Registration No. 333-84249
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM S-3/A
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of Incorporation
or Organization)
13-3439681
(I.R.S. Employer Identification No.)
390 Greenwich Street
New York, New York 10013
(212) 816-6000
(Address, Including Zip Code, and
Telephone Number, Including Area
Code, of Registrant's Principal
Executive Offices)
Andrew Alter
Assistant Secretary
Salomon Brothers Mortgage Securities VII, Inc.
390 Greenwich Street
New York, New York 10013
(212) 816-6000
(Name, Address, Including Zip Code,
and Telephone Number, Including
Area Code, of Agent For Service)
----------------
Copies to:
Richard M. Horowitz, Esq.
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
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<PAGE>
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. |X|
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CALCULATION OF REGISTRATION FEE
Proposed Proposed
maximum maximum
Amount offering aggregate Amount of
Title of securities being price per offering registration
being registered registered (1) unit (2) price (2) fee (1)
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<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates
and Mortgage-Backed Notes, issued
in Series............................... $5,000,000,000.00 100% $5,000,000,000.00 $1,390,000.00
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</TABLE>
(1) $894,310,562.03 aggregate principal amount of Mortgage Pass-Through
Certificates and Mortgage-Backed Notes registered by the Registrant under
Registration Statement No. 333-72647 referred to below and not previously
sold are proposed to be consolidated in this Registration Statement
concurrently with the effectiveness hereof pursuant to Rule 429. All
registration fees in connection with such unsold amount of Mortgage
Pass-Through Certificates and Mortgage-Backed Notes have been previously
paid by the Registrant under the foregoing Registration Statement.
Accordingly, the total amount proposed to be registered under the
Registration Statement as so consolidated as of the date of this filing is
$5,894,310,562.03. In addition, the Registration Fee in connection with
$3,000,000,000.00 aggregate principal amount of Mortgage Pass-Through
Certificates and Mortgage-Backed Notes to be registered by the Registrant
under this Registration Statement has been previously paid by the
Registrant in connection with the original filing on August 2, 1999.
(2) Estimated solely for the purposes of calculating the registration fee on
the basis of the proposed maximum aggregate offering price.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 of the Securities Act of 1933, the Prospectuses
and Prospectus Supplements contained in this Registration Statement also relate
to the Registrant's Registration Statement on Form S-3 (Registration Statement
No. 333-72647. This Registration Statement, which is a new registration
statement, also constitutes a post-effective amendment to Registration Statement
No. 333-72647. Such post-effective amendment shall hereafter become effective
concurrently with the effectiveness of this Registration Statement in accordance
with Section 8(a) of the Securities Act of 1933.
<PAGE>
<TABLE>
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CROSS REFERENCE SHEET FURNISHED PURSUANT TO RULE 404(a)
Items and Captions in Form S-3 Location in Prospectuses
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<S> <C> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................................. Forepart of Registration
Statement and Outside Front
Cover Page of
Prospectuses**
2. Inside Front and Outside Back Cover Pages of
Prospectus..................................................... Inside Front Cover Page of
Prospectuses and Outside
Back Cover Page of
Prospectuses**
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges...................................... Summaries of Prospectus;
Special Considerations
4. Use of Proceeds................................................ Use of Proceeds**
5. Determination of Offering Price................................ *
6. Dilution....................................................... *
7. Selling Security Holders....................................... *
8. Plan of Distribution........................................... Method of Distribution**
9. Description of Securities to Be Registered..................... Outside Front Cover Page;
Summaries of Prospectus;
Description of the Trust
Funds; Description of the
Certificates**
10. Interests of Named Experts and Counsel......................... *
11. Material Changes............................................... Financial Information
12. Incorporation of Certain Information by Reference.............. Incorporation of Certain
Information by Reference
Disclosure of Commission Position on
13. Indemnification for Securities Act Liabilities................. See page II-2
</TABLE>
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* Answer negative or item inapplicable.
** To be completed or provided from time to time by Prospectus Supplement.
<PAGE>
EXPLANATORY NOTE
This Registration Statement consists of (i) a basic prospectus
for use in a residential or multifamily transaction, (ii) a basic prospectus for
use in a commercial or multifamily transaction and (iii) four forms of
prospectus supplement (one form to be used in offering a Series of
Senior/Subordinate Certificates, the second form to be used in offering a Series
of Certificates with various combinations of Credit Support, the third form to
be used in offering a series of commercial or multifamily certificates and the
fourth form to be used in offering Mortgage-Backed Notes). Each basic prospectus
used (in either preliminary or final form) will be accompanied by the applicable
prospectus supplement.
<TABLE>
<CAPTION>
CONTENTS OF REGISTRATION STATEMENT
Page
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<S> <C> <C>
Forms of Prospectus Supplement:
Version 1: Form of Prospectus Supplement relating to
a typical Senior/Subordinate Series............................................. S-1
Version 2: Form of Prospectus Supplement relating to
Certificates with various combinations
of Credit Support............................................................... S-1
Version 3: Form of Prospectus Supplement relating to
a typical Commercial or Multifamily Series...................................... S-1
Version 4: Form of Prospectus Supplement relating to
an offering of Mortgage-Backed Notes............................................ S-1
Basic Prospectuses:
Version 1: Form of Basic Prospectus for use in a
residential or multifamily transaction.......................................... 1
Version 2: Form of Basic Prospectus for use in a
commercial or multifamily transaction........................................... 1
</TABLE>
<PAGE>
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Subject to Completion, Dated September 7, 1999
[Version 1]
Prospectus Supplement
(To Prospectus dated , ____)
$_______________ (APPROXIMATE)
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES ____-
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
MASTER SERVICER
- --------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ IN THIS
PROSPECTUS SUPPLEMENT AND PAGE __ IN THE PROSPECTUS.
