgage Loans had Mortgage Rates
ranging from approximately 7.75% per annum to approximately 16.25% per annum and
the weighted average Mortgage Rate was approximately 10.172% per annum. As of
the Cut-off Date, the Initial Mortgage Loans that do not by their terms have
Prepayment Charges had Mortgage Rates ranging from approximately 8.00% per annum
to approximately 16.25% per annum and the weighted average Mortgage Rate was
approximately 10.443% per annum. As of the Cut-off Date, the Initial Mortgage
Loans that by their terms do have Prepayment Charges had Mortgage Rates ranging
from approximately 7.75% per annum to approximately 16.25% per annum and the
weighted average Mortgage Rate was approximately 10.067% per annum.
The weighted average remaining term to stated maturity of the Initial Mortgage
Loans will be approximately 27 years and 11 months as of the Cut-off Date. None
of the Initial Mortgage Loans will have a first Due Date prior to November 1996
or after July 1998, or will have a remaining term to stated maturity of less
than 9 years and 11 months or greater than 30 years as of the Cut-off Date. The
latest maturity date of any Initial Mortgage Loan is June 2028.
The weighted average Loan-to-Value Ratio at origination of the Initial
Mortgage Loans was approximately 74.438%. No Loan-to-Value Ratio at origination
was greater than approximately 85.00% or less than approximately 9.71%.
S-30
<PAGE>
The Initial Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE INITIAL MORTGAGE LOANS AT ORIGINATION
% OF
AGGREGATE
NUMBER OF AGGREGATE ORIGINAL ORIGINAL
RANGE ($) LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- ----- ----------------- -----------------
<S> <C> <C> <C>
0.01 -- 50,000.00 ............... 2,213 $ 78,890,852.00 12.03%
50,000.01 -- 100,000.00 ............... 3,384 245,414,200.00 37.43
100,000.01 -- 150,000.00 ............... 1,424 172,052,183.00 26.24
150,000.01 -- 200,000.00 ............... 413 71,555,545.00 10.91
200,000.01 -- 250,000.00 ............... 197 44,134,736.00 6.73
250,000.01 -- 300,000.00 ............... 75 20,503,200.00 3.13
300,000.01 -- 350,000.00 ............... 31 10,014,880.00 1.53
350,000.01 -- 400,000.00 ............... 21 7,862,750.00 1.20
400,000.01 -- 450,000.00 ............... 9 3,860,250.00 0.59
450,000.01 -- 500,000.00 ............... 3 1,436,000.00 0.22
----- --------------- -------
TOTAL ............... 7,770 $655,724,596.00 100.00%
===== =============== ======
</TABLE>
S-31
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE INITIAL MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RANGE ($) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------- ----- ---------------- ----------------
<S> <C> <C> <C>
0.01 -- 50,000.00 ................... 2,213 $ 78,654,455.74 12.01%
50,000.01 -- 100,000.00 ................... 3,385 245,107,814.01 37.44
100,000.01 -- 150,000.00 ................... 1,423 171,719,948.31 26.23
150,000.01 -- 200,000.00 ................... 415 71,870,395.71 10.98
200,000.01 -- 250,000.00 ................... 195 43,676,871.47 6.67
250,000.01 -- 300,000.00 ................... 75 20,483,132.55 3.13
300,000.01 -- 350,000.00 ................... 31 10,005,273.26 1.53
350,000.01 -- 400,000.00 ................... 21 7,852,385.17 1.20
400,000.01 -- 450,000.00 ................... 9 3,856,558.91 0.59
450,000.01 -- 500,000.00 ................... 3 1,433,261.60 0.22
----- --------------- -------
TOTAL ............................ 7,770 $654,660,096.73 100.00%
===== =============== ======
</TABLE>
<PAGE>
MORTGAGE RATES ON THE INITIAL MORTGAGE LOANS AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------- ----- ---------------- ----------------
<S> <C> <C> <C>
7.500 -- 7.999 .................. 24 $ 2,301,498.92 0.35%
8.000 -- 8.499 .................. 145 14,157,819.85 2.16
8.500 -- 8.999 .................. 742 76,415,454.68 11.67
9.000 -- 9.499 .................. 690 69,474,257.45 10.61
9.500 -- 9.999 ..................1,618 153,728,714.20 23.48
10.000 -- 10.499 .................. 741 63,625,166.26 9.72
10.500 -- 10.999 ..................1,753 144,448,716.86 22.06
11.000 -- 11.499 .................. 592 41,471,209.77 6.33
11.500 -- 11.999 .................. 498 32,668,088.11 4.99
12.000 -- 12.499 .................. 213 12,943,602.23 1.98
12.500 -- 12.999 .................. 434 26,415,746.14 4.04
13.000 -- 13.499 .................. 99 5,192,248.68 0.79
13.500 -- 13.999 .................. 113 6,137,611.56 0.94
14.000 -- 14.499 .................. 37 2,048,218.66 0.31
14.500 -- 14.999 .................. 35 1,503,224.48 0.23
15.000 -- 15.499 .................. 15 773,896.99 0.12
15.500 -- 15.999 .................. 17 1,094,145.52 0.17
16.000 -- 16.499 .................. 4 260,476.37 0.04
----- ---------------- ------
TOTAL ........................... 7,770 $ 654,660,096.73 100.00%
===== ================ ======
</TABLE>
S-32
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
LOAN-TO-VALUE NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RATIO (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------- ----- ---------------- ----------------
<S> <C> <C> <C>
Less than or equal to 25.00 .......... 63 $ 2,290,235.10 0.35%
25.01 -- 30.00 .................... 44 1,668,997.33 0.25
30.01 -- 35.00 .................... 45 2,135,575.77 0.33
35.01 -- 40.00 .................... 76 3,481,756.82 0.53
40.01 -- 45.00 .................... 104 5,658,188.90 0.86
45.01 -- 50.00 .................... 155 8,294,694.09 1.27
50.01 -- 55.00 .................... 199 11,824,991.89 1.81
55.01 -- 60.00 .................... 479 28,036,089.81 4.28
60.01 -- 65.00 .................... 419 29,690,698.21 4.54
65.01 -- 70.00 .................... 931 68,735,367.13 10.50
70.01 -- 75.00 .................... 1,525 127,376,998.77 19.46
75.01 -- 80.00 .................... 3,042 297,836,806.15 45.49
80.01 -- 85.00 .................... 688 67,629,696.76 10.33
--- --------------- -----
TOTAL .................... 7,770 $654,660,096.73 100.00%
===== =============== ======
</TABLE>
S-32
<PAGE>
MORTGAGED PROPERTY TYPES OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------- ----- ---------------- ----------------
<S> <C> <C> <C>
Single Family ..................... 6,784 $572,063,081.48 87.38%
Two- to Four-Family ............... 464 43,353,501.91 6.62
Condominium ....................... 169 13,576,701.60 2.07
Town House ........................ 67 4,602,105.50 0.70
Planned Unit Development .......... 93 11,050,216.74 1.69
Manufactured Housing .............. 193 10,014,489.50 1.53
----- --------------- ------
TOTAL .................... 7,770 $654,660,096.73 100.00%
===== =============== ======
</TABLE>
MORTGAGED PROPERTY OCCUPANCY STATUS OF THE INITIAL MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------- ----- ---------------- ----------------
Owner Occupied ......... 7,006 $606,046,726.57 92.57%
Non Owner Occupied ..... 727 45,595,900.10 6.96
Second Home ............ 37 3,017,470.06 0.46
----- --------------- ------
TOTAL .................. 7,770 $654,660,096.73 100.00%
===== =============== ======
The occupancy status of a Mortgaged Property is as represented by a
mortgagor in its loan application.
S-33
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE INITIAL MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------- ----- ---------------- ----------------
<S> <C> <C> <C>
Alabama ........................ 227 $ 13,079,157.21 2.00%
Alaska ......................... 2 200,691.32 0.03
Arizona ........................ 209 15,662,205.64 2.39
Arkansas ....................... 17 727,321.82 0.11
California ..................... 1,207 155,444,260.46 23.74
Colorado ....................... 205 18,909,958.85 2.89
Connecticut .................... 130 13,995,328.77 2.14
Delaware ....................... 46 3,586,283.98 0.55
District of Columbia ........... 10 864,052.84 0.13
Florida ........................ 579 42,290,423.38 6.46
Georgia ........................ 84 5,290,920.99 0.81
Hawaii ......................... 26 4,010,219.20 0.61
Idaho .......................... 56 3,942,105.50 0.60
Illinois ....................... 364 31,891,302.70 4.87
Indiana ........................ 129 6,889,360.82 1.05
Iowa ........................... 79 3,478,369.80 0.53
Kentucky ....................... 40 2,317,772.91 0.35
Louisiana ...................... 89 5,656,277.14 0.86
Maine .......................... 13 555,673.93 0.08
Maryland ....................... 96 8,346,401.19 1.27
Massachusetts .................. 175 19,611,862.13 3.00
Michigan ....................... 424 30,698,793.51 4.69
Minnesota ...................... 281 24,175,941.43 3.69
Mississippi .................... 15 635,031.28 0.10
Missouri ....................... 206 12,180,514.50 1.86
Nebraska ....................... 42 2,469,791.09 0.38
Nevada ......................... 46 4,442,184.36 0.68
New Hampshire .................. 11 840,091.79 0.13
New Jersey ..................... 226 22,230,797.80 3.40
New Mexico ..................... 70 4,944,999.41 0.76
New York ....................... 498 45,029,450.12 6.88
North Carolina ................. 98 6,692,278.42 1.02
Ohio ........................... 396 23,588,538.16 3.60
Oklahoma ....................... 206 10,035,981.21 1.53
Oregon ......................... 129 12,673,904.41 1.94
Pennsylvania ................... 370 23,250,223.06 3.55
Rhode Island ................... 86 8,251,944.60 1.26
South Carolina ................. 35 1,677,049.07 0.26
South Dakota ................... 2 90,184.65 0.01
Tennessee ...................... 150 10,371,724.15 1.58
Texas .......................... 283 17,315,561.53 2.64
Utah ........................... 115 10,590,224.08 1.62
Vermont ........................ 4 278,704.44 0.04
Washington ..................... 234 20,509,360.92 3.13
West Virginia .................. 7 347,420.70 0.05
Wisconsin ...................... 36 3,422,411.83 0.52
Wyoming ........................ 17 1,167,039.63 0.18
----- --------------- ------
TOTAL .......................... 7,770 $ 654,660,096.73 100.00%
===== ================= ======
</TABLE>
S-34
<PAGE>
PURPOSE OF THE INITIAL MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------ ----- ---------------- ----------------
Purchase .............. 106 8,833,477.44 1.35%
Equity-out Refinance .. 3,465 244,648,785.03 37.37
Refinance ............. 4,199 401,177,834.26 61.28
----- -------------- ------
TOTAL ........ 7,770 654,660,096.73 100.00%
===== ============== ======
LOAN PROGRAMS OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PROGRAM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------- ----- ---------------- ----------------
<S> <C> <C> <C>
Full Documentation Program .............. 6,181 $ 501,721,808.16 76.64%
Fast Trac Documentation Program ......... 740 84,006,663.76 12.83
Stated Income Documentation Program ..... 849 68,931,624.81 10.53
----- --------------- ------
TOTAL .......................... 7,770 $ 654,660,096.73 100.00%
===== ================ ======
</TABLE>
RISK CATEGORIES OF THE INITIAL MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RISK GRADE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------- ----- ---------------- ----------------
AA ................. 1,898 $170,518,882.69 26.05%
A ................. 2,956 257,814,638.44 39.38
B ................. 1,691 140,097,099.05 21.40
C ................. 977 70,760,174.73 10.81
D ................. 248 15,469,301.82 2.36
--- --------------- ----
TOTAL ..... 7,770 $654,660,096.73 100.00%
===== =============== ======
ADDITIONAL MORTGAGE LOANS
Additional Mortgage Loans will be included in the assets of the Trust
Fund on the Closing Date. Accordingly, the statistical characteristics of the
Mortgage Loans upon the acquisition of Additional Mortgage Loans will vary
somewhat from the statistical characteristics of the Initial Mortgage Loans as
of the Cut-off Date as presented in this Prospectus Supplement.
The inclusion by the Depositor of any Additional Mortgage Loans in the
Trust Fund on the Closing Date is subject to the following requirements: (a) the
Depositor will not select such Additional Mortgage Loans in a manner that it
believes to be adverse to the interests of the Certificateholders; and (b) as of
the Cut-off Date each Additional Mortgage Loan will satisfy the following
criteria: (i) no more than 1.00% of the Additional Mortgage Loans, by aggregate
principal balance as of the Cut-off Date, may be 30 or more but less than 60
days delinquent as of the Cut-off Date and no Additional Mortgage Loan may be 60
or more days delinquent as of the Cut-off Date; (ii) the stated term to maturity
of the Additional Mortgage Loan will not be less than 120 months and will not
exceed 360 months; (iii) the Additional Mortgage Loan may not be a Buydown
Mortgage Loan or provide for negative amortization; (iv) the Additional Mortgage
Loan will not have a loan-to-value ratio greater than 85%; (v) the Additional
S-35
<PAGE>
Mortgage Loans will have, as of the Cut-off Date, a weighted average term since
origination not in excess of 6 months; (vi) no Additional Mortgage Loan shall
have a Mortgage Rate less than 8.00% or greater than 16.25%; (vii) the
Additional Mortgage Loan shall have been serviced by the Master Servicer since
origination; (viii) the Additional Mortgage Loan must have a first payment date
occurring on or before July 1, 1998; and (ix) the Additional Mortgage Loan shall
have been underwritten in accordance with the criteria set forth under
"--Underwriting Standards; Representations" herein.
UNDERWRITING STANDARDS; REPRESENTATIONS
The Mortgage Loans will be acquired by the Depositor from the Mortgage
Loan Seller, who in turn will have acquired the Mortgage Loans from Ameriquest
Mortgage Company (the "Originator" or "Ameriquest"). All of the Mortgage Loans
were originated or acquired by the Originator, generally in accordance with the
underwriting criteria described below.
The information set forth below with regard to the Originator's
underwriting standards has been provided to the Depositor by the Originator.
None of the Depositor, the Mortgage Loan Seller, the Trustee, the Underwriter or
any of their respective affiliates has made any independent investigation of
such information or has made or will make any representation as to the accuracy
or completeness of such information.
The Mortgage Loans were originated generally in accordance with
guidelines (the "Underwriting Guidelines") established by the Originator under
the "Full Documentation", "Fast Trac Documentation" or "Stated Income"
residential loan programs (the "Underwriting Programs"). The Underwriting
Guidelines are primarily intended to evaluate the value and adequacy of the
mortgaged property as collateral and are also intended to consider the
applicant's credit standing and repayment ability. On a case-by-case basis, the
Originator 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 Mortgage Loans to be included in the Mortgage Pool will represent
such underwriting exceptions.
All of the Mortgage Loans originated in the Underwriting Programs are
based on loan application packages submitted through the Originator'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. The
Originator 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 the Originator a letter explaining all
late payments on mortgage debt and, generally, consumer (I.E. non-mortgage)
debt.
Under the Underwriting Programs, during the underwriting process, the
Originator 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 Underwriting Guidelines.
The Underwriting Guidelines are applied in accordance with a procedure which
complies with applicable federal and state laws and regulations and requires (i)
an appraisal of the mortgaged property which conforms to FHLMC and FNMA
standards and (ii) a review of such appraisal, which review may be conducted by
a representative of the Originator or a 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 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
S-36
<PAGE>
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 the Originator's first deed of trust,
is generally 90%.
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.
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 the Originator'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
Underwriting Programs. Each appraisal includes a market data analysis based on
recent sales of comparable homes in the area and, where deemed appropriate,
replacement cost analysis based on the current cost of constructing a similar
home. Every independent appraisal is reviewed by a representative of the
Originator or a fee appraiser before the loan is funded.
The Originator requires that all mortgage loans have title insurance.
The Originator 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.
UNDERWRITING GUIDELINES
The 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 Underwriting
Programs generally have payment histories and debt ratios which would not
satisfy FNMA and FHLMC underwriting guidelines and may have a record of major
derogatory credit items such as outstanding judgments or prior bankruptcies. The
Underwriting Guidelines establish the maximum permitted loan-to-value ratio for
each loan type based upon these and other risk factors.
RISK CATEGORIES
Under the Underwriting Programs, various risk categories are used to
grade the likelihood that the mortgagor will satisfy the repayment conditions of
the mortgage loan. These risk categories establish the maximum permitted
loan-to-value ratio and loan amount, given the occupancy status of the mortgaged
property and the mortgagor's credit history and debt ratio. In general, higher
credit risk mortgage loans are graded in categories which permit higher debt
ratios and more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies; however, the
S-37
<PAGE>
Underwriting Programs establish lower maximum loan-to-value ratios and lower
maximum loan amounts for loans graded in such categories.
The Underwriting Guidelines have the following categories and criteria
for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan:
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 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.
The Originator will make representations and warranties as of the
Closing Date with respect to the Mortgage Loans, and will be obligated to
repurchase any such Mortgage Loan in respect of which a material breach of the
representations and warranties it has made has occurred (other than those
breaches which have been cured). For a discussion of the representations and
warranties made and the repurchase obligation, see "Mortgage Loan
Program--Representations by or on behalf of the Mortgage Loan Seller;
Repurchases" in the Prospectus.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Certificates,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise if the Depositor deems such removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the Mortgage Pool prior to the issuance of the
Certificates unless including such mortgage loans would materially alter the
characteristics of the Mortgage Pool as described herein. The Depositor believes
that the information
S-38
<PAGE>
set forth herein will be representative of the characteristics of the Mortgage
Pool as it will be constituted at the time the Certificates are issued, although
the range of Mortgage Rates and maturities and certain other characteristics of
the Mortgage Loans may vary.
The Additional Mortgage Loans may have characteristics different from
those of the Initial Mortgage Loans. However, each Additional Mortgage Loan must
satisfy the eligibility criteria referred to herein under "--Additional Mortgage
Loans" at the time of its conveyance to the Trust Fund and be underwritten in
accordance with the criteria set forth under "--Underwriting Standards;
Representations" herein.
YIELD ON THE CERTIFICATES
DELAY IN DISTRIBUTIONS ON THE OFFERED CERTIFICATES
The effective yield to holders of the Offered Certificates of each
class will be less than the yields otherwise produced by their respective
Pass-Through Rates and purchase prices because (i) on the first Distribution
Date one month's interest is payable thereon even though 54 days will have
elapsed from the date on which interest begins to accrue thereon, (ii) on each
succeeding Distribution Date the interest payable thereon is the interest
accrued during the month preceding the month of such Distribution Date, which
ends 24 days prior to such Distribution Date and (iii) during each Interest
Accrual Period (other than the first Interest Accrual Period), interest accrues
on a Certificate Principal Balance or Notional Amount that may be less than the
Certificate Principal Balance or Notional Amount of such class actually
outstanding for the first 24 days of such Interest Accrual Period.
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of such prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan, the
mortgagor is not charged interest on the amount of such prepayment for the month
in which such prepayment is made. In addition, the application of the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"), to any
Mortgage Loan will adversely affect, for an indeterminate period of time, the
ability of the Master Servicer to collect full amounts of interest on such
Mortgage Loan. See "Certain Legal Aspects of the Mortgage Loans--Soldiers' and
Sailors' Civil Relief Act of 1940" in the Prospectus. The Master Servicer is
obligated to pay from its own funds only those interest shortfalls attributable
to full and partial prepayments by the mortgagors on the Mortgage Loans, but
only to the extent of its aggregate Servicing Fee for the related Due Period.
See "Pooling and Servicing Agreement--Servicing and Other Compensation and
Payment of Expenses" herein. Accordingly, the effect of (i) any principal
prepayments on the Mortgage Loans, to the extent that any resulting shortfall (a
"Prepayment Interest Shortfall") exceeds any payments made by the Master
Servicer from its own funds ("Compensating Interest") or (ii) any shortfalls
resulting from the application of the Relief Act, will be to reduce the
aggregate amount of interest collected that is available for distribution to
holders of the Certificates. Any such shortfalls will be allocated among the
Certificates as provided herein under "Description of the Certificates--Interest
Distributions".
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on each class of Offered Certificates
(other than the Class XS Certificates), the aggregate amount of distributions on
each class of Offered Certificates and the yield to maturity of each class of
Offered Certificates will be related to the rate and timing of payments of
principal on the Mortgage Loans. The rate of principal payments on the Mortgage
Loans will in turn be affected by the amortization schedules of such Mortgage
Loans and by the rate of principal prepayments thereon (including for this
purpose payments resulting from refinancings, liquidations of
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<PAGE>
the Mortgage Loans due to defaults, casualties, condemnations and repurchases,
whether optional or required, by the Depositor, the Mortgage Loan Seller, the
Originator or the Master Servicer, as the case may be). The Mortgage Loans
generally may be prepaid by the mortgagors at any time; however, as described
under "The Mortgage Pool" herein, with respect to approximately 72.05% of the
Initial 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. All of the Mortgage Loans contain due-on-sale clauses. As described
under "Description of the Certificates--Principal Distributions on the Senior
Certificates" herein, prior to the Distribution Date in June 2003, all principal
prepayments on the Mortgage Loans will be allocated to the Senior Certificates
(other than the Class XS Certificates). Thereafter, as further described herein,
during certain periods, subject to certain loss and delinquency criteria
described herein, the Senior Prepayment Percentage may continue to be
disproportionately large (relative to the Senior Percentage) and the percentage
of principal prepayments payable to the Subordinate Certificates may continue to
be disproportionately small.
Prepayments, liquidations and repurchases of the Mortgage Loans will
result in distributions in respect of principal to the holders of the class or
classes of Offered Certificates then entitled to receive such distributions that
otherwise would be distributed over the remaining terms of the Mortgage Loans.
See "Maturity and Prepayment Considerations" in the Prospectus. Since the rates
of payment of principal on the Mortgage Loans will depend on future events and a
variety of factors (as described more fully herein and in the Prospectus under
"Yield Considerations" and "Maturity and Prepayment Considerations"), no
assurance can be given as to such rate or the rate of principal prepayments. The
extent to which the yield to maturity of any class of Offered Certificates
(other than the Class XS Certificates) may vary from the anticipated yield will
depend upon the degree to which they are purchased at a discount or premium and
the degree to which the timing of payments thereon is sensitive to prepayments
on the Mortgage Loans. Further, an investor should consider, in the case of any
such Certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on the Mortgage Loans could result in an
actual yield to such investor that is lower than the anticipated yield and, in
the case of any such Certificate purchased at a premium, the risk that a faster
than anticipated rate of principal payments could result in an actual yield to
such investor that is lower than the anticipated yield. In general, the earlier
a prepayment of principal on the Mortgage Loans, the greater will be the effect
on the investor's yield to maturity. As a result, the effect on an investor's
yield of principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of such Certificates would not be fully offset by a subsequent like reduction
(or increase) in the rate of principal payments.
Interest on the Class XS-N Certificates will be dependent on the amount
of interest received or advanced with respect to Mortgage Loans that do not by
their terms have Prepayment Charges (with respect to the Class XS-N
Certificates, the "related Mortgage Loans"). The yield to maturity of the Class
XS-N Certificates will be negatively affected by a rapid rate of principal
prepayments on the related Mortgage Loans, and the amount of interest payable on
the Class XS-N Certificates will decrease more significantly as a result of
principal prepayments on related Mortgage Loans with relatively high Mortgage
Rates. Because the related Mortgage Loans do not by their terms have Prepayment
Charges, holders of the Class XS-N Certificates will not benefit from any
slowing effect that the Prepayment Charges may have on the rate of principal
prepayments experienced by the Mortgage Pool. Interest on the Class XS-T
Certificates and the Class XS-S Certificates will be dependent on the amount of
interest received or advanced with respect to Mortgage Loans that by their terms
do have Prepayment Charges (with respect to the Class XS-T Certificates and the
Class XS-S Certificates, the "related Mortgage Loans"). The yield to maturity of
the Class XS-T Certificates and the Class XS-S Certificates will be negatively
affected, to varying degrees, by a rapid rate of principal prepayments on the
related Mortgage Loans, and the amount of interest accruing on the related
Mortgage Loans (and therefore the amount of interest available for distribution
on the Class XS-T Certificates and the Class XS-S Certificates) will decrease
more significantly as a result of principal prepayments on related
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<PAGE>
Mortgage Loans with relatively high Mortgage Rates. See "--Yield Sensitivity of
the Class XS Certificates" herein.
It is highly unlikely that the Mortgage Loans will prepay at any
constant rate until maturity or that all of the Mortgage Loans will prepay at
the same rate. Moreover, the timing of prepayments on the Mortgage Loans may
significantly affect the actual yield to maturity on the Offered Certificates,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation.
Because principal distributions are paid to certain classes of Offered
Certificates before other such classes, holders of classes of Offered
Certificates having a later priority of payment bear a greater risk of losses
(because such Certificates will represent an increasing percentage interest in
the Trust Fund during the period prior to the commencement of distributions of
principal thereon) than holders of classes having earlier priorities for
distribution of principal. In particular with respect to the Lockout
Certificates, as described under "Description of the Certificates--Principal
Distributions on the Senior Certificates" herein, during certain periods, no
principal payments or a disproportionately small portion of the Senior Principal
Distribution Amount will be distributed on the Lockout Certificates, and during
certain other periods, a disproportionately large portion of the Senior
Principal Distribution Amount will be distributed on the Lockout Certificates.
Unless the Certificate Principal Balances of the Class A Certificates (other
than the Lockout Certificates) have been reduced to zero, the Lockout
Certificates will not be entitled to receive any distributions of principal
payments prior to the Distribution Date in June 2001.
The rate of payments (including prepayments) on pools of mortgage loans
is influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment (and refinancing) would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans would be expected to decrease. Other factors affecting prepayment of
mortgage loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. There can be no certainty as to the rate of prepayments on the
Mortgage Loans during any period or over the life of the Certificates. See
"Yield Considerations" and "Maturity and Prepayment Considerations" in the
Prospectus.
In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. In addition, default rates generally are
higher for mortgage loans used to refinance an existing mortgage loan. In the
event of a mortgagor's default on a Mortgage Loan, there can be no assurance
that recourse beyond the specific Mortgaged Property pledged as security for
repayment will be available. See "The Mortgage Pool--Underwriting Standards;
Representations" herein.
MARKET INTEREST RATE AND SUBORDINATION YIELD CONSIDERATIONS
Because the Mortgage Rates on the Mortgage Loans and the Pass-Through
Rates on the Offered Certificates (other than the Class XS Certificates) are
fixed, such rates will not change in response to changes in market interest
rates. Accordingly, if mortgage market interest rates or market yields for
securities similar to such Offered Certificates were to rise, the market value
of such Offered Certificates may decline.
As described under "Description of the Certificates--Allocation of
Losses; Subordination", amounts otherwise distributable to holders of the
Subordinate Certificates may be made available to protect the holders of the
Senior Certificates against interruptions in distributions due to certain
mortgagor delinquencies, to the extent not covered by P&I Advances, and amounts
otherwise distributable to holders of the Subordinate Certificates with a higher
numerical class designation may be made available to protect the holders of
Subordinate Certificates with a lower numerical class designation against such
interruptions in distributions. Such delinquencies may affect the yield to
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<PAGE>
investors on such classes of the Subordinate Certificates, and, even if
subsequently cured, will affect the timing of the receipt of distributions by
the holders of such classes of Subordinate Certificates. In addition, a larger
than expected rate of delinquencies or losses will affect the rate of principal
payments on each class of the Subordinate Certificates if it delays the
scheduled reduction of the Senior Prepayment Percentage, triggers an increase of
the Senior Prepayment Percentage to 100% or triggers a lockout of one or more
classes of Subordinate Certificates from distributions of certain portions of
the Subordinate Principal Distribution Amount. See "Description of the
Certificates--Principal Distributions on the Senior Certificates" and
"--Principal Distributions on the Subordinate Certificates" herein.
WEIGHTED AVERAGE LIFE
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 the
Offered Certificates of each class 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 prepayments of principal by the mortgagor as
well as amounts received by virtue of condemnation, insurance or foreclosure
with respect to the Mortgage Loans), and the timing thereof.
Except as otherwise described under "Description of the
Certificates--Principal Distributions on the Senior Certificates" herein,
distributions of principal will be made to the classes of Class A Certificates
according to the priorities described herein, rather than on a PRO RATA basis
among such classes, unless the Certificate Principal Balances of the Subordinate
Certificates have been reduced to zero. The timing of commencement of principal
distributions to each class of the Class A Certificates and the weighted average
life of each such class will be affected by the rates of prepayment on the
Mortgage Loans experienced both before and after the commencement of principal
distributions on each such class. Moreover, because the Lockout Certificates do
not receive (unless the Certificate Principal Balances of the Class A
Certificates, other than the Lockout Certificates, have been reduced to zero)
any portion of principal payments prior to the Distribution Date occurring in
June 2001 and thereafter will receive (unless the Certificate Principal Balances
of the Class A Certificates, other than the Lockout Certificates, have been
reduced to zero) a disproportionately small or large portion of principal
payments, the weighted average life of the Lockout Certificates will be longer
or shorter than would otherwise be the case, and the effect on the market value
of the Lockout Certificates of changes in market interest rates or market yields
for similar securities may be greater or lesser than for the other classes of
Class A Certificates entitled to principal distributions.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") assumes a prepayment rate for the Mortgage Loans of
100% of the Prepayment Vector. A 100% Prepayment Vector assumes that the
outstanding balance of a pool of mortgage loans prepays at a rate of 5.00% CPR
in the first month of the life of such pool, such rate increasing by an
additional approximate 1.82% CPR (precisely 20/11, expressed as a percentage)
each month thereafter through the eleventh month of the life of such pool, and
such rate thereafter remaining constant at 25% CPR for the remainder of the life
of such pool. A 75% Prepayment Vector assumes, for example, that the outstanding
balance of a pool of mortgage loans prepays at a rate of 3.75% CPR in the first
month of the life of such pool, such rate increasing by an additional
approximate 1.36% CPR (precisely 15/11, expressed as a percentage) each month
thereafter through the eleventh month of the life of such pool, and such rate
thereafter remaining constant at 18.75% CPR for the remainder of the life of
such pool. No representation is made that the Mortgage Loans in the Mortgage
Pool will prepay at the above-described rates or any other rate. CPR refers to
the Constant Prepayment Rate model, which assumes that the outstanding principal
balance of a pool of mortgage loans prepays at a specified constant annual rate
or CPR. In generating monthly cash flows, this rate is converted to an
equivalent constant monthly rate. To assume 25% CPR or any other CPR percentage
is to assume that the stated percentage of the outstanding principal balance of
the pool is prepaid over the course of a year.
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<PAGE>
The tables following the next paragraph indicate the percentage of the
initial Certificate Principal Balance of the indicated classes of Certificates
that would be outstanding after each of the dates shown at various constant
percentages of the Prepayment Assumption and the corresponding weighted average
life of such class of Certificates. The table is based on the following
assumptions (the "Modeling Assumptions"): (i) the Mortgage Pool consists of
seven Mortgage Loans with the characteristics set forth in the table below, (ii)
distributions on such Certificates are received, in cash, on the 25th day of
each month, commencing in June 1998, (iii) the Mortgage Loans prepay at the
constant percentages of the Prepayment Assumption indicated, (iv) no defaults or
delinquencies occur in the payment by mortgagors of principal and interest on
the Mortgage Loans and no shortfalls due to the application of the Relief Act
are incurred, (v) none of the Depositor, the Mortgage Loan Seller, the
Originator, the Master Servicer or any other person purchases from the Trust
Fund any Mortgage Loan pursuant to any obligation or option under the Agreement
(except as indicated in footnote (2) in the tables), (vi) scheduled monthly
payments on the Mortgage Loans are received on the first day of each month
commencing in June 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 May 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 and remaining term to maturity such that the
Mortgage Loan will amortize in amounts sufficient to repay the remaining
principal balance of such Mortgage Loan by its remaining term to maturity, (ix)
the Certificates are purchased on May 29, 1998, (x) the first four Mortgage
Loans in the table below are Mortgage Loans that do not by their terms have
Prepayment Charges and the last three Mortgage Loans in the table below are
Mortgage Loans that by their terms do have Prepayment Charges and (xi) the
Servicing Fee Rate is 0.50% per annum and the Trustee's Fee Rate is 0.007% per
annum.
ASSUMED MORTGAGE LOAN CHARACTERISTICS
PRINCIPAL BALANCE ORIGINAL TERM REMAINING TERM
AS OF THE MORTGAGE TO MATURITY TO MATURITY
CUT-OFF DATE RATE (MONTHS) (MONTHS)
------------ ---- -------- --------
$32,753.00 9.9000% 120 118
$ 15,652,154.00 10.4170% 180 178
$ 10,744,600.00 10.1600% 240 238
$162,203,346.00 10.4650% 360 358
$ 41,172,753.00 10.0020% 180 178
$ 35,397,162.00 9.8364% 240 238
$409,797,232.00 10.0940% 360 358
There will be discrepancies between the characteristics of the Mortgage Loans
actually included in the Trust Fund and the characteristics assumed in preparing
the table below. Any such discrepancy may have an effect upon the percentages of
the initial Certificate Principal Balances outstanding (and the weighted average
lives) of the classes of Certificates set forth in the table. In addition, to
the extent that the actual Mortgage Loans included in the Mortgage Pool have
characteristics that differ from those assumed in preparing the table below,
such classes of Certificates may mature earlier or later than indicated by the
table below. Based on the foregoing assumptions, the table below indicates the
weighted average life of each class of the Class A Certificates and the
Subordinate Certificates and sets forth the percentage of the initial
Certificate Principal Balance of each such class of Certificates that would be
outstanding after each of the 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 Trust
Fund. Variations in the prepayment experience and the balance of the Mortgage
Loans that prepay may increase or decrease the percentages of initial
Certificate Principal Balance (and weighted average lives) shown in the
following table. Such variations may occur even if the average prepayment
experience of all such Mortgage Loans equals any of the specified percentages of
the Prepayment Assumption.
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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES
DISTRIBUTION DATE 0% 25% 50% 75% 100% 125% 150% 0% 25%% 50% 75% 100% 125% 150%
----------------- --------- --------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
May 25, 1999 98 84 69 55 41 26 12 100 100 100 100 100 100 100
May 25, 2000 95 63 32 4 0 0 0 100 100 100 100 45 0 0
May 25, 2001 92 43 0 0 0 0 0 100 100 100 11 0 0 0
May 25, 2002 89 26 0 0 0 0 0 100 100 40 0 0 0 0
May 25, 2003 86 10 0 0 0 0 0 100 100 0 0 0 0 0
May 25, 2004 83 0 0 0 0 0 0 100 93 0 0 0 0 0
May 25, 2005 79 0 0 0 0 0 0 100 64 0 0 0 0 0
May 25, 2006 76 0 0 0 0 0 0 100 47 0 0 0 0 0
May 25, 2007 72 0 0 0 0 0 0 100 30 0 0 0 0 0
May 25, 2008 68 0 0 0 0 0 0 100 12 0 0 0 0 0
May 25, 2009 64 0 0 0 0 0 0 100 0 0 0 0 0 0
May 25, 2010 59 0 0 0 0 0 0 100 0 0 0 0 0 0
May 25, 2011 53 0 0 0 0 0 0 100 0 0 0 0 0 0
May 25, 2012 47 0 0 0 0 0 0 100 0 0 0 0 0 0
May 25, 2013 40 0 0 0 0 0 0 100 0 0 0 0 0 0
May 25, 2014 34 0 0 0 0 0 0 100 0 0 0 0 0 0
May 25, 2015 28 0 0 0 0 0 0 100 0 0 0 0 0 0
May 25, 2016 20 0 0 0 0 0 0 100 0 0 0 0 0 0
May 25, 2017 12 0 0 0 0 0 0 100 0 0 0 0 0 0
May 25, 2018 3 0 0 0 0 0 0 100 0 0 0 0 0 0
May 25, 2019 0 0 0 0 0 0 0 87 0 0 0 0 0 0
May 25, 2020 0 0 0 0 0 0 0 65 0 0 0 0 0 0
May 25, 2021 0 0 0 0 0 0 0 40 0 0 0 0 0 0
May 25, 2022 0 0 0 0 0 0 0 11 0 0 0 0 0 0
May 25, 2023 0 0 0 0 0 0 0 0 0 0 0 0 0 0
May 25, 2024 0 0 0 0 0 0 0 0 0 0 0 0 0 0
May 25, 2025 0 0 0 0 0 0 0 0 0 0 0 0 0 0
May 25, 2026 0 0 0 0 0 0 0 0 0 0 0 0 0 0
May 25, 2027 0 0 0 0 0 0 0 0 0 0 0 0 0 0
May 25, 2028 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
in Years(1) 12.51 2.79 1.57 1.13 0.90 0.76 0.66 22.55 8.00 3.88 2.62 2.00 1.62 1.37
Weighted Average Life
in Years(2) 12.51 2.79 1.57 1.13 0.90 0.76 0.66 22.55 8.00 3.88 2.62 2.00 1.62 1.37
</TABLE>
CLASS A-3 CERTIFICATES
DISTRIBUTION DATE 0% 25% 50% 75% 100% 125% 150%
----------------- ----------- ------------------------------
Closing Date 100% 100% 100% 100% 100% 100% 100%
May 25, 1999 100 100 100 100 100 100 100
May 25, 2000 100 100 100 100 100 88 42
May 25, 2001 100 100 100 100 44 0 0
May 25, 2002 100 100 100 51 0 0 0
May 25, 2003 100 100 90 5 0 0 0
May 25, 2004 100 100 58 0 0 0 0
May 25, 2005 100 100 33 0 0 0 0
May 25, 2006 100 100 21 0 0 0 0
May 25, 2007 100 100 8 0 0 0 0
May 25, 2008 100 100 0 0 0 0 0
May 25, 2009 100 95 0 0 0 0 0
May 25, 2010 100 80 0 0 0 0 0
May 25, 2011 100 64 0 0 0 0 0
May 25, 2012 100 50 0 0 0 0 0
May 25, 2013 100 35 0 0 0 0 0
May 25, 2014 100 23 0 0 0 0 0
May 25, 2015 100 11 0 0 0 0 0
May 25, 2016 100 0 0 0 0 0 0
May 25, 2017 100 0 0 0 0 0 0
May 25, 2018 100 0 0 0 0 0 0
May 25, 2019 100 0 0 0 0 0 0
May 25, 2020 100 0 0 0 0 0 0
May 25, 2021 100 0 0 0 0 0 0
May 25, 2022 100 0 0 0 0 0 0
May 25, 2023 82 0 0 0 0 0 0
May 25, 2024 52 0 0 0 0 0 0
May 25, 2025 18 0 0 0 0 0 0
May 25, 2026 0 0 0 0 0 0 0
May 25, 2027 0 0 0 0 0 0 0
May 25, 2028 0 0 0 0 0 0 0
Weighted Average Life
in Years(1) 26.0514.12 6.65 4.09 3.00 2.38 1.98
Weighted Average Life
in Years(2) 26.0514.12 6.65 4.09 3.00 2.38 1.98
-----------------
(1) The weighted average life of a Certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the Certificate to the related Distribution Date,
(b) adding the results and (c) dividing the sum by the initial Certificate
Principal Balance of the Certificate.
(2) Calculated pursuant to footnote one but assumes the Master Servicer, with
the consent of 100% of the holders of each class of Class XS Certificates,
exercises its option to purchase the Mortgage Loans on any Distribution
Date on which the aggregate principal balance thereof is reduced to less
than 10% of the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date. See "Pooling and Servicing Agreement--Termination" herein.
(TABLE CONTINUED ON NEXT PAGE.)
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<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-4 CERTIFICATES CLASS A-5 CERTIFICATES
DISTRIBUTION DATE 0% 25% 50% 75% 100% 125% 150% 0% 25% 50% 75% 100% 125% 150%
----------------- --------- -------------------------------- --------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
May 25, 1999 100 100 100 100 100 100 100 100 100 100 100 100 100 100
May 25, 2000 100 100 100 100 100 100 100 100 100 100 100 100 100 100
May 25, 2001 100 100 100 100 100 85 27 100 100 100 100 100 100 100
May 25, 2002 100 100 100 100 82 20 0 100 100 100 100 100 100 0
May 25, 2003 100 100 100 100 31 0 0 100 100 100 100 100 18 0
May 25, 2004 100 100 100 71 7 0 0 100 100 100 100 100 0 0
May 25, 2005 100 100 100 47 0 0 0 100 100 100 100 76 0 0
May 25, 2006 100 100 100 41 0 0 0 100 100 100 100 74 0 0
May 25, 2007 100 100 100 31 0 0 0 100 100 100 100 55 0 0
May 25, 2008 100 100 94 22 0 0 0 100 100 100 100 42 0 0
May 25, 2009 100 100 79 13 0 0 0 100 100 100 100 32 0 0
May 25, 2010 100 100 65 6 0 0 0 100 100 100 100 23 0 0
May 25, 2011 100 100 53 0 0 0 0 100 100 100 100 17 0 0
May 25, 2012 100 100 41 0 0 0 0 100 100 100 78 12 0 0
May 25, 2013 100 100 31 0 0 0 0 100 100 100 61 9 0 0
May 25, 2014 100 100 23 0 0 0 0 100 100 100 48 6 0 0
May 25, 2015 100 100 15 0 0 0 0 100 100 100 37 5 0 0
May 25, 2016 100 99 9 0 0 0 0 100 100 100 29 3 0 0
May 25, 2017 100 86 4 0 0 0 0 100 100 100 22 2 0 0
May 25, 2018 100 73 0 0 0 0 0 100 100 95 17 2 0 0
May 25, 2019 100 61 0 0 0 0 0 100 100 78 13 1 0 0
May 25, 2020 100 50 0 0 0 0 0 100 100 63 10 1 0 0
May 25, 2021 100 40 0 0 0 0 0 100 100 50 7 1 0 0
May 25, 2022 100 30 0 0 0 0 0 100 100 39 5 0 0 0
May 25, 2023 100 20 0 0 0 0 0 100 100 30 4 0 0 0
May 25, 2024 100 10 0 0 0 0 0 100 100 22 2 0 0 0
May 25, 2025 100 1 0 0 0 0 0 100 100 15 2 0 0 0
May 25, 2026 76 0 0 0 0 0 0 100 67 9 1 0 0 0
May 25, 2027 24 0 0 0 0 0 0 100 30 4 0 0 0 0
May 25, 2028 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
in Years(1) 28.53 22.22 13.68 7.86 4.75 3.56 2.84 29.67 28.5023.57 16.8810.21 4.83 3.71
Weighted Average Life
in Years(2) 28.35 21.47 13.04 7.68 4.75 3.56 2.84 28.66 23.1615.07 10.667.70 4.83 3.71
</TABLE>
-----------------
(1) The weighted average life of a Certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the Certificate to the related Distribution Date,
(b) adding the results and (c) dividing the sum by the initial Certificate
Principal Balance of the Certificate.