The certificates will represent interests only in a trust consisting primarily
of mortgage loans and will not represent ownership interests in or obligations
of any other entity.
This prospectus supplement may be used to offer and sell the certificates
offered hereby only if accompanied by the prospectus.
- --------------------------------------------------------------------------------
THE TRUST --
o will consist primarily of a mortgage pool of one- to four-family
fixed-rate residential mortgage loans; and
o will be represented by ______ classes of certificates, ______ of which
are offered hereby.
THE OFFERED CERTIFICATES --
o will represent senior, subordinate or residual interests in the trust and
will receive distributions from the assets of the trust; and
o will receive monthly distributions commencing on ________, __ ____
CREDIT ENHANCEMENT --
o the senior certificates will have credit enhancement in the form of
subordination; and
o the offered subordinate certificates will have credit enhancement in the
form of subordination provided by certain classes of non-offered
subordinate certificates and offered subordinate certificates with lower
payment priorities;
Salomon Smith Barney Inc. (the "Underwriter") will offer the Class A-1
Certificates, the Class A-2 Certificates, the Class A-3 Certificates, the Class
A-4 Certificates, the Class A-5 Certificates, the Class A-6 Certificates, the
Class A-7 Certificates, Class XS Certificates, the Class B-1 Certificates, the
Class B-2 Certificates and the Class B-3 Certificates (collectively, the
"Offered Certificates") from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The proceeds to the Depositor from the sale of such certificates, before
deducting expenses, will be approximately _____% of the initial principal
balance of such certificates, plus accrued interest on such certificates. The
Underwriter's commission will be any positive difference between the price it
pays to the Depositor for such certificates and the amount it receives from the
sale of such certificates to the public. See "Method of Distribution" herein.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF
THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE>
SALOMON SMITH BARNEY
UNDERWRITER
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD NOT
ASSUME THAT THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS DOCUMENT.
We provide information to you about the Offered Certificates in two separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to this series of certificates; and
o this prospectus supplement, which describes the specific terms of this
series of certificates.
Salomon Brothers Mortgage Securities VII, Inc.'s principal offices are located
at Seven World Trade Center, New York, New York 10048 and its phone number is
(212) 783-5635.
TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
SUMMARY OF PROSPECTUS SUPPLEMENT............................................S-__
RISK FACTORS................................................................S-__
USE OF PROCEEDS.............................................................S-__
THE MORTGAGE POOL...........................................................S-__
YIELD ON THE CERTIFICATES...................................................S-__
DESCRIPTION OF THE CERTIFICATES.............................................S-__
POOLING AND SERVICING AGREEMENT.............................................S-__
FEDERAL INCOME TAX CONSEQUENCES.............................................S-__
METHOD OF DISTRIBUTION......................................................S-__
SECONDARY MARKET............................................................S-__
LEGAL OPINIONS..............................................................S-__
RATINGS.....................................................................S-__
LEGAL INVESTMENT............................................................S-__
ERISA CONSIDERATIONS........................................................S-__
S-2
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SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS A VERY BROAD OVERVIEW OF THE CERTIFICATES
OFFERED HEREBY AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF
THE OFFERED CERTIFICATES, READ CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND
THE ENTIRE ACCOMPANYING PROSPECTUS. Capitalized terms used but not defined
herein have the meanings assigned to them in the prospectus. An Index of
Principal Definitions is included at the end of the prospectus.
Title of Series...................Salomon Brothers Mortgage Securities VII,
Inc., Mortgage Pass-Through Certificates,
Series ____-_.
Cut-off Date......................__________ __, ____.
Closing Date......................On or about __________ __, ____.
Depositor.........................Salomon Brothers Mortgage Securities VII, Inc.
(the "Depositor"), an indirect wholly-owned
subsidiary of Salomon Smith Barney Holdings
Inc. and an affiliate of Salomon Smith Barney
Inc. The Depositor will deposit the mortgage
loans into the trust. See "The Depositor" in
the prospectus.
Mortgage Loan Seller..............
Originator and Master Servicer....__________________. See "The Mortgage
Pool--Underwriting Standards" and "Pooling and
Servicing Agreement--The Originator and Master
Servicer" herein.
Trustee...........................__________________. See "Pooling and Servicing
Agreement--The Trustee" herein.
Distribution Dates................Distributions on the Offered Certificates will
be made on the __th day of each month, or, if
such day is not a business day, on the next
succeeding business day, beginning in _______.
Offered Certificates..............The classes Offered Certificates and their
pass-through rates and certificate principal
balances or notional amounts are set forth in
the table below.
S-3
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<TABLE>
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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............ $_________ ____% XS. . . . . . . $__________(2) Variable(3)
A-2............ $_________ ____% B-1. . . . . . . $__________ ____%
A-3............ $_________ ____% B-2. . . . . . . $__________ ____%
A-4............ $_________ ____% B-3. . . . . . . $__________ ____%
A-5............ $_________ ____% R. . . . . . . . $ 100 ____%
A-6............ $_________ ____%
============================================================================================================================
</TABLE>
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(1)Approximate.
(2)Approximate Initial Notional Amount.
(3)Calculated as described herein.
THE TRUST
The Depositor will establish a trust with respect to the Series ____-_
Certificates, pursuant to a pooling and servicing agreement dated as of
__________ __, ____ among the Depositor, the Master Servicer and the Trustee.
There are _____ classes of certificates representing the trust. See "Description
of the Certificates" herein.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust. Distributions of interest and/or principal on the Offered
Certificates will be made only from payments received in connection with the
mortgage loans described below.
THE MORTGAGE LOANS
The trust will contain approximately _____ conventional, one- to four-family,
fixed-rate mortgage loans secured by first liens on residential real properties.
The mortgage loans have an aggregate principal balance of approximately
$__________ as of _________ __ ____.
The mortgage loans have original terms to maturity of not greater than [30]
years and the following characteristics as of __________ __, ____.
Range of mortgage rates _____% to _____%.
(approximate):
Weighted average mortgage ______%.
rate (approximate):
Weighted average remaining ___ years and ___ months.
term to stated maturity
(approximate):
Range of principal balances $__________ to
(approximate): $____________.
Average principal balance: $_____________.
Range of loan-to-value ratios _____% to _____%.
Weighted average loan-to- ______%.
value ratio (approximate):
For additional information regarding the mortgage loans, see "The Mortgage Pool"
herein.
THE CERTIFICATES
OFFERED CERTIFICATES. The Offered Certificates will have the characteristics
shown in the table above in this prospectus supplement. The pass-through rates
on each class of Offered Certificates (other than the Class XS Certificates) are
fixed and shown in the table above. The pass-through rate on the Class XS
Certificates is variable and will be calculated for each distribution date as
described under "Description of the Certificates--Pass-Through
<PAGE>
S-3
Rate" herein. The initial variable pass-through rate for the Class XS
Certificates is approximately _____% per annum.
The Offered Certificates will be sold by the Depositor to the Underwriter on the
closing date. [The Underwriter will sell the Class XS Certificates.]
The Offered Certificates will initially be represented by one or more global
certificates registered in the name of CEDE & Co., as nominee of the Depository
Trust Company in minimum denominations of $[10,000] and integral multiples of
$[1.00] in excess thereof. See "Description of the Certificates --Registration
of the Book-Entry Certificates" herein.
The Class XS Certificates will be offered in registered, certificated form,
generally in minimum denominations of $[10,000] and integral multiples of
$[1,000] in excess thereof.
The Class R Certificates will be offered in registered, certificated form, in
minimum denominations of $[20] and integral multiples thereof.
CLASS B-4 CERTIFICATES, CLASS B-5 CERTIFICATES AND CLASS B-6 CERTIFICATES. Such
Certificates are not offered hereby. Such certificates have in the aggregate an
initial certificate principal balance of approximately $____________, evidencing
an aggregate initial undivided interest in the trust of approximately _____%.
Such Certificates will be sold by the Depositor to Salomon Smith Barney Inc. on
the closing date.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Offered
Certificates consists of subordination as described below and under "Description
of the Certificates--Allocation of Losses; Subordination" herein.
SUBORDINATION. The rights of the holders of 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 (the "Subordinate
Certificates") to receive distributions will be subordinated, to the extent
described herein, to the rights of the holders of each class of Class A
Certificates.
In addition, the rights of the holders of Subordinate Certificates with higher
numerical class designations will be subordinated to the rights of holders of
Subordinate Certificates with lower numerical class designations, to the extent
described herein.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates in respect of interest and principal and to afford
such certificates protection against realized losses on the mortgage loans as
described below.
ALLOCATION OF LOSSES. Except as described below, if Subordinate Certificates
remain outstanding, losses on the mortgage loans will be allocated first to the
class of Subordinate Certificates with the lowest payment priority, and the
other classes of certificates will not bear any portion of such losses. If none
of the Subordinate Certificates remain outstanding, losses on mortgage loans
will generally be allocated to the Class A Certificates.
Not all losses will be allocated in the priority set forth above. Losses due to
natural disasters such as floods and earthquakes, fraud by a mortgagor,
bankruptcy of a mortgagor or certain other extraordinary events will be
allocated as described above only up to specified amounts. Losses of these types
in excess of the specified amount will, in general, be allocated to all
outstanding classes of certificates (other than the Class XS Certificates) pro
rata in proportion to their remaining principal balances. Therefore, the
Subordinate Certificates do not act as credit enhancement for such losses.
S-5
<PAGE>
P&I ADVANCES
The Master Servicer is required to advance delinquent payments of principal and
interest on the mortgage loans, subject to the limitations described herein. The
Master Servicer is entitled to be reimbursed for such advances, and therefore
such advances are not a form of credit enhancement. See "Description of the
Certificates--P&I Advances" herein and "Description of the Securities--Advances
in respect of Delinquencies" in the prospectus.