(2) Calculated pursuant to footnote one but assumes the Master Servicer, with
the consent of 100% of the holders of each class of Class XS Certificates,
exercises its option to purchase the Mortgage Loans on any Distribution
Date on which the aggregate principal balance thereof is reduced to less
than 10% of the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date. See "Pooling and Servicing Agreement--Termination" herein.
(TABLE CONTINUED ON NEXT PAGE.)
S-45
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
LOCKOUT CERTIFICATES SUBORDINATE CERTIFICATES
DISTRIBUTION DATE 0% 25% 50% 75% 100% 125% 150% 0% 25% 50% 75% 100% 125% 150%
----------------- --------- ---------------------------------- --------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
May 25, 1999 100 100 100 100 100 100 100 99 99 99 99 99 99 99
May 25, 2000 100 100 100 100 100 100 100 98 98 98 98 98 98 98
May 25, 2001 100 100 100 100 100 100 100 97 97 97 97 97 97 97
May 25, 2002 99 96 93 88 83 76 64 96 96 96 96 96 96 96
May 25, 2003 99 92 85 77 68 53 0 95 95 95 95 95 95 95
May 25, 2004 98 86 74 61 46 18 0 93 92 90 88 86 84 59
May 25, 2005 96 79 62 46 27 0 0 92 88 84 80 75 68 36
May 25, 2006 91 60 37 19 7 0 0 90 83 76 69 62 46 22
May 25, 2007 85 46 23 9 2 0 0 88 77 67 57 48 31 14
May 25, 2008 79 35 14 4 1 0 0 86 71 57 45 35 21 8
May 25, 2009 73 27 9 2 0 0 0 84 64 49 36 26 14 5
May 25, 2010 67 20 5 1 0 0 0 81 59 41 28 19 9 3
May 25, 2011 60 15 3 0 0 0 0 79 53 35 22 14 6 2
May 25, 2012 53 11 2 0 0 0 0 76 48 29 17 10 4 1
May 25, 2013 47 8 1 0 0 0 0 72 43 25 13 7 3 1
May 25, 2014 42 6 1 0 0 0 0 70 39 21 11 5 2 0
May 25, 2015 37 4 0 0 0 0 0 67 35 17 8 4 1 0
May 25, 2016 32 3 0 0 0 0 0 64 31 14 6 3 1 0
May 25, 2017 27 2 0 0 0 0 0 60 28 12 5 2 0 0
May 25, 2018 22 1 0 0 0 0 0 56 24 10 4 1 0 0
May 25, 2019 18 1 0 0 0 0 0 53 21 8 3 1 0 0
May 25, 2020 14 1 0 0 0 0 0 49 18 7 2 1 0 0
May 25, 2021 11 0 0 0 0 0 0 45 16 5 2 0 0 0
May 25, 2022 8 0 0 0 0 0 0 40 13 4 1 0 0 0
May 25, 2023 5 0 0 0 0 0 0 35 11 3 1 0 0 0
May 25, 2024 3 0 0 0 0 0 0 29 8 2 1 0 0 0
May 25, 2025 1 0 0 0 0 0 0 22 6 2 0 0 0 0
May 25, 2026 0 0 0 0 0 0 0 15 4 1 0 0 0 0
May 25, 2027 0 0 0 0 0 0 0 7 2 0 0 0 0 0
May 25, 2028 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
in Years(1) 15.20 9.47 7.60 6.59 5.83 4.99 4.15 19.91 14.71 11.96 10.37 9.36 8.27 6.86
Weighted Average Life
in Years(2) 15.20 9.46 7.58 6.55 5.78 4.96 4.15 19.85 14.21 10.79 8.81 7.28 6.04 5.03
</TABLE>
-----------------
(1) The weighted average life of a Certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the Certificate to the related Distribution Date,
(b) adding the results and (c) dividing the sum by the initial Certificate
Principal Balance of the Certificate.
(2) Calculated pursuant to footnote one but assumes the Master Servicer, with
the consent of 100% of the holders of each class of Class XS Certificates,
exercises its option to purchase the Mortgage Loans on any Distribution
Date on which the aggregate principal balance thereof is reduced to less
than 10% of the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date. See "Pooling and Servicing Agreement--Termination" herein.
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<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 table above
or to any other level, or that the actual weighted average life of any class of
Certificates will conform to any of the weighted average lives set forth in the
table above. Furthermore, the information contained in the table with respect to
the weighted average life of each specified class of Certificates is not
necessarily indicative of the weighted average life of each such class that
might be calculated or projected under different or varying prepayment
assumptions.
The characteristics of the Mortgage Loans will differ from those assumed in
preparing the table above. In addition, it is unlikely that any Mortgage Loan
will prepay at any constant percentage of the Prepayment Assumption until
maturity or that all of the Mortgage Loans will prepay at the same rate. For
example, while the table above and the tables below assume a Prepayment
Assumption that is the same for all of the Mortgage Loans, some Mortgage Loans
have Prepayment Charges and others do not. Mortgage Loans with these and other
differing characteristics are unlikely to prepay at the same rate. The timing of
changes in the rate of prepayments may significantly affect the actual yield to
maturity to investors, even if the average rate of principal prepayments is
consistent with the expectations of investors.
YIELD SENSITIVITY OF THE CLASS XS CERTIFICATES
Interest on the Class XS-N Certificates will be dependent on the amount
of interest received or advanced with respect to Mortgage Loans that do not by
their terms have Prepayment Charges (with respect to the Class XS-N
Certificates, the "related Mortgage Loans"). The yield to maturity of the Class
XS-N Certificates will be negatively affected by a rapid rate of principal
prepayments on the related Mortgage Loans, and the amount of interest payable on
the Class XS-N Certificates will decrease more significantly as a result of
principal prepayments on related Mortgage Loans with relatively high Mortgage
Rates. Interest on the Class XS-T Certificates and the Class XS-S Certificates
will be dependent on the amount of interest received or advanced with respect to
Mortgage Loans that by their terms do have Prepayment Charges (with respect to
the Class XS-T Certificates and the Class XS-S Certificates, the "related
Mortgage Loans"). The yield to maturity of the Class XS-T Certificates and the
Class XS-S Certificates will be negatively affected, to varying degrees, by a
rapid rate of principal prepayments on the related Mortgage Loans, and the
amount of interest accruing on the related Mortgage Loans (and therefore the
amount of interest available for distribution on the Class XS-T Certificates and
the Class XS-S Certificates) will decrease more significantly as a result of
principal prepayments on related Mortgage Loans with relatively high Mortgage
Rates.
The Class XS-T Certificates have been structured so that reductions of
Notional Amount thereof will adhere to the Targeted Notional Amount schedule
described herein assuming, among other things, that prepayments on the related
Mortgage Loans occur each month at 100% of the Prepayment Vector and that no
Realized Losses are incurred on the related Mortgage Loans. However, as
discussed herein, actual reductions of the aggregate principal balance of the
related Mortgage Loans (whether as a result of collections of principal on such
Mortgage Loans or as a result of Realized Losses incurred on such Mortgage
Loans) may be greater or less than would be necessary and sufficient for the
Notional Amount of the Class XS-T Certificate to adhere to the Targeted Notional
Amount schedule. If prepayments on the related Mortgage Loans occur at a
constant level below or above 100% of the Prepayment Vector, or Realized Losses
on the related Mortgage Loans are not as assumed, then reductions of the
Notional Amount of the Class XS-T Certificates may deviate from the Targeted
Notional Amount schedule, with a corresponding positive or negative effect on
the yield to maturity of the Class XS-T Certificates. If on any Distribution
Date, as a result of the allocation of reductions of the aggregate principal
balance of the related Mortgage Loans that occurred during the related Due
Period or Prepayment Period, as applicable, the Notional Amount of the Class
XS-T Certificates has been reduced to the applicable Targeted Notional Amount,
then any excess reductions of the aggregate principal balance of the related
Mortgage Loans (whether as a result of collections of principal on such Mortgage
Loans or as a result
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<PAGE>
of Realized Losses incurred on such Mortgage Loans) relating to such
Distribution Date will be allocated to reduce the Notional Amount of the Class
XS-S Certificates. If a rapid rate of prepayments or Realized Losses causes the
Notional Amount of the Class XS-S Certificates to be reduced to zero, the yield
to maturity of the Class XS-T Certificates will become more sensitive to
prepayments and Realized Losses on the related Mortgage Loans, because all
reductions of the aggregate principal balance of the related Mortgage Loans will
then be allocated to reduce the Notional Amount of the Class XS-T Certificates,
regardless of the Targeted Notional Amount schedule.
There can be no assurance that the Mortgage Loans will prepay or incur
Realized Losses at any particular rate or that any of the Mortgage Loans having
any particular characteristics will prepay or incur Realized Losses at the same
rate as the Mortgage Loans generally or at the same rate as any other Mortgage
Loans. Rather, Mortgage Loans having differing characteristics are likely to
prepay and incur Realized Losses at differing rates.
The following tables indicate the sensitivity of the yield of each class of
the Offered Class XS Certificates to various rates of prepayment on the related
Mortgage Loans and the corresponding pre-tax yield on a corporate bond
equivalent basis. The tables set forth below have been prepared based on the
Modeling Assumptions.
PRE-TAX YIELD TO MATURITY ON THE CLASS XS-N CERTIFICATES
AT VARIOUS PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
ASSUMED AGGREGATE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
PURCHASE PRICE -----------------------------------------------------------
0% 50% 100% 150% 200%
- ------------------------------------- ----------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
$13,771,626.43 ..................... 47.46% 32.86% 17.00% 0.44% (17.26)%
$13,771,626.43 ..................... 47.46% 32.81% 15.74% (4.50)% (27.57)%
</TABLE>
PRE-TAX YIELD TO MATURITY ON THE CLASS XS-T CERTIFICATES
AT VARIOUS PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
ASSUMED AGGREGATE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
PURCHASE PRICE ------------------------------------------------------------
0% 50% 100% 150% 200%
- ------------------------------------- ----------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
$26,488,183.46 40.96% 18.59% 11.02% 2.63% (13.50)%
$26,488,183.46 40.96% 18.56% 9.29% (2.12)% (23.00)%
</TABLE>
- ----------
(1) The Pre-Tax Yields in the second row of each of the preceding tables were
calculated assuming that the Master Servicer, with the consent of 100% of
the holders of each class of Class XS Certificates, exercises its option to
purchase the Mortgage Loans on any Distribution Date on which the aggregate
principal balance thereof is reduced to less than 10% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date. See
"Pooling and Servicing Agreement--Termination" herein.
Based on the Modeling Assumptions, on the basis of a constant prepayment
rate of approximately 151% and approximately 159% of the Prepayment Assumption
for the related Mortgage Loans and the respective purchase prices assumed above,
the yield of the Class XS-N Certificates and the Class XS-T Certificates,
respectively, would be approximately 0%. If the actual prepayment rate on the
related Mortgage Loans were to exceed such rate, initial investors in the
related class of Offered Class XS Certificates would not fully recover their
initial investment.
The pre-tax yields set forth in the preceding tables were calculated by
determining the monthly discount rates that, when applied to the assumed streams
of cash flows to be paid on the Class XS Certificates, would cause the
discounted present value of such assumed stream of cash flows to equal the
assumed purchase price of such Class XS Certificates, and by converting such
monthly rates to corporate bond equivalent rates. Such calculation does not take
into account shortfalls in collection of
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<PAGE>
interest due to prepayments (or other liquidations) on the Mortgage Loans or the
interest rates at which investors may be able to reinvest funds received by them
as distributions on the Class XS Certificates and consequently does not purport
to reflect the return on any investment in the Class XS Certificates when such
reinvestment rates are considered.
The characteristics of the Mortgage Loans will differ from those assumed in
preparing the tables above. There can be no assurance that the cash flows on the
Offered Class XS Certificates will correspond to those used to determine the
pre-tax yields shown above or that the aggregate purchase price of each class of
Offered Class XS Certificates will be as assumed. It is unlikely that any of the
Mortgage Loans will prepay at the specified percentages of the Prepayment
Assumption until maturity or that all of the Mortgage Loans will prepay at the
same rate. For example, while the tables above assume a Prepayment Assumption
that is the same for all of the Mortgage Loans, some Mortgage Loans have
Prepayment Charges and others do not. Mortgage Loans with these and other
differing characteristics are unlikely to prepay at the same rate. The timing of
changes in the rate of prepayments may significantly affect the actual yield to
maturity to investors, even if the average rate of principal prepayments is
consistent with the expectations of investors. The portion of interest payments
on the Mortgage Loans distributable to the related Class XS Certificates will
vary from Mortgage Loan to Mortgage Loan, and will be greater with respect to
Mortgage Loans with higher Mortgage Rates. Accordingly, the yield on the Offered
Class XS Certificates will be lower than indicated in the applicable table above
with respect to any particular average prepayment rate if Mortgage Loans with
higher Mortgage Rates prepay faster than Mortgage Loans with lower Mortgage
Rates, assuming no variation in Mortgage Loan principal balance. Moreover, the
variable Pass-Through Rate on each class of Offered Class XS Certificates will
generally decrease as the Certificate Principal Balances of Class A Certificates
with lower fixed Pass-Through Rates decline. There can be no assurance that the
Mortgage Loans will prepay at any of the rates shown in the table or at any
other particular rate, or that Mortgage Loans with relatively high Mortgage
Rates will prepay at the same rate as the Mortgage Loans generally. Investors
must make their own decisions as to the appropriate prepayment assumptions to be
used in deciding whether to purchase the Offered Class XS Certificates.
YIELD SENSITIVITY OF THE SUBORDINATE CERTIFICATES
If the Certificate Principal Balances of the Class B-6 Certificates, Class
B-5 Certificates, Class B-4 Certificates, Class B-3 Certificates and Class B-2
Certificates have been reduced to zero, the yield to maturity on the Class B-1
Certificates will become extremely sensitive to losses on the Mortgage Loans
(and the timing thereof) that are covered by subordination, because the entire
amount of such losses will be allocated to the Class B-1 Certificates. If the
Certificate Principal Balances of the Class B-6 Certificates, Class B-5
Certificates, Class B-4 Certificates and Class B-3 Certificates have been
reduced to zero, the yield to maturity on the Class B-2 Certificates will become
extremely sensitive to losses on the Mortgage Loans (and the timing thereof)
that are covered by subordination, because the entire amount of such losses will
be allocated to the Class B-2 Certificates. If the Certificate Principal
Balances of the Class B-6 Certificates, Class B-5 Certificates and Class B-4
Certificates have been reduced to zero, the yield to maturity on the Class B-3
Certificates will become extremely sensitive to losses on the Mortgage Loans
(and the timing thereof) that are covered by subordination, because the entire
amount of such losses will be allocated to the Class B-3 Certificates. The
initial undivided interest in the Trust Fund evidenced by the Class B-1
Certificates, the Class B-2 Certificates, the Class B-3 Certificates, the Class
B-4 Certificates, the Class B-5 Certificates and the Class B-6 Certificates is
approximately 4.00%, approximately 2.25%, approximately 1.25%, approximately
1.80%, approximately 0.85% and approximately 0.85%, respectively. Investors in
the Subordinate Certificates should fully consider the risk that Realized Losses
on the Mortgage Loans could result in the failure of such investors to fully
recover their investments. For additional considerations relating to the yield
on the Subordinate Certificates, see "Yield Considerations" and "Maturity and
Prepayment Considerations" in the Prospectus.
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<PAGE>
ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE RESIDUAL CERTIFICATES
The Certificateholders' after-tax rate of return on their Residual
Certificates will reflect their pre-tax rate of return, reduced by the taxes
required to be paid with respect to the Residual Certificates. Holders of
Residual Certificates will have tax liabilities with respect to their Residual
Certificates during the early years of the REMIC's term that substantially
exceed any distributions payable thereon during or prior to any such period. In
addition, holders of Residual Certificates will have tax liabilities with
respect to their Residual Certificates the present value of which substantially
exceeds the present value of distributions payable thereon and of any tax
benefits that may arise with respect thereto. Accordingly, the after-tax rate of
return on the Residual Certificates may be negative or may otherwise be
significantly adversely affected. The timing and amount of taxable income
attributable to the Residual Certificates will depend on, among other things,
the timing and amounts of prepayments and losses experienced with respect to the
Mortgage Pool.
The Residual Certificateholders should consult their own tax advisors as to
the effect of taxes and the receipt of any payments made to such holders in
connection with the transfer of the Residual Certificates on after-tax rates of
return on the Residual Certificates. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1998-AQ1 Certificates will consist of nineteen classes of
certificates (collectively, the "Certificates"), designated as: (i) the Class
A-1 Certificates, the Class A-2 Certificates, the Class A-3 Certificates, the
Class A-4 Certificates and the Class A-5 Certificates (the "Senior Sequential
Certificates"); (ii) the Class A-6 Certificates and the Class A-7 Certificates
(together, the "Lockout Certificates", and collectively with the Senior
Sequential Certificates, the "Class A Certificates"); (iii) the Class XS-N
Certificates and the XS-T Certificates (together, the "Offered Class XS
Certificates"); (iv) the Class XS-S Certificates (together with the Offered
Class XS Certificates, the "Class XS Certificates"; the Class XS Certificates
and the Class A Certificates, together, the "Senior Certificates"); (v) the
Class B-1 Certificates, the Class B-2 Certificates, the Class B-3 Certificates,
the Class B-4 Certificates, the Class B-5 Certificates and the Class B-6
Certificates (collectively, the "Subordinate Certificates"); (vi) the Class P
Certificates; and (vii) the Class R-I Certificates and the Class R-II
Certificates (together, the "Residual Certificates"). Only the Senior
Certificates (other than the Class XS-S Certificates), the Class B-1
Certificates, the Class B-2 Certificates, the Class B-3 Certificates and the
Residual Certificates (collectively, the "Offered Certificates") are offered
hereby.
The Certificates represent in the aggregate the entire beneficial ownership
interest in a Trust Fund (the "Trust Fund") consisting primarily of a segregated
pool (the "Mortgage Pool") of conventional, one- to four-family,
fully-amortizing, first lien mortgage loans substantially all of which are
fixed-rate and having original terms to maturity of not greater than 30 years
(the "Mortgage Loans").
Each class of the Offered Certificates will have the approximate initial
Certificate Principal Balance or Notional Amount, as applicable, as set forth on
the cover hereof and will have the Pass-Through Rate determined as provided
under "Summary of Prospectus Supplement--Pass-Through Rate" and "--Interest
Distributions" herein. The Residual Certificates also represent the right to
receive additional distributions in respect of the Trust Fund on any
Distribution Date after all required payments of principal and interest have
been made on such date in respect of the other classes of Certificates, although
it is not anticipated that funds will be available for any such additional
distribution. The Class B-4 Certificates, Class B-5 Certificates and Class B-6
Certificates have in the aggregate an initial Certificate Principal Balance of
approximately $23,624,700 and a fixed Pass-Through Rate for each Distribution
Date of 7.00% per annum. The Class P Certificates have an initial Certificate
Principal Balance of approximately $100, will not be entitled to distributions
in respect of interest and will be entitled to all Prepayment Charges received
in respect of the Mortgage Loans. The Class XS-S Certificates have an
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<PAGE>
initial Notional Amount of approximately $121,591,787 and an initial variable
Pass-Through Rate of approximately 2.8479% per annum. The Class B-4
Certificates, the Class B-5 Certificates, the Class B-6 Certificates the Class P
Certificates and the Class XS-S Certificates, which are not being offered
hereby, will be sold by the Depositor to Salomon Brothers Inc on the Closing
Date.
The Class A Certificates will be issued, maintained and transferred on the
book-entry records of DTC and its Participants (Class A Certificates so issued,
maintained and transferred, the "Book-Entry Certificates") in minimum
denominations of $10,000 and integral multiples of $1.00 in excess thereof. The
Class XS Certificates and the Subordinate Certificates will be issued in
registered, certificated form, in minimum percentage interests corresponding to
initial Certificate Principal Balances or Notional Amounts, as applicable, of
$10,000 and integral multiples of $1,000 in excess thereof, except that one
Certificate of each such class may be issued evidencing an amount equal to
either (i) the sum of an otherwise authorized denomination thereof plus the
remainder of the aggregate initial Certificate Principal Balance or Notional
Amount, as applicable, for such class or (ii) such remainder. The Residual
Certificates will be offered in registered, certificated form, in minimum
denominations of $20 and integral multiples thereof.