OPTIONAL TERMINATION
At its option, the Master Servicer may purchase all of the mortgage loans,
together with any properties in respect thereof acquired on behalf of the trust,
and thereby effect termination and early retirement of the Certificates, after
the aggregate principal balance of the mortgage loans (and properties acquired
in respect thereof) remaining in the trust has been reduced to less than [10%]
of the aggregate principal balance of the mortgage loans as of __________ __,
____. See "Pooling and Servicing Agreement-- Termination" herein and
"Description of the Securities-- Termination" in the prospectus.
FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the trust as a real estate mortgage investment
conduit for federal income tax purposes. See "Federal Income Tax
Consequences--Characterization of Investments in REMIC Certificates" in the
prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Federal Income Tax Consequences"
herein and in the prospectus.
RATINGS
It is a condition to the issuance of the certificates that the Offered
Certificates receive the following ratings from [______________ ("_____") and
___________ ("_________")]:
OFFERED
CERTIFICATES [RA] [RA]
- ------------ ---- ----
Class A-1 AAA AAA
through Class
A-7
Class XS AAA AAA[r]
Class B-1 AA AA
Class B-2 A A
Class B-3 BBB BBB
Class R AAA AAA
- ---------------------
[(1) Not rated.]
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 _____________ ratings is attached to highlight
certificates that __________ believes may 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.]
The ratings on the Class R Certificates do not address the likelihood of receipt
by the holders of such certificates of any amounts in excess of the initial
certificate balance thereof and interest thereon. See "Yield on the
Certificates" and "Ratings" herein and "Yield Considerations" in the prospectus.
LEGAL INVESTMENT
The Offered Certificates (other than the Class ___ and Class ___ 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
S-6
<PAGE>
category by one or more nationally recognized statistical rating organizations
and, as such, will be legal investments for certain entities to the extent
provided in SMMEA and applicable state laws. The Class ___ Certificates and the
Class ___ Certificates will not constitute "mortgage related securities" for
purposes of SMMEA. See "Legal Investment" herein and in the prospectus.
ERISA CONSIDERATIONS
The U.S. Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption 91-23, to the Underwriter. Such exemption generally
exempts from the application of certain of the prohibited transaction provisions
of Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the excise taxes imposed on such prohibited transactions
by Section 4975(a) and (b) of the Internal Revenue Code of 1986 (the "Code") and
Section 502(i) of ERISA, transactions relating to the purchase, sale and holding
of pass-through certificates underwritten by the Underwriter. Such exemption
generally applies to certificates such as the Class A Certificates and the Class
XS Certificates, and the servicing and operation of asset pools such as the
mortgage pool, provided that certain conditions are satisfied.
Such exemption will only apply to the Class A Certificates and the Class XS
Certificates. ACCORDINGLY, THE OTHER CLASSES OF CERTIFICATES MAY NOT BE ACQUIRED
BY OR ON BEHALF OF A PLAN EXCEPT AS DESCRIBED HEREIN. See "ERISA Considerations"
herein and in the prospectus.
S-7
<PAGE>
RISK FACTORS
[In addition to the matters described elsewhere in this prospectus
supplement and the prospectus, prospective investors should carefully consider
the following factors before deciding to invest in the Offered Certificates].
[Appropriate Risk Factors as necessary]
[THE UNDERWRITING STANDARDS OF THE MORTGAGE LOANS ARE NOT AS STRINGENT AS THOSE
UNDERWRITTEN IN A MORE TRADITIONAL MANNER, OR UNDERWRITTEN TO THE STANDARDS OF
FANNIE MAE AND FREDDIE MAC, WHICH MAY RESULT IN LOSSES ALLOCATED TO THE OFFERED
CERTIFICATEHOLDERS
The 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 Fannie Mae and
Freddie Mac guidelines but who generally have 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 at the time of origination of the Originator's
first lien, which secondary financing would reduce the equity the mortgagor
would otherwise have in the related mortgaged property as indicated in the
Originator's loan-to-value ratio determination.
As a result of such underwriting standards, the mortgage loans in the
mortgage pool are likely to experience rates of delinquency, foreclosure and
bankruptcy that are higher, and that may be substantially higher, than those
experienced by mortgage loans underwritten in a more traditional manner.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the mortgage loans in the mortgage pool than on mortgage loans originated in
a more traditional manner. No assurance can be given that the values of the
related mortgaged properties have remained or will remain at the levels in
effect on the dates of origination of the related mortgage loans. See "The
Mortgage Pool--Underwriting Standards; Representations" herein].
[CERTAIN MORTGAGE LOANS HAVE HIGH LOAN-TO-VALUE RATIOS WHICH MAY PRESENT A
GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately _____% of the mortgage loans, by aggregate principal balance
as of _________ __, ____, had a loan-to-value ratio at origination in excess of
80%. No mortgage loan in the mortgage pool with a loan-to-value ratio at
origination in excess of 80% will be covered by a primary mortgage insurance
policy. No mortgage loan will have a loan-to-value ratio exceeding __% at
origination. Mortgage loans with higher loan-to-value ratios may present a
greater risk of loss. In addition, an overall decline in the residential real
estate market, a rise in interest rates over a period of time and the general
condition of a mortgaged property, as well as other factors, may have the effect
of reducing the value of such mortgaged property from the appraised value at the
time the mortgage loan was originated. If there is a reduction in value of the
mortgaged property, the loan-to-value ratio may increase over what it was at the
time the mortgage loan was originated. Such an increase may reduce the
likelihood of liquidation or other proceeds being sufficient to satisfy the
mortgage loan. There can be no assurance that the loan-to-value ratio of any
mortgage loan
S-8
<PAGE>
determined at any time after origination is less than or equal to its original
loan-to-value ratio. See "The Mortgage Pool--General" herein].
[CERTAIN MORTGAGE LOANS ARE DELINQUENT AS OF THE CUT-OFF DATE, WHICH MAY PRESENT
A GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately ____% of the mortgage loans, by aggregate principal balance
as of ________ __, ____, were thirty days or more but less than sixty days
delinquent in their monthly payments as of _______ __, ____. Approximately ____%
of the mortgage loans, by aggregate principal balance as of ________ __, ____,
were sixty days or more but less than ninety days delinquent in their monthly
payments as of the _________ __, ____. However, investors in the mortgage loans
should realize that approximately _____% of the mortgage loans, by aggregate
principal balance as of ________ __, ____, have a first payment date occurring
on or after _________ __, ____ and, therefore, such mortgage loans could not
have been delinquent as of ________ __, ____].
[THE MORTGAGE LOANS ARE CONCENTRATED IN THE [STATE OF ___________], WHICH MAY
PRESENT A GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately _____% of the mortgage loans, by aggregate principal balance
of the mortgage loans as of __________ __, ____, are secured by mortgaged
properties located in the State of _________. The aggregate principal balance of
mortgage loans in the ________ zip code with the largest amount of such mortgage
loans, by aggregate principal balance as of ________ __, ____, was approximately
$_____________. If the __________ residential real estate market should
experience an overall decline in property values after the dates of origination
of the mortgage loans, the rates of delinquencies, foreclosures, bankruptcies
and losses on the mortgage loans may increase over historical levels of
comparable type loans, and may increase substantially.
[THE CERTIFICATES ARE OBLIGATIONS OF THE TRUST ONLY
The certificates will not represent an interest in or obligation of the
Depositor, the Master Servicer, the Mortgage Loan Seller, the Trustee or any of
their respective affiliates. Neither the certificates nor the underlying
mortgage loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the Depositor, the Master Servicer, the Trustee or any of
their respective affiliates. Proceeds of the assets included in the trust will
be the sole source of payments on the Offered Certificates, and there will be no
recourse to the Depositor, the Master Servicer, the Mortgage Loan Seller, 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].
[THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES WILL
BE AFFECTED BY PREPAYMENT SPEEDS
The rate and timing of distributions allocable to principal on the Class A
Certificates will depend, in general, on the rate and timing of principal
payments (including prepayments and collections upon defaults, liquidations and
repurchases) on the mortgage loans and the allocation thereof to pay principal
on such certificates as provided herein. The rate and timing of distributions
allocable to principal on the other classes of 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 all of the mortgage loans and the allocation
thereof to pay principal on such 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 _____%
of the mortgage loans, by aggregate principal balance as of
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<PAGE>
________ __, ____, a prepayment may subject the related mortgagor to a
prepayment charge, which may act as a deterrent to prepayment of such mortgage
loan. See "The Mortgage Pool" herein.
Generally, when prevailing interest rates are increasing, prepayment rates
on mortgage loans tend to decrease. A decrease in the prepayment rates on the
mortgage loans will result in a reduced rate of return of principal to investors
in the Class A Certificates at a time when reinvestment at such higher
prevailing rates would be desirable. A decrease in the prepayment rates on all
of the mortgage loans will result in a reduced rate of return of principal to
investors in the other classes of 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 related Class A Certificates, at time when reinvestment at comparable
yields may not be possible. An increase in the prepayment rates on all of the
mortgage loans will result in a greater rate of return of principal to investors
in the other classes of Offered Certificates, other than the Class XS
Certificates, at a time when reinvestment at comparable yields may not be
possible.
Prior to the distribution date in _______ ____, the Subordinate
Certificates will be entitled to receive distributions allocable to principal
based on a disproportionately small percentage of principal prepayments on the
mortgage loans, and the Class A Certificates will be entitled to receive
distributions allocable to principal based on a disproportionately large
percentage (which may be 100%) of principal prepayments on the mortgage loans.
To the extent that no principal prepayments or a disproportionately small
percentage of such prepayments are distributed on the Subordinate Certificates,
the subordination afforded to the Class A Certificates, in the absence of losses
allocated to such certificates, will be increased.
For further information regarding the effect of principal prepayments on
the weighted average lives of the Offered Certificates, see "Yield on the
Certificates" herein, including the table entitled "Percent of Initial
Certificate Principal Balance Outstanding at the Following Percentages of the
Prepayment Assumption"].
[THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON A VARIETY OF
FACTORS
The yield to maturity on the Offered Certificates, particularly the Class
XS Certificates, will depend, in general, on:
o the applicable purchase price; and
o the rate and timing of principal payments (including prepayments and
collections upon defaults, liquidations and repurchases) on the related
mortgage loans and the allocation thereof to reduce the certificate
principal balance or notional amount of such certificates, as well as
other factors.