The Book-Entry Certificates will initially be represented by one or more
global certificates registered in the name of a nominee of DTC (together with
any successor clearing agency selected by the Depositor, the "Clearing Agency"),
except as provided below. The Depositor has been informed by DTC that DTC's
nominee will be CEDE & Co. ("CEDE"). No person acquiring an interest in any
class of the Book-Entry Certificates (a "Certificate Owner") will be entitled to
receive a certificate representing such person's interest, except as set forth
below under "--Definitive Certificates". Unless and until Definitive
Certificates are issued under the limited circumstances described herein, all
references to actions by Certificateholders with respect to the Book-Entry
Certificates shall refer to actions taken by DTC upon instructions from its
Participants (as defined below), and all references herein to distributions,
notices, reports and statements to Certificateholders with respect to the
Book-Entry Certificates shall refer to distributions, notices, reports and
statements to DTC or CEDE, as the registered holder of the Book-Entry
Certificates, for distribution to Certificate Owners in accordance with DTC
procedures. See "--Registration of the Book-Entry Certificates" and
"--Definitive Certificates" herein.
The Offered Class XS Certificates, the Class B-1 Certificates, the Class
B-2 Certificates, the Class B-3 Certificates, the Residual Certificates and the
Definitive Certificates will be transferable and exchangeable at the offices of
the Trustee. The Subordinate Certificates and the Residual Certificates may not
be purchased by or transferred to a Plan (as defined herein) except upon
delivery of a certification of facts or an opinion of counsel, as provided
herein. See "--Restrictions on Transfer of the Subordinate Certificates and the
Residual Certificates" and "ERISA Considerations" herein. Transfer of the
Residual Certificates will be subject to certain additional restrictions and
transfer of the Residual Certificates to any non-United States person will be
prohibited, in each case as described under "Certain Federal Income Tax
Consequences--Special Tax Considerations Applicable to Residual Certificates"
herein and under "Certain Federal Income Tax Consequences--REMICs--Tax On
Transfers of REMIC Residual Certificates to Certain Organizations" and
"--Taxation of Owners of Residual Certificates--Noneconomic REMIC Residual
Certificates" in the Prospectus. No service charge will be imposed for any
registration of transfer or exchange, but the Trustee may require payment of a
sum sufficient to cover any tax or other governmental charge imposed in
connection therewith.
All distributions to holders of the Certificates, other than the final
distribution on any class of Certificates, will be made on each Distribution
Date by or on behalf of the Trustee to the persons in whose names such
Certificates are registered at the close of business on the related Record Date,
which will be the last business day of the month preceding the month in which
such Distribution Date occurs. Such distributions will be made either (a) by
check mailed to the address of each such Certificateholder as it appears in the
Certificate Register or (b) upon written request to the Trustee at least five
business days prior to the relevant Record Date by any holder of Certificates
having an
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<PAGE>
aggregate initial Certificate Principal Balance or Notional Amount, as
applicable, that is in excess of the lesser of (i) $5,000,000 or (ii) two-thirds
of the initial aggregate Certificate Principal Balance or Notional Amount, as
applicable, of such class of Certificates, by wire transfer in immediately
available funds to the account of such Certificateholder specified in the
request. The final distribution on any class of Certificates will be made in
like manner, but only upon presentment and surrender of such Certificates at the
corporate trust office of the Trustee or such other location specified in the
notice to Certificateholders of such final distribution.
REGISTRATION OF THE BOOK-ENTRY CERTIFICATES
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and to facilitate the
clearance and settlement of securities transactions between Participants through
electronic book entries, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers (including the
Underwriter), banks, trust companies and clearing corporations. Indirect access
to the DTC system is also available to others such as banks, brokers, dealers,
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly ("Indirect Participants").
Certificate Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, the Book-Entry Certificates may do so only through Participants and Indirect
Participants. In addition, Certificate Owners will receive all distributions of
principal of and interest on the Book-Entry Certificates from the Trustee
through DTC and DTC Participants. The Trustee will forward payments to DTC in
same day funds and DTC will forward such payments to Participants in next day
funds settled through the New York Clearing House. Each Participant will be
responsible for disbursing such payments to Indirect Participants or to
Certificate Owners. Unless and until Definitive Certificates are issued, it is
anticipated that the only Certificateholder of the Book-Entry Certificates will
be CEDE, as nominee of DTC. Certificate Owners will not be recognized by the
Trustee as Certificateholders, as such term is used in the Agreement and
Certificate Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and Indirect Participants with which Certificate Owners have
accounts with respect to the Book-Entry Certificates similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess Definitive Certificates, the Rules provide a mechanism by which
Certificate Owners through their Participants and Indirect Participants will
receive payments and will be able to transfer their interest.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and on behalf of certain banks, the ability of a
Certificate Owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to such
Certificates, may be limited due to the absence of physical certificates for the
Book-Entry Certificates. In addition, under a book-entry format, Certificate
Owners may experience delays in their receipt of payments since distribution
will be made by the Trustee to CEDE, as nominee for DTC.
Under the Rules, DTC will take action permitted to be taken by a
Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC account the Book-Entry Certificates are credited.
Additionally, under the Rules, DTC will take such actions with respect to
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<PAGE>
specified Voting Rights only at the direction of and on behalf of Participants
whose holdings of Book-Entry Certificates evidence such specified Voting Rights.
DTC may take conflicting actions with respect to Voting Rights, to the extent
that Participants whose holdings of Book-Entry Certificates evidence such Voting
Rights, authorize divergent action.
The Depositor, the Master Servicer and the Trustee will have no liability
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the Book-Entry Certificates held by CEDE, as
nominee for DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
DEFINITIVE CERTIFICATES
Definitive Certificates will be issued to Certificate Owners or their
nominees, respectively, rather than to DTC or its nominee, only if (i) the
Depositor advises the Trustee in writing that DTC is no longer willing or able
to discharge properly its responsibilities as Clearing Agency with respect to
the Book-Entry Certificates and the Depositor is unable to locate a qualified
successor, (ii) the Depositor, at its option, elects to terminate the book-entry
system through DTC, or (iii) after the occurrence of an Event of Default,
Certificate Owners representing in the aggregate not less than 51% of the Voting
Rights of the Book-Entry Certificates advise the Trustee and DTC through
Participants, in writing, that the continuation of a book-entry system through
DTC (or a successor thereto) is no longer in the Certificate Owners' best
interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee is required to notify all Certificate Owners through
Participants of the availability of Definitive Certificates. Upon surrender by
DTC of the Definitive Certificates representing the Book-Entry Certificates and
receipt of instructions for re-registration, the Trustee will reissue the
Book-Entry Certificates as Definitive Certificates issued in the respective
principal amounts owned by individual Certificate Owners, and thereafter the
Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement. Such Definitive Certificates will be
issued in minimum denominations of $10,000, except that any beneficial ownership
represented by a Book-Entry Certificate in an amount less than $10,000
immediately prior to the issuance of a Definitive Certificate shall be issued in
a minimum denomination equal to the amount of such beneficial ownership.
INTEREST DISTRIBUTIONS
Distributions on each Distribution Date will be made to the extent of the
Available Distribution Amount for such Distribution Date. The Available
Distribution Amount for any Distribution Date generally includes scheduled
payments on the Mortgage Loans due during the related Due Period and received on
or prior to the related Determination Date, prepayments and other unscheduled
collections received on the Mortgage Loans during the related Prepayment Period,
any P&I Advances made by the Master Servicer for such Distribution Date and with
respect to each Mortgage Loan with a first payment date occurring in July 1998,
a cash amount equal to interest on such Mortgage Loan, net of fees payable to
the Master Servicer and the Trustee and certain amounts reimbursable to the
Master Servicer, the Depositor and the Trustee as provided in the Agreement. The
holders of the Class P Certificates will be entitled to all Prepayment Charges
received on the Mortgage Loans and such amounts will not be available for
distribution on the other classes of Certificates.
Distributions in respect of interest will be made (i) on each Distribution
Date to the holders of the Senior Certificates and, on the first Distribution
Date, to the holders of the Residual Certificates, in an aggregate amount equal
to the Senior Interest Distribution Amount and (ii) on each Distribution Date to
the holders of the Subordinate Certificates, in an aggregate amount equal to the
Subordinate Interest Distribution Amount, to the extent of the portion of the
Available Distribution Amount remaining after the distribution on such date of
the Senior Interest Distribution Amount and the Senior Principal Distribution
Amount. The Senior Interest Distribution Amount on each Distribution Date is
equal to the aggregate of the Interest Distribution Amounts for such
Distribution Date on all of the Senior Certificates and, on
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the first Distribution Date, the Residual Certificates. The Subordinate Interest
Distribution Amount on each Distribution Date is equal to the aggregate of the
Interest Distribution Amounts for such Distribution Date on all of the
Subordinate Certificates.
Distributions of the Subordinate Interest Distribution Amount on each
Distribution Date will be made first, to the holders of the Class B-1
Certificates, second to the holders of the Class B-2 Certificates, third to the
holders of the Class B-3 Certificates, and then to the holders of the remaining
classes of Subordinate Certificates, in each case to the extent of available
funds and in each case to the extent of the Interest Distribution Amount for
such Certificates for such Distribution Date.
The Interest Distribution Amount for the Certificates of any class on any
Distribution Date is equal to interest accrued during the related Interest
Accrual Period on the Certificate Principal Balance or Notional Amount, as
applicable, of such Certificates immediately prior to such Distribution Date at
the then applicable Pass-Through Rate for such class, plus, in the case of each
such class, any such amount remaining unpaid from previous Distribution Dates,
and reduced (to not less than zero), in the case of each such class, by the
allocable share for such class of Prepayment Interest Shortfalls to the extent
not covered by Compensating Interest paid by the Master Servicer, shortfalls
resulting from the application of the Relief Act and certain other interest
shortfalls not covered by the subordination provided by more subordinate classes
of Certificates. Any Prepayment Interest Shortfalls for any Distribution Date to
the extent not covered by Compensating Interest paid by the Master Servicer and
any shortfalls resulting from the application of the Relief Act will be
allocated among the holders of the Certificates (other than the Class P
Certificates) on a PRO RATA basis based on the respective amounts of interest
accrued on such Certificates for such Distribution Date.
The Pass-Through Rate applicable to the calculation of the Interest
Distribution Amounts for each class of Class A Certificates is fixed and is set
forth on the cover hereof. The Pass-Through Rate applicable to the calculation
of the Interest Distribution Amount for the Class XS-N Certificates for any
Distribution Date is equal to (A) the weighted average of the Net Mortgage
Rates, for the related Due Period, on each of the Mortgage Loans that does not
by its terms have a Prepayment Charge minus (B) the weighted average of the
Pass-Through Rates, for such Distribution Date, on the Certificates (other than
the Class XS Certificates). The Pass-Through Rate applicable to the calculation
of the Interest Distribution Amount for the Class XS-T Certificates and the
Class XS-S Certificates for any Distribution Date is equal to (A) the weighted
average of the Net Mortgage Rates, for the related Due Period, on each of the
Mortgage Loans that by its terms has a Prepayment Charge minus (B) the weighted
average of the Pass-Through Rates, for such Distribution Date, on the
Certificates (other than the Class XS Certificates). The Net Mortgage Rate for
any Mortgage Loan is equal to the Mortgage Rate for such Mortgage Loan minus the
sum of the Servicing Fee Rate and the Trustee's Fee Rate for such Mortgage Loan.
The Servicing Fee Rate for each Mortgage Loan is equal to 0.50% per annum. The
Trustee's Fee Rate for each Mortgage Loan is equal to 0.007% per annum. The
initial variable Pass-Through Rate for the Class XS-N Certificates and the Class
XS-T Certificates is approximately 3.2240% per annum and approximately 2.8479%
per annum, respectively.
The Interest Accrual Period for each class of Certificates for any
Distribution Date is the one-month period preceding the month in which such
Distribution Date occurs. All distributions of interest will be based on a
360-day year consisting of twelve 30-day months. Except as otherwise described
herein, on any Distribution Date, distributions of the Interest Distribution
Amount for a class of Certificates will be made in respect of such class of
Certificates, to the extent provided herein, on a PARI PASSU basis, based on the
Certificate Principal Balance or Notional Amount, as applicable, of the
Certificates of each such class.
The Certificate Principal Balance of a Certificate (other than a Class XS
Certificate) outstanding at any time represents the then maximum amount that the
holder thereof is thereafter entitled to receive as distributions allocable to
principal from the cash flow on the Mortgage Loans and the other assets in the
Trust Fund. The Certificate Principal Balance of any class of Certificates
(other than the Class XS Certificates) as of any date of determination is equal
to the initial Certificate Principal Balance thereof,
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reduced by the aggregate of (a) all amounts allocable to principal previously
distributed with respect to such Certificate and (b) without duplication of
amounts described in clause (a) above, any reductions in the Certificate
Principal Balance thereof deemed to have occurred in connection with allocations
thereto of (i) Realized Losses on the Mortgage Loans and (ii) Extraordinary
Trust Fund Expenses, in either case as described below.
The Notional Amount of the Class XS-N Certificates as of any date of
determination is equal to the aggregate principal balance of the then
outstanding Mortgage Loans that do not by their terms have Prepayment Charges
(with respect to the Class XS-N Certificates, the "related Mortgage Loans). The
aggregate Notional Amount of the Class XS-T Certificates and the Class XS-S
Certificates as of any date of determination is equal to the aggregate principal
balance of the then outstanding Mortgage Loans that by their terms do have
Prepayment Charges (with respect to the Class XS-T and Class XS-S Certificates,
the "related Mortgage Loans). The initial Notional Amount of the Class XS-T
Certificates is shown on the cover hereof and the Initial Notional Amount of the
Class XS-S Certificates is approximately $121,591,787, and each will be reduced
from time to time as follows: on each Distribution Date, reductions of the
aggregate principal balance of the related Mortgage Loans (whether as a result
of collections of principal on such Mortgage Loans or as a result of Realized
Losses incurred on such Mortgage Loans) that occurred during the related Due
Period or Prepayment Period, as applicable, will be deemed to be allocated (i)
first, in reduction of the Notional Amount of the Class XS-T Certificates, until
the Notional Amount of such class has been reduced to the Targeted Notional
Amount for such Distribution Date, (ii) second, in reduction of the Notional
Amount of the Class XS-S Certificates, until the Notional Amount of such class
has been reduced to zero, and (iii) third, in reduction of the Notional Amount
of the Class XS-T Certificates, until the Notional Amount of such class has been
reduced to zero. The following table shows the approximate Targeted Notional
Amounts for the Class XS-T Certificates for each Distribution Date. Reference to
the Notional Amount of each class of Class XS Certificates is solely for
convenience in certain calculations and does not represent the right to receive
any distributions allocable to principal.
The approximate Targeted Notional Amounts in the following table are based
on an initial Notional Amount of $364,775,360 for the Class XS-T Certificates.
However, the actual initial Notional Amount (and therefore, the Targeted
Notional Amount for each Distribution Date) will be determined based on the
actual Mortgage Pool as constituted on the Closing Date. The actual Targeted
Notional Amount schedule will be provided as part of the Current Report on Form
8-K to be filed relating to the Certificates containing a copy of the Agreement.
See "Pooling and Servicing Agreement--General" herein.
TARGETED NOTIONAL AMOUNT (APPROXIMATE)
THERE IS NO ASSURANCE THAT THE NOTIONAL AMOUNT OF THE CLASS XS-T
CERTIFICATES FOR ANY DISTRIBUTION DATE WILL EQUAL THE TARGETED NOTIONAL AMOUNT
FOR SUCH DISTRIBUTION DATE SET FORTH IN THE TABLE.