The yield to investors on the Offered Certificates will be adversely
affected by any allocation thereto of interest shortfalls on the mortgage loans.
In general, if the Offered Certificates, other than the Class XS
Certificates, are purchased at a premium and principal distributions thereon
occur at a rate faster than anticipated at the time of purchase, the investor's
actual yield to maturity will be lower than that assumed at the time of
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<PAGE>
purchase. Conversely, if the Offered Certificates, other than the Class XS
Certificates, are purchased at a discount and principal distributions thereon
occur at a rate slower than that anticipated at the time of purchase, the
investor's actual yield to maturity will be lower than that originally assumed.
The proceeds to the Depositor from the sale of the Offered Certificates
were determined based on a number of assumptions, including a prepayment
assumption of ____% of the standard prepayment assumption, and weighted average
lives corresponding thereto. No representation is made that the mortgage loans
will prepay at such rate or at any other rate, or that the mortgage loans will
prepay at the same rate. The yield assumptions for the Offered Certificates will
vary as determined at the time of sale. See "Yield on the Certificates" herein].
[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 RELATED MORTGAGE LOANS AND OTHER FACTORS
CLASS XS CERTIFICATES: The Class XS Certificates will receive a portion of
the interest payments only from mortgage loans that have net mortgage rates
higher than ____%. Therefore, the yield on the Class XS Certificates will be
extremely sensitive to the rate and timing of principal prepayments and defaults
on such mortgage loans. Investors in the Class XS Certificates should be aware
that mortgage loans with higher mortgage rates may prepay faster than mortgage
loans with lower mortgage rates. If the mortgage loans that have net mortgage
rates higher than ____% are prepaid at a rate faster than an investor assumed at
the time of purchase, the yield to investors in the Class XS Certificates will
be adversely affected. Investors in the Class XS Certificates should fully
consider the risk that a rapid rate of prepayments on the mortgage loans that
have net mortgage rates higher than ____% could result in the failure of such
investors to fully recover their investments.
SUBORDINATE CERTIFICATES: The weighted average lives of, and the yield to
maturity on, the Class B-1 Certificates, the Class B-2 Certificates and the
Class B-3 Certificates will be progressively more sensitive, in increasing order
of their numerical class designations, 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 a higher numerical class designation (including
covered by the Class B-4, Class B-5 and Class B-6 Certificates which are not
offered hereby). 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].
[THE RESIDUAL CERTIFICATES WILL RECEIVE LIMITED DISTRIBUTIONS OF PRINCIPAL AND
INTEREST AND MAY HAVE SIGNIFICANT TAX LIABILITIES
Holders of the Class R Certificates are entitled to receive distributions
of principal and interest as described herein, but the holders of such
certificates are not expected to receive any distributions after the first
distribution date. In addition, holders of such certificates will have tax
liabilities with respect to their certificates during the early years of the
term of the trust that substantially exceed the principal and interest payable
thereon during or prior to such periods. See "--Federal Income Tax Consequences"
below, "Yield on the Certificates--Additional Yield Considerations Applicable
Solely to the Residual Certificates" herein and "Federal Income Tax
Consequences" herein and in the Prospectus].
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<PAGE>
[VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE
MORTGAGE LOANS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosure, and require licensing of the 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:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers
regarding the terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age,
race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under
the Consumer Credit Protection Act, in the extension of credit;
and
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws, policies
and principles may limit the ability of the trust to collect all or part of the
principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the 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, it will be obligated to cure such
breach or repurchase or replace the affected mortgage loan in the manner
described in the prospectus].
[YEAR 2000 SYSTEMS RISK COULD AFFECT THE ABILITY OF THE MASTER SERVICER TO
PERFORM ITS DUTIES
As is the case with most companies using computers in their operations, the
Master Servicer is faced with the task of completing its compliance goals in
connection with the year 2000 issue. The year 2000 issue is the result of prior
computer programs being written using two digits, rather than four digits, to
define the applicable year. Any of the Master Servicer's computer programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. Any such occurrence could result in major computer
system failure or miscalculations. The Master Servicer is presently engaged in
various procedures to ensure that its computer systems and software will be year
2000 compliant. However, in the event that the Master Servicer, or any of its
suppliers, customers, brokers or agents do not successfully and timely achieve
year 2000 compliance, the performance of obligations of the Master Servicer
under the pooling and servicing agreement could be materially adversely
affected].
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<PAGE>
THE MORTGAGE POOL
GENERAL
References to percentages of the Mortgage Loans unless otherwise noted are
calculated based on the aggregate principal balance of the Mortgage Loans as of
the Cut-off Date.
The Mortgage Pool will consist of approximately _____ conventional, one- to
four-family, fixed-rate, fully-amortizing Mortgage Loans secured by first liens
on residential real properties (the "Mortgaged Properties") and having an
aggregate principal balance as of ________ __, ____ (the "Cut-off Date") of
approximately $___________, 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 __%. The Mortgage Loans have original terms to
maturity of not greater than [30] years.
The Mortgage Loans are secured by first mortgages or deeds of trust or
other similar security instruments creating first liens on one- to four-family
residential properties consisting of 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 from the Originator. See "--Underwriting Standards;
Representations" herein. The Originator will act as the master servicer for the
Mortgage Loans originated by it pursuant to the Agreement (in such capacity, the
"Master Servicer").
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 _____% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such Mortgage Loan provides for payment of a
prepayment charge on certain partial or full prepayments made within one year,
five years or such other period as provided in the related Mortgage Note from
the date of origination of such Mortgage Loan. The amount of the prepayment
charge is as provided in the related Mortgage Note, and such prepayment charge
will generally apply if, in any twelve-month period during the first year, five
years or such other period as provided in the related Mortgage Note from the
date of origination of such Mortgage Loan, the Mortgagor prepays an aggregate
amount exceeding __% of the original principal balance of such Mortgage Loan.
With respect to _____% of such Mortgage Loans, the amount of the prepayment
charge will generally be equal to ___ months' advance interest calculated on the
basis of the Mortgage Rate in effect at the time of such prepayment on the
amount prepaid in excess of __% of the original principal balance of such
Mortgage Loan for a period of five years and one year, respectively. The
_____________ will be entitled to all prepayment charges received on the
Mortgage Loans, and such amounts will not be available for distribution on the
Certificates. The Master Servicer may, in its discretion, waive the collection
of any otherwise applicable prepayment charge or reduce the amount thereof
actually collected, and accordingly, there can be no assurance that the
prepayment charges will have any effect on the prepayment performance of the
Mortgage Loans.
The average principal balance of the Mortgage Loans at origination was
approximately $______. No Mortgage Loan had a principal balance at origination
of greater than approximately $_______ or less than approximately $______. The
average principal balance of the Mortgage Loans as of the Cut-off Date was
approximately $______. No Mortgage Loan had a principal balance as of the
Cut-off Date of greater than approximately $_______ or less than approximately
$______.
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<PAGE>
As of the Cut-off Date, the Mortgage Loans had Mortgage Rates ranging from
approximately _____% per annum to approximately ______% per annum and the
weighted average Mortgage Rate was approximately _____% per annum. The weighted
average remaining term to stated maturity of the Mortgage Loans will be
approximately __ years and __ months as of the Cut-off Date. None of the
Mortgage Loans will have a first Due Date prior to ________ ____ or after
_________ ____, or will have a remaining term to maturity of less than __ years
and __ months or greater than __ years as of the Cut-off Date. The latest
maturity date of any Mortgage Loan is
- -------- ----.
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans was approximately ______%. No Loan-to-Value Ratio at origination was
greater than approximately _____% or less than approximately ____%.
The Mortgage Loans are expected to have as of the Cut-off Date the
following characteristics listed on Appendix A hereto.
UNDERWRITING STANDARDS; REPRESENTATIONS
All of the Mortgage Loans were originated by ________________ (in such
capacity, the "Mortgage Loan Seller"), generally in accordance with the
underwriting criteria specified in the Prospectus, except as described herein.
[Description of differences with Prospectus description under the heading
"Underwriting Standards; Representations"].
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Certificates,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise if the Depositor deems such removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the Mortgage Pool prior to the issuance of the
Certificates unless including such mortgage loans would materially alter the
characteristics of the Mortgage Pool as described herein. The Depositor believes
that the information set forth herein will be representative of the
characteristics of the Mortgage Pool as it will be constituted at the time the
Certificates are issued, although the range of Mortgage Rates and maturities and
certain other characteristics of the Mortgage Loans may vary.
YIELD ON THE CERTIFICATES
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 __ 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
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<PAGE>
month of such Distribution Date, which ends __ 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 is less than the Certificate Principal Balance or Notional
Amount of such class actually outstanding for the first __ 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 master
serviced by it, 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 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 _____% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, a prepayment may subject the related mortgagor
to a prepayment charge. 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 ________
____, 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.
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<PAGE>
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.
The yield to maturity on the Class XS Certificates will be extremely
sensitive to prepayments on the Mortgage Loans generally, and most sensitive to
prepayments on 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 ________ ____.
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
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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 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
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<PAGE>
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 ________ ____ 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
___% of the Prepayment Vector. A ___% Prepayment Vector assumes that the
outstanding balance of a pool of mortgage loans prepays at a rate of ____% CPR
in the first month of the life of such pool, such rate increasing by an
additional approximate ____% CPR (precisely __/__, expressed as a percentage)
each month thereafter through the eleventh month of the life of such pool, and
such rate thereafter remaining constant at __% CPR for the remainder of the life
of such pool. An __% Prepayment Vector assumes, for example, that the
outstanding balance of a pool of mortgage loans prepays at a rate of ____% CPR
in the first month of the life of such pool, such rate increasing by an
additional approximate ____% CPR (precisely _____/__, expressed as a percentage)
each month thereafter through the ________ month of the life of such pool, and
such rate thereafter remaining constant at __% 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 __% CPR or any other CPR percentage
is to assume that the stated percentage of the outstanding principal balance of
the pool is prepaid over the course of a year.