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TARGETED TARGETED
NOTIONAL NOTIONAL
DISTRIBUTION DATE AMOUNT DISTRIBUTION DATE AMOUNT
----------------- ------ ----------------- ------
June 1998 ............ $361,793,771.74 August 2001......... $150,994,450.16
July 1998 ............ 358,233,765.81 September 2001 ..... 147,274,432.48
August 1998 .......... 354,100,745.80 October 2001 ....... 143,644,759.94
September 1998 ....... 349,402,879.62 November 2001 ...... 140,103,257.86
October 1998 ......... 344,151,124.52 December 2001 ...... 136,647,803.63
November 1998 ........ 338,359,231.98 January 2002 ....... 133,276,325.45
December 1998 ........ 332,043,731.48 February 2002 ...... 129,986,801.10
January 1999 ......... 325,223,892.76 March 2002 ......... 126,777,256.77
February 1999 ........ 317,921,664.33 April 2002 ......... 123,645,765.95
March 1999 ........... 310,161,591.22 May 2002 ........... 120,590,448.23
April 1999 ........... 302,588,898.47 June 2002 .......... 117,609,468.22
May 1999 ............. 295,199,092.09 July 2002 .......... 114,701,034.52
June 1999 ............ 287,987,785.42 August 2002 ........ 111,863,398.63
July 1999 ............ 280,950,696.55 September 2002 ..... 109,094,853.92
August 1999 .......... 274,083,645.84 October 2002 ....... 106,393,734.67
September 1999 ....... 267,382,553.47 November 2002 ...... 103,758,415.04
October 1999 ......... 260,843,437.09 December 2002 ...... 101,187,308.16
November 1999 ........ 254,462,409.44 January 2003 ....... 98,678,865.21
December 1999 ........ 248,235,676.17 February 2003 ...... 96,231,574.47
January 2000 ......... 242,159,533.54 March 2003 ......... 93,843,960.44
February 2000 ........ 236,230,366.33 April 2003 ......... 91,514,583.02
March 2000 ........... 230,444,645.70 May 2003 ........... 89,242,036.62
April 2000 ........... 224,798,927.11 June 2003 .......... 87,024,949.35
May 2000 ............. 219,289,848.38 July 2003 .......... 84,861,982.21
June 2000 ............ 213,914,127.66 August 2003 ........ 82,751,828.33
July 2000 ............ 208,668,561.53 September 2003 ..... 80,693,212.17
August 2000 .......... 203,550,023.18 October 2003 ....... 78,684,888.78
September 2000 ....... 198,555,460.52 November 2003 ...... 76,725,643.09
October 2000 ......... 193,681,894.42 December 2003 ...... 74,814,289.18
November 2000 ........ 188,926,417.01 January 2004 ....... 72,949,669.57
December 2000 ........ 184,286,189.92 February 2004 ...... 71,130,654.58
January 2001 ......... 179,758,442.67 March 2004 ......... 69,356,141.61
February 2001 ........ 175,340,471.03 April 2004 ......... 67,625,054.55
March 2001 ........... 171,029,635.45 May 2004 ........... 65,936,343.12
April 2001 ........... 166,823,359.50 June 2004 .......... 64,288,982.25
May 2001 ............. 162,719,128.40 July 2004 .......... 62,681,971.47
June 2001 ............ 158,714,487.53 August 2004 ........ 61,114,334.36
July 2001 ............ 154,807,040.97 September 2004 ..... 59,585,117.92
TARGETED TARGETED
NOTIONAL NOTIONAL
DISTRIBUTION DATE AMOUNT DISTRIBUTION DATE AMOUNT
----------------- ------ ----------------- ------
October 2004 ......... $58,093,392.08 December 2007 ..... $21,912,453.11
November 2004 ........ 56,638,249.07 January 2008 ...... 21,349,795.69
December 2004 ........ 55,218,802.95 February 2008 ..... 20,801,143.58
January 2005 ......... 53,834,189.06 March 2008 ........ 20,266,154.52
February 2005 ........ 52,483,563.54 April 2008 ........ 19,744,494.49
March 2005 ........... 51,166,102.78 May 2008 .......... 19,235,837.58
April 2005 ........... 49,881,002.99 June 2008 ......... 18,739,865.72
May 2005 ............. 48,627,479.68 July 2008 ......... 18,256,268.55
June 2005 ............ 47,404,767.24 August 2008 ....... 17,784,743.22
July 2005 ............ 46,212,118.47 September 2008 .... 17,324,994.20
August 2005 .......... 45,048,804.13 October 2008 ...... 16,876,733.10
September 2005 ....... 43,914,112.52 November 2008 ..... 16,439,678.51
October 2005 ......... 42,807,349.07 December 2008 ..... 16,013,555.85
November 2005 ........ 41,727,835.91 January 2009 ...... 15,598,097.17
December 2005 ........ 40,674,911.49 February 2009 ..... 15,193,041.00
January 2006 ......... 39,647,930.16 March 2009 ........ 14,798,132.21
February 2006 ........ 38,646,261.84 April 2009 ........ 14,413,121.86
March 2006 ........... 37,669,291.60 May 2009 .......... 14,037,767.01
April 2006 ........... 36,716,419.30 June 2009 ......... 13,671,830.64
May 2006 ............. 35,787,059.29 July 2009 ......... 13,315,081.45
June 2006 ............ 34,880,639.98 August 2009 ....... 12,967,293.77
July 2006 ............ 33,996,603.57 September 2009 .... 12,628,247.36
August 2006 .......... 33,134,405.70 October 2009 ...... 12,297,727.37
September 2006 ....... 32,293,515.11 November 2009 ..... 11,975,524.12
October 2006 ......... 31,473,413.33 December 2009 ..... 11,661,433.04
November 2006 ........ 30,673,594.47 January 2010 ...... 11,355,254.52
December 2006 ........ 29,893,564.71 February 2010 ..... 11,056,793.79
January 2007 ......... 29,132,842.19 March 2010 ........ 10,765,860.79
February 2007 ........ 28,390,956.69 April 2010 ........ 10,482,270.12
March 2007 ........... 27,667,449.32 May 2010 .......... 10,205,840.83
April 2007 ........... 26,961,872.19 June 2010 ......... 9,936,396.41
May 2007 ............. 26,273,788.33 July 2010 ......... 9,673,764.61
June 2007 ............ 25,602,771.21 August 2010 ....... 9,417,777.37
July 2007 ............ 24,948,404.66 September 2010 .... 9,168,270.72
August 2007 .......... 24,310,282.51 October 2010 ...... 8,925,084.67
September 2007 ....... 23,688,008.42 November 2010 ..... 8,688,063.14
October 2007 ......... 23,081,195.60 December 2010 ..... 8,457,053.82
November 2007 ........ 22,489,466.60 January 2011 ...... 8,231,908.12
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TARGETED TARGETED
NOTIONAL NOTIONAL
DISTRIBUTION DATE AMOUNT DISTRIBUTION DATE AMOUNT
----------------- ------ ----------------- ------
February 2011 ........ $8,012,481.06 April 2014 ......... $2,832,100.87
March 2011 ........... 7,798,631.19 May 2014 ........... 2,755,797.96
April 2011 ........... 7,590,220.51 June 2014 .......... 2,681,445.56
May 2011 ............. 7,387,114.37 July 2014 .......... 2,608,995.23
June 2011 ............ 7,189,181.41 August 2014 ........ 2,538,399.75
July 2011 ............ 6,996,293.46 September 2014 ..... 2,469,613.00
August 2011 .......... 6,808,325.49 October 2014 ....... 2,402,590.04
September 2011 ....... 6,625,155.49 November 2014 ...... 2,337,287.00
October 2011 ......... 6,446,664.44 December 2014 ...... 2,273,661.07
November 2011 ........ 6,272,736.25 January 2015 ....... 2,211,670.52
December 2011 ........ 6,103,257.61 February 2015 ...... 2,151,274.62
January 2012 ......... 5,938,118.01 March 2015 ......... 2,092,433.62
February 2012 ........ 5,777,209.62 April 2015 ......... 2,035,108.78
March 2012 ........... 5,620,427.27 May 2015 ........... 1,979,262.27
April 2012 ........... 5,467,668.32 June 2015 .......... 1,924,857.21
May 2012 ............. 5,318,832.66 July 2015 .......... 1,871,857.61
June 2012 ............ 5,173,822.63 August 2015 ........ 1,820,228.37
July 2012 ............ 5,032,542.94 September 2015 ..... 1,769,935.25
August 2012 .......... 4,894,900.65 October 2015 ....... 1,720,944.84
September 2012 ....... 4,760,805.07 November 2015 ...... 1,673,224.55
October 2012 ......... 4,630,167.74 December 2015 ...... 1,626,742.59
November 2012 ........ 4,502,902.37 January 2016 ....... 1,581,467.96
December 2012 ........ 4,378,924.78 February 2016 ...... 1,537,370.40
January 2013 ......... 4,258,152.83 March 2016 ......... 1,494,420.41
February 2012 ........ 4,140,506.43 April 2016 ......... 1,452,589.21
March 2012 ........... 4,025,907.42 May 2016 ........... 1,411,848.73
April 2012 ........... 3,919,247.38 June 2016 .......... 1,372,171.57
May 2013 ............. 3,815,289.21 July 2016 .......... 1,333,531.02
June 2013 ............ 3,713,966.17 August 2016 ........ 1,295,901.03
July 2013 ............ 3,615,213.17 September 2016 ..... 1,259,256.18
August 2013 .......... 3,518,966.69 October 2016 ....... 1,223,571.68
September 2013 ....... 3,425,164.76 November 2016 ...... 1,188,823.34
October 2013 ......... 3,333,746.92 December 2016 ...... 1,154,987.59
November 2013 ........ 3,244,654.18 January 2017 ....... 1,122,041.41
December 2013 ........ 3,157,828.97 February 2017 ...... 1,089,962.37
January 2014 ......... 3,073,215.16 March 2017 ......... 1,058,728.57
February 2014 ........ 2,990,757.95 April 2017 ......... 1,028,318.68
March 2014 ........... 2,910,403.90 May 2017 ........... 998,711.87
TARGETED TARGETED
NOTIONAL NOTIONAL
DISTRIBUTION DATE AMOUNT DISTRIBUTION DATE AMOUNT
----------------- ------ ----------------- ------
June 2017 ............ $969,887.84 August 2020 ......... $311,710.50
July 2017 ............ 941,826.77 September 2020 ...... 302,087.17
August 2017 .......... 914,509.35 October 2020 ........ 292,726.45
September 2017 ....... 887,916.74 November 2020 ....... 283,621.60
October 2017 ......... 862,030.56 December 2020 ....... 274,766.02
November 2017 ........ 836,832.90 January 2021 ........ 266,153.29
December 2017 ........ 812,306.27 February 2021 ....... 257,777.14
January 2018 ......... 788,433.63 March 2021 .......... 249,631.46
February 2018 ........ 765,198.35 April 2021 .......... 241,710.30
March 2018 ........... 742,584.22 May 2021 ............ 234,007.86
April 2018 ........... 721,473.35 June 2021 ........... 226,518.46
May 2018 ............. 700,917.04 July 2021 ........... 219,236.60
June 2018 ............ 680,901.32 August 2021 ......... 212,156.89
July 2018 ............ 661,412.55 September 2021 ...... 205,274.07
August 2018 .......... 642,437.42 October 2021 ........ 198,583.04
September 2018 ....... 623,962.96 November 2021 ....... 192,078.80
October 2018 ......... 605,976.53 December 2021 ....... 185,756.50
November 2018 ........ 588,465.78 January 2022 ........ 179,611.39
December 2018 ........ 571,418.68 February 2022 ....... 173,638.86
January 2019 ......... 554,823.48 March 2022 .......... 167,834.39
February 2019 ........ 538,668.75 April 2022 .......... 162,193.59
March 2019 ........... 522,943.30 May 2022 ............ 156,712.18
April 2019 ........... 507,636.25 June 2022 ........... 151,385.98
May 2019 ............. 492,736.99 July 2022 ........... 146,210.94
June 2019 ............ 478,235.14 August 2022 ......... 141,183.07
July 2019 ............ 464,120.62 September 2022 ...... 136,298.51
August 2019 .......... 450,383.56 October 2022 ........ 131,553.50
September 2019 ....... 437,014.35 November 2022 ....... 126,944.35
October 2019 ......... 424,003.63 December 2022 ....... 122,467.50
November 2019 ........ 411,342.26 January 2023 ........ 118,119.44
December 2019 ........ 399,021.32 February 2023 ....... 113,896.77
January 2020 ......... 387,032.13 March 2023 .......... 109,796.17
February 2020 ........ 375,366.20 April 2023 .......... 105,814.42
March 2020 ........... 364,015.28 May 2023 ............ 101,948.36
April 2020 ........... 352,971.30 June 2023 ........... 98,194.92
May 2020 ............. 342,226.40 July 2023 ........... 94,551.11
June 2020 ............ 331,772.92 August 2023 ......... 91,014.01
July 2020 ............ 321,603.38 September 2023 ...... 87,580.77
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TARGETED TARGETED
NOTIONAL NOTIONAL
DISTRIBUTION DATE AMOUNT DISTRIBUTION DATE AMOUNT
----------------- ------ ----------------- ------
October 2023 ......... $84,248.63 December 2026 ............... $11,157.92
November 2023 ........ 81,014.88 January 2027 ................ 10,209.17
December 2023 ........ 77,876.89 February 2027 ............... 9,293.49
January 2024 ......... 74,832.10 March 2027 .................. 8,409.93
February 2024 ........ 71,878.01 April 2027 .................. 7,557.57
March 2024 ........... 69,012.18 May 2027 .................... 6,735.50
April 2024 ........... 66,232.24 June 2027 ................... 5,942.87
May 2024 ............. 63,535.87 July 2027 ................... 5,178.80
June 2024 ............ 60,920.83 August 2027 ................. 4,442.48
July 2024 ............ 58,384.91 September 2027 .............. 3,733.10
August 2024 .......... 55,925.97 October 2027 ................ 3,049.87
September 2024 ....... 53,541.93 November 2027 ............... 2,392.04
October 2024 ......... 51,230.76 December 2027 ............... 1,758.85
November 2024 ........ 48,990.47 January 2028 ................ 1,149.58
December 2024 ........ 46,819.15 February 2028 ............... 563.52
January 2025 ......... 44,714.90 March 2028 and thereafter.... 0.00
February 2025 ........ 42,675.90
March 2025 ........... 40,700.36
April 2025 ........... 38,786.55
May 2025 ............. 36,932.78
June 2025 ............ 35,137.38
July 2025 ............ 33,398.76
August 2025 .......... 31,715.35
September 2025 ....... 30,085.63
October 2025 ......... 28,508.11
November 2025 ........ 26,981.34
December 2025 ........ 25,503.91
January 2026 ......... 24,074.46
February 2026 ........ 22,691.64
March 2026 ........... 21,354.15
April 2026 ........... 20,060.73
May 2026 ............. 18,810.13
June 2026 ............ 17,601.15
July 2026 ............ 16,432.63
August 2026 .......... 15,303.43
September 2026 ....... 14,212.42
October 2026 ......... 13,158.53
November 2026 ........ 12,140.70
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PRINCIPAL DISTRIBUTIONS ON THE SENIOR CERTIFICATES
Distributions in respect of principal will be made on each Distribution
Date to the holders of the class or classes of the Class A Certificates then
entitled to distributions in respect of principal, and on the first Distribution
Date to the holders of the Residual Certificates, in an aggregate amount equal
to the Senior Principal Distribution Amount.
Holders of the Class A Certificates then entitled to distributions in
respect of principal will be entitled to receive on each Distribution Date, and
holders of the Residual Certificates will be entitled to receive on the first
Distribution Date, distributions allocable to principal in reduction of the
Certificate Principal Balances of the Class A Certificates, and on the first
Distribution Date the Residual Certificates, equal to the sum of the following:
(i) the product of (A) the then applicable Senior Percentage and (B)
the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments on
the Mortgage Loans due during the related Due Period, whether or not received;
(2) the principal portion of all proceeds received in respect
of the repurchase of a Mortgage Loan (or, in the case of a
substitution, certain amounts received representing a principal
adjustment) as required by the Agreement during the related Prepayment
Period; and
(3) the principal portion of all other unscheduled collections
(other than amounts described in clauses (ii) and (iii) hereof),
including insurance proceeds and liquidation proceeds, received during
the related Prepayment Period, to the extent applied as recoveries of
principal;
(ii) the product of (A) the then applicable Senior Prepayment
Percentage and (B) the aggregate of all full and partial principal
prepayments received during the related Prepayment Period;
(iii) with respect to the net liquidation proceeds received and
allocable to principal of any Mortgage Loan that was finally liquidated
during the related Prepayment Period, the lesser of (a) the then applicable
Senior Prepayment Percentage multiplied by such net liquidation proceeds
and (b) the then applicable Senior Percentage multiplied by the Scheduled
Principal Balance of such Mortgage Loan at the time of liquidation; and
(iv) any amounts allocable to principal for any previous Distribution
Date (calculated pursuant to the three preceding clauses) that remain
undistributed, to the extent that any such amounts are not attributable to
Realized Losses that were allocated to the Subordinate Certificates.
With respect to any Distribution Date, the lesser of (a) the balance of the
Available Distribution Amount remaining after the Senior Interest Distribution
Amount is distributed and (b) the sum of the amounts described in clauses (i)
through (iv) above is hereinafter referred to as the "Senior Principal
Distribution Amount".
Holders of the Class XS Certificates are not entitled to receive any
distributions allocable to principal.
The Senior Percentage, which initially will equal approximately 89.00%, and
will in no event exceed 100%, will be adjusted for each Distribution Date after
the first Distribution Date to be the percentage equal to the aggregate
Certificate Principal Balances of the Class A Certificates immediately prior to
such Distribution Date divided by the aggregate of the Scheduled Principal
Balance of each of the Mortgage Loans immediately prior to such Distribution
Date. The Subordinate Percentage as of any date of determination is equal to
100% minus the Senior Percentage as of such date. The Scheduled Principal
Balance of any Mortgage Loan as of any date of determination is equal to the
principal balance thereof as of the Cut-off Date (after application of all
scheduled principal payments due on or before the Cut-off Date, whether or not
received), reduced by (x) the principal portion of all monthly payments due
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on or before the date of determination, whether or not received, (y) all amounts
allocable to unscheduled principal that were received prior to the calendar
month in which the date of determination occurs, and (z) any Bankruptcy Loss
occurring out of a Deficient Valuation (as defined herein) that was incurred
prior to the calendar month in which the date of determination occurs.
Except as described below, the Senior Prepayment Percentage for any
Distribution Date occurring prior to the Distribution Date in June 2003 will
equal 100%. Except as described below, the Senior Prepayment Percentage for any
Distribution Date occurring after the first five years will be as follows: for
any Distribution Date during the sixth year after the Closing Date, the Senior
Percentage for such Distribution Date plus 70% of the Subordinate Percentage for
such Distribution Date; for any Distribution Date during the seventh year after
the Closing Date, the Senior Percentage for such Distribution Date plus 60% of
the Subordinate Percentage for such Distribution Date; for any Distribution Date
during the eighth year after the Closing Date, the Senior Percentage for such
Distribution Date plus 40% of the Subordinate Percentage for such Distribution
Date; for any Distribution Date during the ninth year after the Closing Date,
the Senior Percentage for such Distribution Date plus 20% of the Subordinate
Percentage for such Distribution Date; and for any Distribution Date thereafter,
the Senior Percentage for such Distribution Date (unless on any such
Distribution Date the Senior Percentage exceeds the initial Senior Percentage,
in which case the Senior Prepayment Percentage for such Distribution Date will
equal 100%). Any scheduled reduction to the Senior Prepayment Percentage
described above shall not be made as of any Distribution Date unless (i) the
outstanding principal balance of Mortgage Loans delinquent 60 days or more
(including real estate owned and Mortgage Loans in foreclosure) averaged over
the last six months does not exceed 50% of the sum of the then current
Certificate Principal Balances of the Subordinate Certificates and (ii) Realized
Losses on the Mortgage Loans to date are less than the then applicable Trigger
Amount. The Trigger Amount for any Distribution Date occurring after the first
five years will be as follows: for any Distribution Date during the sixth year
after the Closing Date, 30% of the initial sum of the Certificate Principal
Balances of the Subordinate Certificates; for any Distribution Date during the
seventh year after the Closing Date, 35% of the initial sum of the Certificate
Principal Balances of the Subordinate Certificates; for any Distribution Date
during the eighth year after the Closing Date, 40% of the initial sum of the
Certificate Principal Balances of the Subordinate Certificates; for any
Distribution Date during the ninth year after the Closing Date, 45% of the
initial sum of the Certificate Principal Balances of the Subordinate
Certificates; and for any Distribution Date during the tenth year (or any year
thereafter) after the Closing Date, 50% of the initial sum of the Certificate
Principal Balances of the Subordinate Certificates. Notwithstanding the
foregoing, upon reduction of the Certificate Principal Balances of the Senior
Certificates to zero, the Senior Prepayment Percentage will equal 0%.
The disproportionate allocation of certain unscheduled payments in respect
of principal will have the effect of accelerating the amortization of the Senior
Certificates (other than the Class XS Certificates) while, in the absence of
Realized Losses, increasing the respective percentage interest in the principal
balance of the Mortgage Loans evidenced by the Subordinate Certificates.
Increasing the respective percentage interest in the Trust Fund of the
Subordinate Certificates relative to that of the Senior Certificates is intended
to preserve the availability of the subordination provided by the Subordinate
Certificates.
If on any Distribution Date the allocation to the Senior Certificates
(other than the Class XS Certificates) of full and partial principal prepayments
and other amounts in the percentage required above would reduce the aggregate
outstanding Certificate Principal Balance of such Class A Certificates below
zero, such Senior Prepayment Percentage for such Distribution Date will be
limited to the percentage necessary to reduce the aggregate Certificate
Principal Balance of such Senior Certificates to zero.
For purposes of all principal distributions described above and for
calculating the Senior Percentage, the Subordinate Percentage and the Senior
Prepayment Percentage, the applicable Certificate Principal Balance for any
Distribution Date shall be determined after the allocation of losses
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on the Mortgage Loans in, and Extraordinary Trust Fund Expenses attributable to,
the Mortgage Pool to be made on such Distribution Date as described under
"--Allocation of Losses; Subordination" below.
PRIORITY OF PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES
AND THE RESIDUAL CERTIFICATES
Distributions of the Senior Principal Distribution Amount on the Class A
Certificates and the Residual Certificates on each Distribution Date will be
made as follows:
(i) First, concurrently, to the holders of each class of the Residual
Certificates on the Distribution Date in June 1998, an amount equal to the
entire Certificate Principal Balance thereof;
(ii) Second, concurrently, to the holders of each class of Lockout
Certificates, the related Lockout Distribution Percentage of the remaining
Senior Principal Distribution Amount, until the related Certificate
Principal Balance thereof has been reduced to zero;
(iii) Third, to the holders of the Class A-1 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(iv) Fourth, to the holders of the Class A-2 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(v) Fifth, to the holders of the Class A-3 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(vi) Sixth, to the holders of the Class A-4 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(vii) Seventh, to the holders of the Class A-5 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(viii) Eighth, concurrently on a PRO RATA basis, to the holders of each
class of Lockout Certificates, until the Certificate Principal Balances
thereof have been reduced to zero.
Notwithstanding the foregoing priorities, upon the reduction of the
Certificate Principal Balances of the Subordinate Certificates to zero, the
priority of distributions of principal among the Class A Certificates will be
disregarded and distributions allocable to principal will be paid on each
succeeding Distribution Date to holders of the Class A Certificates, on a PRO
RATA basis, based on the Certificate Principal Balances thereof.
The "Lockout Certificate Percentage" for each class of Lockout Certificates
will be calculated for each Distribution Date to be the percentage equal to the
aggregate Certificate Principal Balance of the related Lockout Certificates
divided by the sum of the aggregate Certificate Principal Balances of the Class
A Certificates. The "Lockout Distribution Percentage" for each class of Lockout
Certificates and for any Distribution Date occurring prior to the Distribution
Date in June 2001 will be equal to 0%. The related "Lockout Distribution
Percentage" for any Distribution Date occurring after the first three years
following the Closing Date will be as follows: for any Distribution Date during
the fourth or fifth year after the Closing Date, 45% of the related Lockout
Certificate Percentage for such Distribution Date; for any Distribution Date
during the sixth year after the Closing Date, 80% of the related Lockout
Certificate Percentage for such Distribution Date; for any Distribution Date
during the seventh year after the Closing Date, 100% of the related Lockout
Certificate Percentage for such Distribution Date, and for any Distribution Date
thereafter, the lesser of (x) 300% of the related Lockout Certificate Percentage
and (y) 100%. Notwithstanding the foregoing, if the Certificate Principal
Balances of the Class A Certificates (other than the Lockout Certificates) have
been reduced to zero, each Lockout Distribution Percentage will be equal to
100%.
PRINCIPAL DISTRIBUTION ON THE SUBORDINATE CERTIFICATES
Holders of each class of Subordinate Certificates will be entitled to
receive on each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining after distribution on
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such date of the Senior Interest Distribution Amount, the Senior Principal
Distribution Amount and the Subordinate Interest Distribution Amount,
distributions allocable to principal in reduction of the Certificate Principal
Balances thereof equal to the sum of the following:
(i) the product of (A) the then applicable related Class B Percentage
and (B) the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments on
the Mortgage Loans due during the related Due Period, whether or not received;
(2) the principal portion of all proceeds received in respect
of the repurchase of a Mortgage Loan (or, in the case of a
substitution, certain amounts received representing a principal
adjustment) as required by the Agreement during the related Prepayment
Period; and
(3) the principal portion of all other unscheduled collections
(other than amounts described in clauses (ii) and (iii) hereof),
including insurance proceeds and liquidation proceeds, received during
the related Prepayment Period, to the extent applied as recoveries of
principal;
(ii) the portion allocable to such class of Subordinate Certificates,
as described below, of the product of (A) the then applicable Subordinate
Prepayment Percentage and (B) the aggregate of all full and partial
principal prepayments received during the related Prepayment Period;
(iii) the portion allocable to such class of Subordinate Certificates,
as described below, of net liquidation proceeds received and allocable to
principal of any Mortgage Loan that was finally liquidated during the
related Prepayment Period, to the extent of the amount, if any, by which
such net liquidation proceeds exceed the amount distributable to the Class
A Certificates in respect of such net liquidation proceeds pursuant to
clause (iii) of the definition of Senior Principal Distribution Amount; and
(iv) any amounts allocable to principal for any previous Distribution
Date (calculated pursuant to the three preceding clauses) that remain
undistributed, to the extent that any such amounts are not attributable to
Realized Losses that were allocated to classes of the Subordinate
Certificates bearing a higher numerical class designation.
With respect to any Distribution Date, the lesser of (a) the balance of the
Available Distribution Amount remaining after the distribution of the Senior
Interest Distribution Amount, the Senior Principal Distribution Amount and the
Subordinate Interest Distribution Amount and (b) the aggregate of the sum for
each class of Subordinate Certificates of the amounts described in clauses (i)
through (iv) of the immediately preceding paragraph is hereinafter referred to
as the "Subordinate Principal Distribution Amount".
The Class B Percentage for the Class B-1 Certificates, the Class B-2
Certificates, the Class B-3 Certificates, the Class B-4 Certificates, the Class
B-5 Certificates and the Class B-6 Certificates (with respect to each such
class, the related "Class B Percentage") initially will equal approximately
4.00%, approximately 2.25%, approximately 1.25%, approximately 1.80%,
approximately 0.85% and approximately 0.85%, respectively, and will in no event
exceed 100%, and will be adjusted for each Distribution Date to be the
percentage equal to the Certificate Principal Balance of the related class of
Subordinate Certificates immediately prior to such Distribution Date divided by
the aggregate of the Scheduled Principal Balance of each of the Mortgage Loans
immediately prior to such Distribution Date. The Subordinate Prepayment
Percentage for any Distribution Date will equal 100% minus the Senior Prepayment
Percentage.
On any Distribution Date, the portion of (a) all principal prepayments on
the Mortgage Loans and (b) net liquidation proceeds allocable to principal of
any Mortgage Loan that was finally liquidated during the related Prepayment
Period, in each case not included in the Senior Principal Distribution Amount
will be allocated on a PRO RATA basis among the following classes of Subordinate
Certificates in proportion to the respective outstanding Certificate Principal
Balances thereof: (i) the Class B-1 Certificates; (ii) the Class B-2
Certificates, if on such Distribution Date the aggregate percentage interest
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in the Trust Fund evidenced by the Class B-2 Certificates, the Class B-3
Certificates, the Class B-4 Certificates, the Class B-5 Certificates and the
Class B-6 Certificates equals or exceeds 7.00% before giving effect to
distributions on such Distribution Date; (iii) the Class B-3 Certificates, if on
such Distribution Date the aggregate percentage interest in the Trust Fund
evidenced by the Class B-3 Certificates, the Class B-4 Certificates, the Class
B-5 Certificates and the Class B-6 Certificates equals or exceeds 4.75% before
giving effect to distributions on such Distribution Date; (iv) the Class B-4
Certificates, if on such Distribution Date the percentage interest in the Trust
Fund evidenced by the Class B-4 Certificates, the Class B-5 Certificates and the
Class B-6 Certificates equals or exceeds 3.50% before giving effect to
distributions on such Distribution Date; (v) the Class B-5 Certificates, if on
such Distribution Date the percentage interest in the Trust Fund evidenced by
the Class B-5 Certificates and the Class B-6 Certificates equals or exceeds
1.70% before giving effect to distributions on such Distribution Date; and (vi)
the Class B-6 Certificates, if on such Distribution Date the percentage interest
in the Trust Fund evidenced by the Class B-6 Certificates equals or exceeds
0.85% before giving effect to distributions on such Distribution Date.
For purposes of all principal distributions described above and for
calculating the Subordinate Percentage, the applicable Certificate Principal
Balance for any Distribution Date shall be determined after the allocation of
losses on the Mortgage Loans in, and Extraordinary Trust Fund Expenses
attributable to, the Mortgage Pool to be made on such Distribution Date as
described under "--Allocation of Losses; Subordination" below.
As stated above under "--Principal Distributions on the Senior
Certificates", for each Distribution Date occurring prior to the Distribution
Date in June 2003, the Senior Prepayment Percentage will equal 100%, and until
the earlier of such date and the date on which the Class A Certificates are paid
in full, no distributions based on principal prepayments or, in certain
instances, net liquidation proceeds, on the Mortgage Loans will be distributed
to the Subordinate Certificates. Thereafter, unless the Certificate Principal
Balances of the Senior Certificates have been reduced to zero, the Subordinate
Prepayment Percentage may continue to be 0% or otherwise be disproportionately
small relative to the Subordinate Percentage. See "--Principal Distributions on
the Senior Certificates" herein.
Distributions of the Subordinate Principal Distribution Amount on each
Distribution Date will be made as follows: first to the holders of the Class B-1
Certificates, second to the holders of the Class B-2 Certificates, third to the
holders of the Class B-3 Certificates, and then to the holders of the remaining
classes of Subordinate Certificates, in each case to the extent of available
funds and in each case to the extent of the portion of the Subordinate Principal
Distribution Amount payable in respect of each such class of Subordinate
Certificates for such Distribution Date.
On each Distribution Date, holders of the Class R-II Certificates will be
entitled to receive any Available Distribution Amount remaining after
distribution on such date of the Senior Interest Distribution Amount, the Senior
Principal Distribution Amount, the Subordinate Interest Distribution Amount and
the Subordinate Principal Distribution Amount; provided that if such
Distribution Date is the final Distribution Date, then such remaining amount
will be distributed: FIRST, to the holders of the Class P Certificates, until
the Certificate Principal Balance thereof has been reduced to zero; and SECOND
to the holders of the Class R-II Certificates.
P&I ADVANCES
Subject to the following limitations, the Master Servicer will be obligated
to advance or cause to be advanced on or before each Distribution Date its own
funds, or funds in the Certificate Account that are not included in the
Available Distribution Amount for such Distribution Date, in an amount equal to
the aggregate of all payments of principal and interest, net of the Servicing
Fee (as defined herein), that were due during the related Due Period on the
Mortgage Loans and that were delinquent on the related Determination Date, plus
certain amounts representing assumed payments not covered by any current net
income on the Mortgaged Properties acquired by foreclosure or deed in lieu of
foreclosure (any such advance, a "P&I Advance").
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P&I Advances are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making such P&I Advances is to
maintain a regular cash flow to the Certificateholders, rather than to guarantee
or insure against losses. The Master Servicer will not be required to make any
P&I Advances with respect to reductions in the amount of the monthly payments on
the Mortgage Loans due to bankruptcy proceedings or the application of the
Relief Act.
All P&I Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which such unreimbursed P&I Advance was made. In addition, any P&I
Advances previously made in respect of any Mortgage Loan that are deemed by the
Master Servicer to be nonrecoverable from related late collections, insurance
proceeds or liquidation proceeds may be reimbursed to the Master Servicer out of
any funds in the Certificate Account prior to the distributions on the
Certificates. In the event the Master Servicer fails in its obligation to make
any such advance, the Trustee will be obligated to make any such advance, to the
extent required in the Agreement.
ALLOCATION OF LOSSES; SUBORDINATION
Realized Losses (other than Excess Losses) and any Extraordinary Trust Fund
Expenses will be allocated on any Distribution Date as follows: first, to the
Class B-6 Certificates; second, to the Class B-5 Certificates; third, to the
Class B-4 Certificates; fourth, to the Class B-3 Certificates; fifth, to the
Class B-2 Certificates; and sixth, to the Class B-1 Certificates, in each case
until the Certificate Principal Balance of such class has been reduced to zero.
Thereafter, such Realized Losses and any Extraordinary Trust Fund Expenses will
be allocated on any Distribution Date among the Class A Certificates on a PRO
RATA basis. Excess Special Hazard Losses, Excess Bankruptcy Losses, Excess Fraud
Losses and Extraordinary Losses (collectively, "Excess Losses") will be
allocated on any Distribution Date among all the Certificates (other than the
Class XS Certificates and the Class P Certificates) on a PRO RATA basis. Any
allocation of a Realized Loss to a Certificate will be made by reducing the
Certificate Principal Balance thereof by the amount so allocated as of the
Distribution Date in the month following the calendar month in which such
Realized Loss was incurred. The Agreement does not permit the allocation of any
Realized Losses to the Class P Certificates.
An allocation of a Realized Loss on a PRO RATA basis among two or more
classes of Certificates means an allocation to each such class of Certificates
on the basis of its then outstanding Certificate Principal Balance prior to
giving effect to distributions to be made on such Distribution Date.
With respect to any defaulted Mortgage Loan that is finally liquidated
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed-in-lieu of foreclosure or
otherwise, the amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the Master
Servicer for P&I Advances, Servicing Fees and Servicing Advances) towards
interest and principal owing on the Mortgage Loan. Such amount of loss realized
and any Special Hazard Losses, Fraud Losses and Bankruptcy Losses are referred
to herein as "Realized Losses".
In the event that Realized Losses are incurred that are covered by
subordination, such losses will be allocated to the most subordinate class of
Certificates then outstanding. The priorities for distribution of cash flows
described herein, in certain circumstances, may result in cash flow shortfalls
to any class of Subordinate Certificates even if it is not the most subordinate
class of Certificates then outstanding; however, the interest portion of any
such shortfall would be distributable as unpaid Interest Distribution Amount on
future Distribution Dates as cash flows allow, to the extent of available funds,
and the principal portion of any such shortfall would not result in a reduction
of the Certificate Principal Balance of such class. In such event, the
percentage interest represented by such class would increase relative to the
respective Certificate Principal Balances of the more subordinate classes of
Certificates. With
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respect to the most subordinate class of the Certificates outstanding at the
time any Realized Loss is incurred, the total amount of the Realized Loss
allocated to such class may be greater than the concurrent reduction in the
Certificate Principal Balance thereof because such reduction will not reflect
any undistributed Interest Distribution Amount on such class. Such undistributed
Interest Distribution Amount on the most subordinate class of the Certificates
outstanding will not be distributable on any future Distribution Date. As a
result, it is possible that the total amount of Realized Losses that may be
allocated to any class of Subordinate Certificates may exceed the initial
Certificate Principal Balance thereof.
In order to maximize the likelihood of distribution in full of the Senior
Interest Distribution Amount and the Senior Principal Distribution Amount, on
each Distribution Date, holders of Senior Certificates have a right to
distributions of the Available Distribution Amount that is prior to the rights
of the holders of the Subordinate Certificates, to the extent necessary to
satisfy the Senior Interest Distribution Amount and the Senior Principal
Distribution Amount.
The application of the Senior Prepayment Percentage (when it exceeds the
Senior Percentage) to determine the Senior Principal Distribution Amount will
accelerate the amortization of the Class A Certificates relative to the actual
amortization of the Mortgage Loans. To the extent that the Class A Certificates
are amortized faster than the Mortgage Loans, in the absence of offsetting
Realized Losses allocated to the Subordinate Certificates, the percentage
interest evidenced by the Class A Certificates in the Trust Fund will be
decreased (with a corresponding increase in the percentage interest in the Trust
Fund evidenced by the Subordinate Certificates), thereby increasing, relative to
their respective Certificate Principal Balances, the subordination afforded the
Senior Certificates by the Subordinate Certificates.
The aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses (the "Special Hazard Amount") through
subordination shall initially be equal to approximately $6,750,000. As of any
date of determination following the Cut-off Date, the Special Hazard Amount
shall equal approximately $6,750,000 less the sum of (A) any amounts allocated
through subordination in respect of Special Hazard Losses and (B) the Adjustment
Amount. The Adjustment Amount will be equal to an amount calculated pursuant to
the terms of the Agreement.
The aggregate amount of Realized Losses which may be allocated in
connection with Fraud Losses (the "Fraud Loss Amount") through subordination
shall initially be equal to approximately $20,250,000. As of any date of
determination after the Cut-off Date, the Fraud Loss Amount shall equal (X)
prior to the first anniversary of the Cut-off Date an amount equal to 3.00% of
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date,
minus the aggregate amounts allocated through subordination with respect to
Fraud Losses on the Mortgage Loans up to such date of determination, (Y) from
the first to the second anniversary of the Cut-off Date, an amount equal to (1)
the lesser of (a) the Fraud Loss Amount as of the most recent anniversary of the
Cut-off Date and (b) 2.00% of the aggregate principal balance of all of the
Mortgage Loans as of the most recent anniversary of the Cut-off Date minus (2)
the aggregate amounts allocated through subordination with respect to Fraud
Losses on the Mortgage Loans since the most recent anniversary of the Cut-off
Date up to such date of determination and (Z) from the second to the fifth
anniversary of the Cut-off Date, an amount equal to (1) the lesser of (a) the
Fraud Loss Amount as of the most recent anniversary of the Cut-off Date, and (b)
1.00% of the aggregate principal balance of all of the Mortgage Loans as of the
most recent anniversary of the Cut-off Date minus (2) the aggregate amounts
allocated through subordination with respect to Fraud Losses on the Mortgage
Loans since the most recent anniversary of the Cut-off Date up to such date of
determination. On and after the fifth anniversary of the Cut-off Date, the Fraud
Loss Amount shall be zero.
The aggregate amount of Realized Losses which may be allocated in
connection with Bankruptcy Losses (the "Bankruptcy Amount") through
subordination will initially be equal to approximately $219,000. As of any date
of determination, the Bankruptcy Amount shall equal the initial Bankruptcy
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Amount less the sum of any amounts allocated through subordination for such
losses up to such date of determination.
The Special Hazard Amount, Fraud Loss Amount and Bankruptcy Amount may be
reduced or modified upon confirmation from Standard & Poor's, Duff & Phelps and
Fitch that such reduction or modification will not adversely affect the
then-current ratings assigned to the Offered Certificates rated thereby. Such a
reduction or modification may adversely affect the coverage provided by the
subordination with respect to Special Hazard Losses, Fraud Losses and Bankruptcy
Losses.
A "Special Hazard Loss" is a loss incurred in respect of any defaulted
Mortgage Loan as a result of direct physical loss or damage to the Mortgaged
Property (except as a result of the exclusions described below), which is not
insured against under the standard hazard insurance policy or blanket policy
insuring against hazard losses which the Master Servicer is required to cause to
be maintained on each Mortgage Loan. See "Description of Primary Insurance
Policies--Primary Hazard Insurance Policies" in the Prospectus.
Special Hazard Losses will not include any loss resulting from:
(i) wear and tear, deterioration, rust or corrosion, mold, wet
or dry rot; inherent vice or latent defect; animals, birds, vermin, insects;
(ii) smog, smoke, vapor, liquid or dust discharge from
agricultural or industrial operations; pollution; contamination;
(iii) settling, subsidence, cracking, shrinkage, bulging or
expansion of pavements, foundations, walls, floors, roofs or ceilings; and
(iv) errors in design, faulty workmanship or faulty materials,
unless the collapse of the property or a part thereof ensues and then only for
the ensuing loss.
Special Hazard Losses also will not include any loss (each, an "Extraordinary
Loss") resulting from:
(i) nuclear or chemical reaction or nuclear radiation or
radioactive or chemical contamination, all whether controlled or
uncontrolled and whether such loss be direct or indirect, proximate or
remote or be in whole or in part caused by, contributed to or aggravated by
a peril covered by the definition of the term "Special Hazard Loss";
(ii) hostile or warlike action in time of peace or war,
including action in hindering, combating or defending against an actual,
impending or expected attack by any government or sovereign power, de jure
or de facto, or by any authority maintaining or using military, naval or
air forces, or by military, naval or air forces, or by an agent of any such
government, power, authority or forces;
(iii) any weapon of war employing atomic fission or
radioactive forces whether in time of peace or war; and
(iv) insurrection, rebellion, revolution, civil war, usurped
power or action taken by governmental authority in hindering, combating or
defending against such an occurrence, seizure or destruction under
quarantine or customs regulations, confiscation by order of any government
or public authority, or risks of contraband or illegal transactions or
trade.
"Excess Special Hazard Losses" are Special Hazard Losses in excess of the
Special Hazard Amount.
A "Fraud Loss" is a loss incurred on a defaulted Mortgage Loan as to which
there was intentional fraud, dishonesty or misrepresentation in the origination
of such Mortgage Loan.
"Excess Fraud Losses" are Fraud Losses in excess of the Fraud Loss Amount.
A "Bankruptcy Loss" is a Deficient Valuation or a Debt Service Reduction.
With respect to any Mortgage Loan, a "Deficient Valuation" is a valuation by a
court of competent jurisdiction of the
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Mortgaged Property in an amount less than the then outstanding indebtedness
under the Mortgage Loan, which valuation results from a proceeding initiated
under the United States Bankruptcy Code. A "Debt Service Reduction" is any
reduction in the amount which a mortgagor is obligated to pay on a monthly basis
with respect to a Mortgage Loan as a result of any proceeding initiated under
the United States Bankruptcy Code, other than a reduction attributable to a
Deficient Valuation.
"Excess Bankruptcy Losses" are Bankruptcy Losses in excess of the
Bankruptcy Amount.
An "Extraordinary Trust Fund Expense" is an unanticipated, non-Mortgage
Loan specific Trust Fund expense, including certain reimbursements to the Master
Servicer or Depositor described in the Prospectus under "Description of the
Certificates--Certain Matters Regarding the Master Servicer and the Depositor",
certain reimbursements to the Trustee described under "Pooling and Servicing
Agreement--The Trustee" herein and certain taxes that may be payable by the
Trust Fund as described herein under "Certain Federal Income Tax Consequences".
RESTRICTIONS ON TRANSFER OF THE SUBORDINATE CERTIFICATES AND THE RESIDUAL
CERTIFICATES
Because the Subordinate Certificates are subordinate to the Senior
Certificates, the Subordinate Certificates of any class may not be purchased by
or transferred to a Plan (as defined herein) except upon the delivery of a
certification of facts or an opinion of counsel, as provided herein. In
addition, the Residual Certificates may not be purchased by or transferred to a
Plan (as defined herein) except upon the delivery of a certification of facts or
an opinion of counsel, as provided herein. See "ERISA Considerations" herein. In
addition, the Residual Certificates will be subject to certain additional
restrictions described under "Certain Federal Income Tax Consequences--Special
Tax Considerations Applicable to the Residual Certificates" herein and "Certain
Federal Income Tax Consequences--REMICs--Tax on Transfers of REMIC Residual
Certificates to Certain Organizations" and "--Taxation of Owners of REMIC
Residual Certificates--Noneconomic REMIC Residual Certificates" in the
Prospectus.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Agreement, a form of which
is filed as an exhibit to the Registration Statement. A Current Report on Form
8-K relating to the Certificates containing a copy of the Agreement as executed
will be filed by the Depositor with the Securities and Exchange Commission
within fifteen days of the initial issuance of the Certificates. The Trust Fund
created under the Agreement will consist of (i) all of the Depositor's right,
title and interest in and to the Mortgage Loans, the related Mortgage Notes,
Mortgages and other related documents, (ii) all payments on or collections in
respect of the Mortgage Loans due after the Cut-off Date, together with any
proceeds thereof, (iii) any Mortgaged Properties acquired on behalf of
Certificateholders by foreclosure or by deed in lieu of foreclosure, and any
revenues received thereon, (iv) the rights of the Trustee under all insurance
policies required to be maintained pursuant to the Agreement and (v) the rights
of the Depositor under the Mortgage Loan Purchase Agreement among the Depositor,
the Mortgage Loan Seller and the Originator (other than certain rights of the
Depositor to indemnification by the Originator). Reference is made to the
Prospectus for important information in addition to that set forth herein
regarding the Trust Fund, the terms and conditions of the Agreement and the
Offered Certificates. The Offered Certificates will be transferable and
exchangeable at the corporate trust offices of the Trustee, located in
Minneapolis, Minnesota. The Depositor will provide to a prospective or actual
Certificateholder without charge, on written request, a copy (without exhibits)
of the Agreement. Requests should be addressed to the Secretary, Salomon
Brothers Mortgage Securities VII, Inc., Seven World Trade Center, New York, New
York 10048.
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ASSIGNMENT OF THE MORTGAGE LOANS
The Depositor will deliver to the Trustee or to a custodian with respect to
each Mortgage Loan (i) the Mortgage Note endorsed without recourse to the
Trustee to reflect the transfer of the Mortgage Loan, (ii) the original Mortgage
with evidence of recording indicated thereon and (iii) an assignment of the
Mortgage in recordable form to the Trustee, reflecting the transfer of the
Mortgage Loan. Such assignments of Mortgage Loans are required to be recorded by
or on behalf of the Depositor in the appropriate offices for real property
records.
THE ORIGINATOR AND MASTER SERVICER
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 Agreement, Ameriquest will serve as the master servicer for
the Mortgage Loans sold indirectly by it to the Depositor (in such capacity, the
"Master 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 March 31, 1998, Ameriquest had 188 offices, consisting
of 37 loan origination centers located in California and 151 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.
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.
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<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------------------------------
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 $761,902
Sales $1,081,841 $1,108,162 $2,072,517 $2,507,262 $737,994
</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
March
At December 31, 31,
------------- ---------------- ------------- -------------- --------------
1994 1995 1996 1997 1998
------------- ---------------- ------------- -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal
Balance $2,721,665 $2,790,704 $3,622,400 $4,556,331 $4,868,727
Number of Loans 24,669 26,766 36,564 49,124 53,491
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance $20,923 $35,503 $54,719 $87,054 $47,510
Number of Loans 195 327 557 931 553
Delinquency as a Percentage
of Total Outstanding Principal
Balance 0.77% 1.27% 1.51% 1.91% 0.98%
Delinquency as a Percentage
of Number of Loans 0.79% 1.22% 1.52% 1.90% 1.03%
61-90 Days
Principal Balance $24,013 $25,237 $36,565 $41,875 $47,001
Number of Loans 193 253 382 436 478
Delinquency as a Percentage
of Total Outstanding
Principal Balance 0.88% 0.90% 1.01% 0.92% 0.97%
Delinquency as a Percentage
of Number of Loans 0.78% 0.95% 1.04% 0.89% 0.89%
91 Days or More
Principal Balance $97,202 $109,703 $152,537 $208,761 $239,136
Number of Loans 771 977 1,531 2,120 2,492
Delinquency as a Percentage
of Total Outstanding
Principal Balance 3.57% 3.93% 4.21% 4.58% 4.91%
Delinquency as a Percentage
of Number of Loans 3.13% 3.65% 4.19% 4.32% 4.66%
Total Delinquencies:
Principal Balance $142,138 $170,444 $243,822 $337,690 $333,647
Number of Loans 1,159 1,557 2,470 3,487 3,523
Delinquency as a Percentage
of Total Outstanding
Principal Balance 5.22% 6.11% 6.73% 7.41% 6.85%
Delinquency as a Percentage
of Number of Loans 4.70% 5.82% 6.76% 7.10% 6.59%
FORECLOSURES PENDING(1)
Principal Balance $111,514 $132,679 $165,525 $206,740 $221,038
Number of Loans 955 1,200 1,591 2,070 2,223
Foreclosures Pending as a
Percentage of Total
Outstanding Principal
Balance 4.10% 4.75% 4.57% 4.54% 4.54%
Foreclosures Pending as
a Percentage of Number of
Loans 3.87% 4.48% 4.35% 4.21% 4.16%
NET LOAN LOSSES for the
Period(2) $51,296 $37,914 $38,915 $38,182 $13,424
NET LOAN LOSSES as a
Percentage of Total Outstanding
Principal Balance 1.88% 1.36% 1.07% 0.84% 0.28%
</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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As of March 31, 1998, 710 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, 696
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 Fund. 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 $4,868,727 at March 31,
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.
THE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association, will act as Trustee for the Certificates pursuant to the Agreement.
The Trustee's offices for notices under the Agreement are located at Sixth
Street and Marquette Avenue, Minneapolis, Minnesota 55479-0070, Attention:
Corporate Trust Services, and its telephone number is (612) 667-1117.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Agreement will be equal to accrued interest at the
Trustee's Fee Rate of 0.007% per annum on the Stated Principal Balance of each
Mortgage Loan (the "Trustee's Fee"). The Agreement will provide that the Trustee
and any director, officer, employee or agent of the Trustee will be indemnified
by the Trust Fund and will be held harmless against any loss, liability or
expense (not including expenses, disbursements and advances incurred or made by
the Trustee, including the compensation and the expenses and disbursements of
its agents and counsel, in the ordinary course of the Trustee's performance in
accordance with the provisions of the Agreement) incurred by the Trustee in
connection with any pending or threatened claim or legal action arising out of
or in connection with the acceptance or administration of its obligations and
duties under the Agreement, other than any loss, liability or expense (i)
resulting from a breach of the Master Servicer's obligations and duties under
the Agreement, (ii) that constitutes a specific liability of Trustee under the
Agreement or (iii) incurred by reason of willful misfeasance, bad faith or
negligence in the performance of the Trustee's duties under the Agreement
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<PAGE>
or as a result of a breach, or by reason of reckless disregard, of the Trustee's
obligations and duties under the Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect of
its servicing activities for the Certificates will be equal to accrued interest
at the Servicing Fee Rate of 0.50% per annum with respect to each Mortgage Loan
for each calendar month on the same principal balance on which interest on such
Mortgage Loan accrues for such calendar month (the "Servicing Fee"). As
additional servicing compensation, the Master Servicer is entitled to retain all
assumption fees and late payment charges in respect of Mortgage Loans, to the
extent collected from mortgagors, together with any interest or other income
earned on funds held in the Certificate Account and any escrow accounts in
respect of Mortgage Loans. The Master Servicer is obligated to offset any
Prepayment Interest Shortfall in respect of Mortgage Loans on any Distribution
Date (payments made by the Master Servicer in satisfaction of such obligation,
"Compensating Interest") to the extent of its aggregate Servicing Fee for such
Distribution Date. The Master Servicer is obligated to pay certain insurance
premiums and certain ongoing expenses associated with the Mortgage Pool in
respect of Mortgage Loans and incurred by the Master Servicer in connection with
its responsibilities under the Agreement and is entitled to reimbursement
therefor as provided in the Agreement. See "Description of the
Certificates--Retained Interest; Servicing Compensation and Payment of Expenses"
in the Prospectus for information regarding expenses payable by the Master
Servicer and "Certain Federal Income Tax Consequences" herein regarding certain
taxes payable by the Master Servicer.
VOTING RIGHTS
At all times, 97% of all Voting Rights will be allocated among the holders
of the Certificates (other than the Class XS Certificates, the Class P
Certificates and the Residual Certificates) in proportion to the then
outstanding Certificate Principal Balances of their respective Certificates, 1%
of all Voting Rights will be allocated among the holders of the Class P
Certificates in proportion to the then outstanding Certificate Principal
Balances of their respective Certificates, 1% of all Voting Rights will be
allocated among the holders of the Class XS Certificates in proportion to the
then outstanding Notional Amounts of their respective Certificates and 1% of all
Voting Rights will be allocated among the holders of the Residual Certificates
in proportion to the percentage interests in each such class evidenced by their
respective Certificates.
TERMINATION
The circumstances under which the obligations created by the Agreement will
terminate in respect of the Certificates are described in "Description of the
Certificates--Termination" in the Prospectus. The Master Servicer, but only with
the consent of 100% of the holders of each class of Class XS Certificates, will
have the right to purchase all remaining Mortgage Loans and any properties
acquired in respect thereof and thereby effect early retirement of the
Certificates on any Distribution Date following the Due Period during which the
aggregate principal balance of the Mortgage Loans and such properties at the
time of purchase is reduced to less than 10% of the aggregate principal balance
of the Mortgage Loans as of the Cut-off Date; provided, however, that on any
Distribution Date following the Due Period during which the aggregate principal
balance of the Mortgage Loans and such properties at the time of purchase is
reduced to 2% or less of the aggregate principal balance of the Mortgage Loans
as of the Cut-off Date, such consent will no longer be required. In the event
the Master Servicer exercises such option, the purchase price payable in
connection therewith generally will be equal to the greater of par or the fair
market value of the Mortgage Loans and such properties, plus accrued interest
for each Mortgage Loan at the related Mortgage Rate to but not including the
first day of the month in which such repurchase price is distributed, together
with any amounts due to the Master Servicer for servicing compensation at the
Servicing Fee Rate and any unreimbursed Servicing Advances. In the event the
Master Servicer exercises such option, the portion of the purchase price
allocable to the Certificates of each class will be, to the extent of available
funds, (i) in the case of the Certificates of any class, other than the Class XS
Certificates, 100% of the then outstanding Certificate Principal Balance
thereof,
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<PAGE>
plus (ii) in the case of the Certificates of any class, one month's interest on
the then outstanding Certificate Principal Balance or Notional Amount thereof at
the then applicable Pass-Through Rate for such class, plus (iii) any previously
accrued but unpaid interest thereon. In no event will the trust created by the
Agreement continue beyond the expiration of 21 years from the death of the
survivor of the persons named in the Agreement. See "Description of the
Certificates--Termination" in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Two separate elections will be made to treat designated portions of the
Trust Fund as real estate mortgage investment conduits ("REMIC I" and "REMIC
II", respectively, and each a "REMIC") for federal income tax purposes. Upon the
issuance of the Offered Certificates, Thacher Proffitt & Wood, counsel to the
Depositor, will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the Agreement, for federal income tax
purposes, each of REMIC I and REMIC II will qualify as a REMIC under Sections
860A through 860G of the Internal Revenue Code of 1986 (the "Code").
For federal income tax purposes, (i) the Class R-I Certificates will be the
sole class of "residual interests" in REMIC I, (ii) separate non-certificated
regular interests in REMIC I will be issued and will be the "regular interests"
in REMIC I, (iii) the Class R-II Certificates will be the sole class of
"residual interests" in REMIC II and (iv) the Senior Certificates, the
Subordinate Certificates and the Class P Certificates will evidence the "regular
interests" in, and will be treated as debt instruments of, REMIC II. See
"Certain Federal Income Tax Consequences--REMIC--Classification of REMICs" in
the Prospectus.
For federal income tax reporting purposes, the Offered Class XS
Certificates will, and the Class A Certificates, the Class B-1 Certificates, the
Class B-2 Certificates and the Class B-3 Certificates will not, be treated as
having been issued with original issue discount. The prepayment assumption that
will be used in determining the rate of accrual of original issue discount,
premium and market discount, if any, for federal income tax purposes will be
based on the assumption that, subsequent to the date of any determination, the
Mortgage Loans will prepay at a rate equal to 100% of the Prepayment Vector. No
representation is made that the Mortgage Loans will prepay at that rate or at
any other rate. See "Certain Federal Income Tax Consequences--REMICs--Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount" in the
Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers of
the Class XS Certificates should be aware that the OID Regulations do not
adequately address certain issues relevant to, or are not applicable to,
securities such as the Class XS Certificates. In addition, there is considerable
uncertainty concerning the application of the OID Regulations to REMIC Regular
Certificates that provide for payments based on a variable rate such as the
Class XS Certificates. Prospective purchasers of the Class XS Certificates are
advised to consult their tax advisors concerning the tax treatment of such
Certificates.
If the method of computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to any
Certificateholder (in particular, the holders of the Class XS Certificates), the
amount of original issue discount allocable to such period would be zero, and
such Certificateholder will be permitted to offset such amounts only against the
respective future income (if any) from such Certificate. Although uncertain, a
Certificateholder may be permitted to deduct a loss to the extent that his or
her respective remaining basis in such Certificate exceeds the maximum amount of
future payments to which such Certificateholder is entitled, assuming no further
prepayments of the Mortgage Loans. Although the matter is not free from doubt,
any such loss might be treated as a capital loss.
The OID Regulations in some circumstances permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that of the issuer. Accordingly, it is possible that holders of Offered
Certificates issued with original issue discount may be able to select a method
for recognizing original issue discount that differs from that used in preparing
reports to Certificateholders
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<PAGE>
and the IRS. Prospective purchasers of Offered Certificates issued with original
issue discount are advised to consult their tax advisors concerning the tax
treatment of such Certificates in this regard.
Certain Classes of Certificates may be treated for federal income tax
purposes as having been issued with a premium. Certificateholders may elect to
amortize such premium under a constant yield method in which case such
amortizable premium will generally be allocated among the interest payments on
such Certificates and will be applied as an offset against such interest
payments. See "Certain Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Regular Certificates--Premium" in the Prospectus.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code, generally in the same proportion that the assets in the related
Trust Fund would be so treated. In addition, interest on the Offered
Certificates will be treated as "interest on obligations secured by mortgages on
real property" under Section 856(c)(3)(B) of the Code, generally to the extent
that the Offered Certificates are treated as "real estate assets" under Section
856(c)(4)(A) of the Code. The Offered Certificates (other than the Residual
Certificates) also will be treated as "qualified mortgages" under Section
860G(a)(3) of the Code. See "Certain Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Certificates" in
the Prospectus.
It is not anticipated that either REMIC I or REMIC II will engage in any
transactions that would subject it to the prohibited transactions tax as defined
in Section 860F(a)(2) of the Code, the contributions tax as defined in Section
860G(d) of the Code or the tax on net income from foreclosure property as
defined in Section 860G(c) of the Code. However, in the event that any such tax
is imposed on REMIC I or REMIC II, such tax will be borne (i) by the Trustee, if
the Trustee has breached its obligations with respect to REMIC compliance under
the Agreement, (ii) by the Master Servicer, if the Master Servicer has breached
its obligations with respect to REMIC compliance under the Agreement and (iii)
otherwise by the Trust Fund, with a resulting reduction in amounts otherwise
distributable to holders of the related Offered Certificates. See "Description
of the Certificates-- General" and "Certain Federal Income Tax
Consequences--REMICs--Prohibited Transactions Tax and Other Taxes" in the
Prospectus.
The responsibility for filing annual federal information returns and other
reports will be borne by the Trustee. See "Certain Federal Income Tax
Consequences--REMICs--Reporting and Other Administrative Matters" in the
Prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO RESIDUAL CERTIFICATES
The IRS has issued regulations under the provisions of the Code related to
REMICs (the "REMIC Regulations") that significantly affect holders of the
Residual Certificates. The REMIC Regulations will impose restrictions on the
transfer or acquisition of certain residual interests, including the Residual
Certificates. In addition, the REMIC Regulations contain restrictions that apply
to the transfer of "noneconomic" residual interests to United States persons.
The REMIC Regulations also provide that transfers of a Residual Certificate to a
non-United States person will be disregarded for tax purposes in certain cases.
Transfers of the Residual Certificates to such persons are, however, prohibited
under the Agreement. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Noneconomic REMIC Residual Certificates" in the Prospectus and
"ERISA Considerations" and "Description of the Certificates--Restrictions on
Transfer of the Residual Certificates" herein for additional restrictions on
transfer of the Residual Certificates.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, unless "no significant purpose of the
transfer was to impede the assessment or collection of tax". Based on the REMIC
Regulations, the Residual Certificates will constitute noneconomic residual
interests during some or all of their terms for purposes
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<PAGE>
of the REMIC Regulations and, accordingly, unless no significant purpose of a
transfer is to impede the assessment or collection of tax, transfers of the
Residual Certificates may be disregarded and purported transferors may remain
liable for any taxes due with respect to the income on the Residual
Certificates. All transfers of the Residual Certificates will be subject to
certain restrictions under the terms of the Agreement that are intended to
reduce the possibility of any such transfer being disregarded to the extent that
the Residual Certificates constitute noneconomic residual interests.
The holders of the Class R-II Certificates will be required to report
taxable income and pay tax with respect to the early accrual periods of the
related REMIC's term that significantly exceeds the amount of cash distributions
received by such holders from the related REMIC with respect to such periods.
Furthermore, the tax on such income will exceed the cash distributions with
respect to such periods. Consequently, holders of Class R-II Certificates should
have other sources of funds sufficient to pay any federal income taxes due in
the earlier years of the related REMIC as a result of their ownership of Class
R-II Certificates. In addition, the required inclusion of this amount of taxable
income during the related REMIC's earlier accrual periods and the deferral of
corresponding tax losses or deductions until later accrual periods or until the
ultimate sale or disposition of a Class R-II Certificate (or possibly later
under the "wash sale" rules of Section 1091 of the Code) may cause the after-tax
rate of return of a holder of a Class R-II Certificate to be zero or negative
even where such holders' pre-tax rate of return is positive. That is, on a
present value basis, the resulting tax liabilities of a holder of a Class R-II
Certificate will substantially exceed the sum of any tax benefits and the amount
of any cash distributions on such Class R-II Certificates over their life.
An individual, trust or estate that holds (whether directly or indirectly
through certain pass-through entities) a Residual Certificate, particularly a
Class R-I Certificate, may have significant additional gross income with respect
to, but may be subject to limitations on the deductibility of, servicing and
trustee's fees and other administrative expenses properly allocable to the
related REMIC in computing such holder's regular tax liability and will not be
able to deduct such fees or expenses to any extent in computing such holder's
alternative minimum tax liability. Such expenses will be allocated for federal
income tax information reporting purposes entirely to the Class R-I Certificates
and not to the Class R-II Certificates. However, it is possible that the IRS may
require all or some portion of such fees and expenses to be allocable to the
Class R-II Certificates. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates--Pass
Through of Miscellaneous Itemized Deductions" in the Prospectus.
Potential investors in Residual Certificates should also be aware that
under the terms of the Agreement, the holders of the largest Percentage Interest
in the Residual Certificates shall, by their acceptance of such Certificates,
agree to irrevocably appoint the Trustee as their agent to perform all of the
duties of the tax matters person for the related REMIC.
Purchasers of the Residual Certificates are strongly advised to consult
their own tax advisors as to the economic and tax consequences of investment in
the Residual Certificates.
For further information regarding the federal income tax consequences of
investing in the Residual Certificates, see "Yield on the
Certificates--Additional Yield Considerations Applicable Solely to the Residual
Certificates" herein and "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated May 27, 1998 (the "Underwriting Agreement"), the Depositor has
agreed to sell, and Salomon Brothers Inc (the "Underwriter") has agreed to
purchase the Offered Certificates. The Underwriter is obligated to purchase all
Offered Certificates of the respective classes offered hereby if it purchases
any. The Underwriter is an affiliate of the Depositor.
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<PAGE>
Distribution of the Offered Certificates will be made from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the Depositor, will be
approximately 106.2374% of the aggregate initial Certificate Principal Balance
of the Offered Certificates (other than the Class XS Certificates), plus accrued
interest on the Offered Certificates. In connection with the purchase and sale
of the Offered Certificates, the Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting discounts.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended, or will contribute to payments the
Underwriter may be required to make in respect thereof.
SECONDARY MARKET
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates--Reports to Certificateholders", which will
include information as to the outstanding principal balance of the Offered
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Offered
Certificates will be available through any other source. In addition, the
Depositor is not aware of any source through which price information about the
Offered Certificates will be generally available on an ongoing basis. The
limited nature of such information regarding the Offered Certificates may
adversely affect the liquidity of the Offered Certificates, even if a secondary
market for the Offered Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be passed
upon for the Depositor by Thacher Proffitt & Wood, New York, New York, and for
the Underwriter by Stroock & Stroock & Lavan LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Certificates that the Class A
Certificates and the Residual Certificates be rated "AAA" by Standard & Poor's
Ratings Services ("Standard & Poor's") , "AAA" by Duff & Phelps Credit Rating
Co. ("Duff & Phelps") and "AAA" by Fitch IBCA, Inc. ("Fitch"), that the Offered
Class XS Certificates be rated "AAAr" by Standard & Poor's, "AAA" by Duff &
Phelps and "AAA" by Fitch, that the Class B-1 Certificates be rated at least
"AA" by Standard & Poor's, "AA" by Duff & Phelps and "AA" by Fitch, that the
Class B-2 Certificates be rated at least "A" by Standard & Poor's, and that the
Class B-3 Certificates be rated at least "BBB" by Standard & Poor's.
The ratings of Standard & Poor's, Duff & Phelps and Fitch assigned to
mortgage pass-through certificates address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled. The rating process addresses structural and legal aspects associated
with the Certificates, including the nature of the underlying mortgage loans.
The ratings assigned to mortgage pass-through certificates do not represent any
assessment of the likelihood that principal prepayments will be made by the
mortgagors or the degree to which such prepayments will differ from that
originally anticipated. The ratings do not address the possibility that
Certificateholders might suffer a lower than anticipated yield due to non-credit
events or that the holders of the Class XS Certificates may fail to recover
fully their initial investment The "r" of the "AAAr" rating of the Offered Class
XS Certificates by Standard & Poor's is attached to highlight derivative,
hybrid, and certain other certificates that Standard & Poor's believes may
experience high volatility or high variability in expected returns due to
non-credit risks. Examples of such obligations are: securities whose principal
or interest return is
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indexed to equities, commodities or currencies; certain swaps and options; and
interest only and principal only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that a Certificate will exhibit no
volatility or variability in total return.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Offered Certificates are subsequently lowered for any reason, no person or
entity is obligated to provide any additional credit support or credit
enhancement with respect to the Offered Certificates.
The Depositor has not requested that any rating agency rate any class of
the Offered Certificates other than as stated above. However, there can be no
assurance as to whether any other rating agency will rate any class of the
Offered Certificates, or, if it does, what rating would be assigned by any such
other rating agency. A rating on any class of the Offered Certificates by
another rating agency, if assigned at all, may be lower than the ratings
assigned to such classes of the Offered Certificates as stated above.
LEGAL INVESTMENT
The Senior Certificates and the Class B-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as they are rated not lower than
the second highest rating category by a Rating Agency (as defined in the
Prospectus) and, as such, will be legal investments for certain entities to the
extent provided in SMMEA. SMMEA, however, provides for state limitation on the
authority of such entities to invest in "mortgage related securities" provided
that such restrictive legislation was enacted prior to October 3, 1991. Certain
states have enacted legislation which overrides the preemption provisions of
SMMEA. The Class B-2 Certificates and the Class B-3 Certificates 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 certain regulatory authorities may be
subject to restrictions on investment in the Offered Certificates. The Federal
Financial Institutions Examination Council, which includes the Board of
Governors of the Federal Reserve System (the "FRB"), the Federal Deposit
Insurance Corporation (the "FDIC"), the National Credit Union Administration
(the "NCUA"), the Comptroller of the Currency (the "OCC") and the Office of
Thrift Supervision (the "OTS"), has issued a supervisory policy statement (the
"Policy Statement") that is applicable to all depository institutions (to the
extent adopted by their respective federal regulators), setting forth guidelines
for and imposing significant restrictions on investments in "high-risk mortgage
securities". The Policy Statement generally indicates that a mortgage derivative
product will be deemed to be high-risk if (i) it has a weighted average life
greater than 10 years given a reasonable prepayment assumption or (ii) it
exhibits greater average life volatility or greater price volatility than a
benchmark fixed-rate thirty-year mortgage backed pass-through security.
According to the Policy Statement, prior to purchase, a depository institution
would be required to determine whether a mortgage derivative product that it is
considering acquiring is high-risk, and if so that the proposed acquisition
would reduce the institution's overall interest rate risk. Reliance on analysis
and documentation obtained from a securities dealer or other outside party
without internal analysis by the institution would be unacceptable, and a
failure to adhere to the monitoring, reporting and diligence requirements would
be considered an unsafe and unsound practice. There can be no assurance as to
whether certain classes of the Offered Certificates would be treated as
high-risk under the Policy Statement. The Policy Statement has been adopted by
the FRB, the FDIC, the OCC, the OTS and the NCUA. In addition, the NCUA has
issued regulations governing federal credit union investments which prohibit
investment in certain specified types of securities, which may include the
Offered Certificates. The NCUA has indicated that its regulations will take
precedence over the Policy Statement. Similar policy statements and regulations
have been issued by other regulators having jurisdiction over other types of
depository institutions. Any such institution should consult its own legal
advisors in determining whether and to what extent there may be restrictions on
its ability to invest in the Offered Certificates. See "Legal Investment" in the
Prospectus.
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ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or any other plan or arrangement
subject to ERISA or Section 4975 of the Code (each, a "Plan") or any person
investing Plan Assets of any Plan (as defined in the Prospectus under "ERISA
Considerations") should carefully review with its legal advisors whether the
purchase, sale or holding of Certificates will give rise to a prohibited
transaction under ERISA or Section 4975 of the Code.
The U.S. Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption 89-89 (the "Exemption"), as described under "ERISA
Considerations" in the Prospectus, to the Underwriter. The Exemption generally
exempts from the application of certain of the prohibited transaction provisions
of Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the excise taxes imposed on such prohibited transactions
by Section 4975(a) and (b) of the Code and Section 502(i) of ERISA, transactions
relating to the purchase, sale and holding of pass-through certificates
underwritten by the Underwriter such as the Senior Certificates, and the
servicing and operation of asset pools such as the Mortgage Pool, provided that
certain conditions are satisfied. The purchase of the Senior Certificates by, on
behalf of or with the Plan Assets of any Plan may qualify for exemptive relief
under the Exemption. However, the Exemption contains a number of conditions
which must be met for the Exemption to apply, including the requirement that any
such Plan must be an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the Securities and Exchange Commission under the Securities Act
of 1933, as amended. A fiduciary of a Plan contemplating purchasing a Senior
Certificate must make its own determination that the conditions set forth in the
Exemption will be satisfied with respect to the Senior Certificates.
Because the characteristics of the Subordinate Certificates and the
Residual Certificates will not meet the requirements of Prohibited Transaction
Class Exemption ("PTCE") 83-1 (as described in the Prospectus) or the Exemption,
the purchase, sale or holding of such Certificates by, on behalf of or with Plan
Assets of any Plan may result in prohibited transactions or the imposition of
excise taxes or civil penalties. Therefore, the Agreement provides that
transfers of such Certificates to a Plan, a trustee or other person acting on
behalf of any Plan or to any person using Plan Assets to effect such acquisition
will not be registered by the Trustee unless the purchaser thereof provides the
Depositor, the Trustee and the Master Servicer with either (i) 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 Master Servicer,
the Trustee or the Trust Fund, to the effect that the purchase of such
Certificates is permissible under applicable law, will not constitute or result
in any non-exempt prohibited transaction under ERISA or Section 4975 of the Code
and will not subject the Depositor, the Master Servicer, the Trustee or the
Trust Fund to any obligation in addition to those undertaken in the Agreement or
(ii) a certification of facts substantially to the effect that the purchase of
such Certificates by or on behalf of such Plan is permissible under applicable
law, will not constitute or result on a non-exempt prohibited transaction under
ERISA or Section 4975 of the Code, will not subject the Depositor, the Trustee
or the Master Servicer to any obligation in addition to those undertaken in the
Agreement and the following conditions are met: (a) the transferee is an
insurance company and (i) the source of funds used to purchase such Certificates
is an "insurance company general account" (as such term is defined in PTCE
95-60), (ii) the conditions set forth in PTCE 95-60 have been satisfied and
(iii) there is 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, exceeds
10% of the total of all reserves and liabilities of such general account (as
determined under PTCE 95-60) as of the date of the acquisition of such
Certificates; (b) the transferee is an insurance company and (i) the source of
funds used to purchase such Certificates is an insurance company general
account, (ii) the requirements of Sections 401(c) of ERISA and the regulations
to be promulgated thereunder have been satisfied and will continue to be
satisfied and (iii) the insurance company represents that it understands that
the operation of the general account after December 31, 1998 may affect its
ability to continue to hold such Certificates after the date which is 18 months
after the 401(c) Regulations become final and that unless
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<PAGE>
a Class Exemption or an exception under Section 401(c) of ERISA is then
available for the continued holding of such Certificates, it will dispose of
such Certificates prior to the date which is 18 months after the 401(c)
Regulations become final; (c) the transferee is an insurance company and (i) the
source of funds used to purchase such Certificates is an "insurance company
pooled separate account" (as such term is defined in PTCE 90-1), (ii) the
conditions set forth in PTCE 90-1 have been satisfied and (iii) there is no
Plan, together with all other Plans maintained by the same employer (or any
"affiliate" thereof, as defined in PTCE 90-1) or by the same employee
organization, with assets which exceed 10% of the total of all assets in such
pooled separate account (as determined under PTCE 90-1) as of the date of the
acquisition of such Certificates; (d) the transferee is a bank and (i) the
source of funds used to purchase such Certificates is a "collective investment
fund" (as defined in PTCE 91-38), (ii) the conditions set forth in PTCE 91-38
have been satisfied and (iii) there is no Plan, the interests of which, together
with the interests of any other Plans maintained by the same employer or
employee organization, in the collective investment fund exceed 10% of the total
of all assets in the collective investment fund (as determined under PTCE 91-38)
as of the date of acquisition of such Certificates; (e) the transferee is a
"qualified professional asset manager" described in PTCE 84-14 and the
conditions set forth in PTCE 84-14 have been satisfied and will continue to be
satisfied; or (f) the transferee is an "in-house asset manager" described in
PTCE 96-23 and the conditions set forth in PTCE 96-23 have been satisfied and
will continue to be satisfied. The Subordinate Certificates and the Residual
Certificates will contain a legend describing such restrictions on transfer.
Before purchasing a Senior Certificate, a fiduciary of a Plan should itself
confirm (a) that the Senior Certificates constitute "certificates" for purposes
of the Exemption and (b) that the specific and general conditions of the
Exemption and the other requirements set forth in the Exemption would be
satisfied. In addition, any Plan fiduciary that proposes to cause a Plan to
purchase a Certificate should consult with its counsel with respect to the
potential applicability to such investment of the fiduciary responsibility and
prohibited transaction provisions of ERISA and the Code to the proposed
investment. For further information regarding the ERISA considerations of
investing in the Certificates, see "ERISA Considerations" in the Prospectus.
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<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 April 27, 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
2
<PAGE>
CAPTION PAGE
Single-Family Loans and Multifamily Loans................ 80
Leases and Rents......................................... 81
Cooperative Loans........................................ 81
Contracts................................................ 82
Foreclosure on Mortgages................................. 84
Foreclosure on Cooperative Shares........................ 85
Repossession with respect to Contracts................... 86
Louisiana Law............................................ 87
Rights of Redemption with respect to Single-Family
Properties and Multifamily Properties.................. 88
Notice of Sale; Redemption Rights with respect to
Manufactured Homes..................................... 88
Anti-Deficiency Legislation and Other Limitations
on Lenders............................................. 88
Junior Mortgages......................................... 90
Consumer Protection Laws with respect to Contracts....... 90
Other Limitations........................................ 91
Enforceability of Certain Provisions..................... 92
Subordinate Financing.................................... 93
Applicability of Usury Laws.............................. 94
Alternative Mortgage Instruments......................... 94
Formaldehyde Litigation with respect to Contracts........ 95
Soldiers' and Sailors' Civil Relief Act of 1940.......... 95
Environmental Legislation................................ 96
Forfeitures in Drug and RICO Proceedings................. 97
Negative Amortization Loans.............................. 97
Certain Federal Income Tax Consequences....................... 97
General.................................................. 97
REMICs................................................... 98
Notes.................................................... 116
Grantor Trust Funds...................................... 116
Partnership Trust Funds.................................. 126
State and Other Tax Consequences.............................. 133
ERISA Considerations.......................................... 133
Representation from Plans Investing in Notes with
"Substantial Equity Features" or Certain Securities.... 138
Tax Exempt Investors..................................... 139
Consultation with Counsel................................ 139
Legal Investment.............................................. 139
Methods of Distribution....................................... 140
Legal Matters................................................. 141
Financial Information......................................... 141
Index of Principal Definitions................................ 142
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES COVERED BY SUCH SUPPLEMENT, WHETHER OR
NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER SUCH
SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS OF
THE SECURITIES COVERED BY SUCH SUPPLEMENT AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
3
<PAGE>
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information filed by the Depositor can be
inspected and copied at the public reference facilities maintained by the
Commission at its Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, and its Regional Offices located as follows: Chicago Regional
Office, 500 West Madison, 14th Floor, Chicago, Illinois 60661; New York Regional
Office, Seven World Trade Center, New York, New York 10048. Copies of such
material can also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates
and electronically through the Commission's Electronic Data Gathering, Analysis
and Retrieval System at the Commission's Web site (http:\\www.sec.gov). The
Depositor does not intend to send any financial reports to Securityholders (as
defined herein).
This Prospectus does not contain all of the information set forth in the
Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Depositor has filed with the Commission under the Securities
Act of 1933 and to which reference is hereby made.
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMC's most recent Information Statement and any subsequent information
statement, any supplement to any information statement relating to FHLMC and any
quarterly report made available by FHLMC after December 31, 1983 can be obtained
by writing or calling the FHLMC Investor Inquiry Department at 8200 Jones Branch
Drive, Mail Stop 319, McLean, Virginia 22102 (800-336-3672). The Depositor did
not participate in the preparation of FHLMC's Offering Circular, Information
Statement or any supplement and, accordingly, makes no representation as to the
accuracy or completeness of the information set forth therein.
Copies of FNMA's most recent Prospectus for FNMA Certificates are available
from FNMA's Mortgage Backed Securities Office, 3900 Wisconsin Avenue, N.W.,
Washington, D.C. 20016 (202-752- 6547). FNMA's annual report and quarterly
financial statements, as well as other financial information, are available from
FNMA's Office of the Treasurer, 3900 Wisconsin Avenue, N.W., Washington, D.C.
20016 (202-752-7000) or the Office of the Vice President of Investor Relations,
3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7000). The
Depositor did not participate in the preparation of FNMA's Prospectus and,
accordingly, makes no representations as to the accuracy or completeness of the
information set forth therein.
REPORTS TO SECURITYHOLDERS
The Trustee will mail monthly reports concerning each Trust Fund to all
registered holders of Securities (the "Securityholders") of the related series.
With respect to each series of Certificates or Notes, Securityholders will be
referred to as the "Certificateholders" or the "Noteholders", respectively. See
"Description of the Securities--Reports to Securityholders".
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of the offering of Securities offered hereby evidencing interest therein. The
Depositor will provide or cause to be provided without charge to each person to
whom this Prospectus is delivered in connection with the offering of one or more
classes of Securities offered hereby, a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to one or more of such classes of such offered Securities, other
than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to its principal executive office at Seven World Trade
Center, New York, New York 10048, Attention: Secretary, or by telephone at (212)
783-5635. The Depositor has determined that its financial statements are not
material to the offering of any Securities offered hereby.
4
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Securities contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. An Index of Principal
Definitions is included at the end of this Prospectus.
Title of Securities..............Mortgage Pass-Through Certificates, issuable in
series (the "Certificates") or Mortgage-Backed
Notes, issuable in series (the "Notes," and
together with the Certificates, the
"Securities").
Depositor........................Salomon Brothers Mortgage Securities VII, Inc.,
an indirect wholly-owned subsidiary of Salomon
Smith Barney Holdings Inc. and an affiliate of
Salomon Brothers 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.
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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
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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)
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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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<PAGE>
provided in the related Prospectus Supplement,
distributions of principal will be made on each
Distribution Date to the class or classes of
Securities entitled thereto until the Principal
Balance of such class has been reduced to zero.
Distributions of principal of any class of
Securities will be made on a pro rata basis
among all of the Securities of such class.
Strip Securities with no Principal Balance will
not receive distributions in respect of
principal. See "Description of the
Securities--Principal of the Securities".
Advances.........................The Master Servicer, directly or through
sub-servicers, will service and administer the
Mortgage Loans included in a Trust Fund and,
unless the related Prospectus Supplement
provides otherwise, in connection therewith
will be obligated to make certain advances with
respect to delinquent scheduled payments on the
Mortgage Loans. Advances made by the Master
Servicer are reimbursable to the extent
described herein and in the related Prospectus
Supplement. The Prospectus Supplement with
respect to any series may provide that the
Master Servicer will obtain a cash advance
surety bond, or maintain a cash advance reserve
fund, to cover any obligation of the Master
Servicer to make advances. The obligor on any
such surety bond will be named, and the terms
applicable to any such cash advance reserve
fund will be described in the related
Prospectus Supplement. See "Description of the
Securities--Advances in respect of
Delinquencies".
Optional Termination.............If so specified in the related Prospectus
Supplement, a series of Securities may be
subject to optional early termination through
the repurchase of the assets in the related
Trust Fund by the party specified therein,
under the circumstances and in the manner set
forth herein under "Description of the
Securities--Termination".
Tax Status of the Securities.....Each series of Certificates offered hereby will
constitute either (i) "regular interests"
("REMIC Regular Certificates") and "residual
interests" ("REMIC Residual Certificates") in a
Trust Fund treated as a REMIC under Sections
860A through 860G of the Code, (ii) interests
("Grantor Trust Certificates") in a Trust Fund
treated as a grantor trust under applicable
provisions of the Code, (iii) interests
("Partnership Certificates") in a Trust Fund
treated as a partnership under applicable
provisions of the Code or (iv) evidences of
indebtedness ("Debt Certificates") of a Trust
Fund treated as debt instruments for federal
income tax purposes. Each series of Notes
offered hereby will represent indebtedness of
the related Trust Fund.
In general, to the extent the assets and income
of the Trust Fund are treated as qualifying
assets and income under the following sections
of the Code, REMIC Regular
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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 89-89 (the
"Exemption"), to Salomon Brothers Inc
("Salomon") that generally exempts from the
application of
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certain of the prohibited transaction
provisions of Section 406 of ERISA and the
excise taxes imposed on such prohibited
transactions by Section 4975(a) and (b) of the
Code, transactions relating to the purchase,
sale and holding of pass-through certificates
underwritten by Salomon and the servicing and
operation of asset pools such as certain of the
Trust Funds, provided that certain conditions
are satisfied. If the conditions of the
Exemption will not be satisfied, the 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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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.
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.
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.
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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 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.
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CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
In the case of Grantor Trust Fractional Interest Certificates, unless
otherwise disclosed in the related Prospectus Supplement and subject to the
discussion below with respect to Buydown Mortgage Loans, counsel to the
Depositor will deliver an opinion that, in general, Grantor Trust Fractional
Interest Certificates will represent interests in (i) "loans . . . secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code; (ii) "obligation[s] (including any participation or Certificate of
beneficial ownership therein) which . . .[are] principally secured by an
interest in real property" within the meaning of Section 860G(a)(3) of the Code;
and (iii) "real estate assets" within the meaning of Section 856(c)(4)(A) of the
Code, in each case to the extent the Mortgage Loans qualify for such treatment.
In addition, counsel to the Depositor will deliver an opinion that interest on
Grantor Trust Fractional Interest Certificates will to the same extent be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Section 856(c)(3)(B) of the
Code.
The assets constituting certain Grantor Trust Funds may include Buydown
Mortgage Loans. The characterization of an investment in Buydown Mortgage Loans
will depend upon the precise terms of the related Buydown Agreement, but to the
extent that such Buydown Mortgage Loans are secured by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. No directly applicable precedents exist
with respect to the federal income tax treatment or the characterization of
investments in Buydown Mortgage Loans. Accordingly, holders of Grantor Trust
Certificates should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Grantor Trust Fund that includes Buydown Mortgage Loans.
GRANTOR TRUST STRIP CERTIFICATES
Even if Grantor Trust Strip Certificates evidence an interest in a Grantor
Trust Fund consisting of Mortgage Loans that are "loans . . . secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code, and "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code, and the interest on which is "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code, it is unclear whether the Grantor Trust Strip Certificates, and the income
therefrom, will be so characterized. However, the policies underlying such
sections (namely, to encourage or require investments in mortgage loans by
thrift institutions and real estate investment trusts) may suggest that such
characterization is appropriate. Counsel to the Depositor will not deliver any
opinion on these questions. Prospective purchasers to which such
characterization of an investment in Grantor Trust Strip Certificates is
material should consult their tax advisors regarding whether the Grantor Trust
Strip Certificates, and the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which . . .[are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
Holders of a particular series of Grantor Trust Fractional Interest
Certificates generally will be required to report on their federal income tax
returns their shares of the entire income from the Mortgage Loans (including
amounts used to pay reasonable servicing fees and other expenses) 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.
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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.
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
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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 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.
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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 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
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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 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
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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 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
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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 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
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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 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
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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
89-89 (54 Fed. Reg. 42581, Oct. 17, 1989) (the "Exemption"), to Salomon Brothers
Inc, which generally exempts from the application of the prohibited transaction
provisions of Section 406 of ERISA, and the excise taxes imposed on such
prohibited transactions pursuant to Section 4975(a) and (b) of the Code, certain
transactions, among others, relating to the servicing and operation of mortgage
pools and the initial purchase, holding and subsequent resale of mortgage
pass-through certificates underwritten by an Underwriter (as hereinafter
defined), provided that certain conditions set forth in the Exemption are
satisfied. For purposes of this Section "ERISA Considerations", the term
"Underwriter" shall include (a) Salomon Brothers Inc, (b) any person directly or
indirectly, through one or more intermediaries, controlling, controlled by or
under common control with Salomon Brothers Inc and (c) any member of the
underwriting syndicate or selling group of which a person described in (a) or
(b) is a manager or co-manager with respect to a class of Certificates.
The Exemption sets forth six general conditions which must be satisfied for
the Exemption to apply. First, the acquisition of Certificates by a Plan or with
Plan Assets must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
Exemption only applies to Certificates evidencing rights and interests that are
not subordinated to the rights and interests evidenced by other Certificates of
the same trust. Third, the Certificates at the time of acquisition by a Plan or
with Plan Assets must be rated in one of the three highest generic rating
categories by Standard & Poor's Structured 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.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS IN DETERMINING WHETHER
AND TO WHAT EXTENT THE SECURITIES CONSTITUTE LEGAL INVESTMENTS FOR SUCH
INVESTORS OR ARE SUBJECT TO INVESTMENT, CAPITAL OR OTHER RESTRICTIONS, AND, IF
APPLICABLE, WHETHER SMMEA HAS BEEN OVERRIDDEN IN ANY JURISDICTION RELEVANT TO
SUCH INVESTOR.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the Supplements to this Prospectus
will be offered in series. The distribution of the Securities may be effected
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Salomon Brothers Inc ("Salomon")
acting as underwriter with other underwriters, if any, named therein. In such
event, the Prospectus Supplement may also specify that the underwriters will not
be obligated to pay for any 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 acting as agent or in some cases as principal
with respect to Securities which it has previously purchased or agreed to
purchase. If Salomon acts as agent in the sale of Securities, Salomon 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 elects to purchase Securities
as principal, Salomon may realize losses or profits based upon the difference
between its purchase price and the sales price. The Prospectus Supplement with
respect to any series offered other than through underwriters will contain
information regarding the nature of such offering and any agreements to be
entered into between the Depositor and purchasers of Securities of such series.
The Depositor will indemnify Salomon and any underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments Salomon and any underwriters may be required to make
in respect thereof.
In the ordinary course of business, Salomon and the Depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing
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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
- ---- ----------
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
Exemption Rating Agencies ...............................................134
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PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
- ---- ----------
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 ........................................116
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
Net Interest Rate .......................................................47
Nonrecoverable Advance ..................................................56
Note Interest Rate .......................................................6
Note Principal Balance ..................................................54
Note Register ...........................................................53
Noteholders ..........................................................4, 58
143
<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
- ---- ----------
Notes ....................................................................5
OID Regulations .........................................................98
Originator ..............................................................24
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 ............................................................14, 140
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
Single Family Loans .....................................................24
Single Family Properties ................................................24
SMMEA ..............................................................14, 139
Special Hazard Amount ...................................................69
144
<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
- ---- ----------
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-26
The Mortgage Pool .....S-29
Yield on the Certificates .....S-39
Description of the Certificates .....S-50
Pooling and Servicing Agreement .....S-67
Certain Federal Income Tax Consequences .....S-73
Method of Distribution .....S-75
Secondary Market .....S-76
Legal Opinions .....S-76
Ratings .....S-76
Legal Investment .....S-77
ERISA Considerations .....S-78
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 AUGUST 25, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN WHICH IT RELATES. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTION.
$651,375,200 (APPROXIMATE)
ASSET-BACKED CERTIFICATES,
SERIES 1998-AQ1
SALOMON BROTHERS MORTGAGE
SECURITIES VII, INC.
DEPOSITOR
AMERIQUEST MORTGAGE COMPANY
ORIGINATOR AND MASTER SERVICER
SALOMON SMITH BARNEY
PROSPECTUS SUPPLEMENT
DATED MAY 27, 1998