The tables following the next paragraph indicate the percentage of the
initial Certificate Principal Balance of the 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 ____
Mortgage Loans with the characteristics set forth in the table below, (ii)
distributions on such Certificates are received, in cash, on the __th day of
each month, commencing in ________ ____, (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 ________ ____, 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 _______ ____, 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 _______ __, ____ and (x) the Servicing Fee
Rate is ____% per annum and the Trustee's Fee Rate is _____% per annum.
S-18
<PAGE>
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
PRINCIPAL BALANCE ORIGINAL TERM REMAINING TERM
AS OF THE MORTGAGE TO MATURITY TO MATURITY
CUT-OFF DATE RATE (MONTHS) (MONTHS)
------------ ---- -------- --------
<S> <C> <C> <C>
$ %
$ %
$ %
$ %
</TABLE>
There will be discrepancies between the characteristics of the actual
Mortgage Loans 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.
S-19
<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>
.................................
.................................
.................................
Weighted Average Life
in Years(1)....................
Weighted Average Life
in Years(2)....................
</TABLE>
<TABLE>
<CAPTION>
CLASS A-3 CERTIFICATES
DISTRIBUTION DATE 0% 25% 50% 75% 100% 125% 150%
----------------- -- --- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
.................................
.................................
.................................
Weighted Average Life
in Years(1)....................
Weighted Average Life
in Years(2)....................
</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
exercises its option to purchase the Mortgage Loans. See "Pooling
and Servicing Agreement-- Termination" herein.
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
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> <C> <C>
.................................
.................................
.................................
.................................
Weighted Average Life
in Years(1)....................
Weighted Average Life
in Years(2)....................
</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
exercises its option to purchase the Mortgage Loans. See "Pooling and
Servicing Agreement-- Termination" herein.
(Table continued on next page.)
S-20
<PAGE>
S-
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-6 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>
...................................
...................................
...................................
...................................
Weighted Average Life
in Years(1)......................
Weighted Average Life
in Years(2)......................
</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
exercises its option to purchase the Mortgage Loans. See "Pooling
and Servicing Agreement-- Termination" herein.
S-21
<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. 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
The yield to maturity of the Class XS Certificates will be extremely
sensitive to the prepayment, repurchase and default experience on the Mortgage
Loans, which may fluctuate significantly from time to time. A rapid rate of
principal payments on the Mortgage Loans will have a materially negative effect
on the yield to maturity of the Class XS Certificates, and principal prepayments
on Mortgage Loans with higher Mortgage Rates will have a greater negative impact
on the yield to maturity of the Class XS Certificates than principal prepayments
on Mortgage Loans with lower Mortgage Rates. There can be no assurance that the
Mortgage Loans will prepay at any particular rate. Prospective investors in the
Class XS Certificates should fully consider the associated risks, including the
risk that such investors may not fully recover their initial investment.
The following table indicates the sensitivity of the yield of the Class XS
Certificates to various rates of prepayment on the Mortgage Loans and the
corresponding pre-tax yield on a corporate bond equivalent basis. The table set
forth below has been prepared based on the Modeling Assumptions.
<TABLE>
<CAPTION>
PRE-TAX YIELD TO MATURITY ON THE CLASS XS CERTIFICATES
AT VARIOUS PERCENTAGES OF THE PREPAYMENT ASSUMPTION
ASSUMED AGGREGATE
PURCHASE PRICE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
0% 25% 50% 75% 100% 125% 150%
-- --- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$........................... % % % % 7.96% 1.90% (4.35)%
</TABLE>
On the basis of a constant prepayment rate of approximately ___% of the
Prepayment Assumption and the purchase price assumed above, the yield to
maturity of the Class XS Certificates would be approximately __%. If the actual
prepayment rate were to exceed such rate, initial investors in the Class XS
Certificates would not fully recover their initial investment.
The pre-tax yields set forth in the preceding table 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 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.
S-22
<PAGE>
The characteristics of the Mortgage Loans will differ from those assumed in
preparing the table above. There can be no assurance that the cash flows on the
Class XS Certificates will correspond to those used to determine the pre-tax
yields shown above or that the aggregate purchase price of the Class XS
Certificates will be as assumed. It is unlikely that any Mortgage Loan 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. 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 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 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 the 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 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 ____%, approximately ____%, approximately ____%, approximately
____%, approximately ____% and approximately ____%, 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.
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
S-23
<PAGE>
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 "Federal Income Tax Consequences"
herein and in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series ____-___ Certificates will consist of ________ 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 (the "Lockout Certificates", and
together with the Senior Sequential Certificates, the "Class A Certificates");
(iii) the Class XS Certificates (the Class A Certificates and the Class XS
Certificates, together, the "Senior Certificates"); (iv) 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"); and (v) the Class R Certificates
(the "Residual Certificates"). Only the Senior 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, fixed-rate,
fully-amortizing, first lien mortgage loans having original terms to maturity of
not greater than 30 years (the "Mortgage Loans") and an aggregate principal
balance as of _______ __, ____ (the "Cut-off Date"), after application of
scheduled payments due whether or not received, of approximately $___________,
subject to a permitted variance as described herein under "The Mortgage Pool".
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 $__________ and a fixed Pass-Through Rate for each Distribution
Date of ____% per annum. 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 Smith Barney 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 $_____ and integral multiples of $____ 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
S-24
<PAGE>
Balances or notional amounts, as applicable, of $______ and integral multiples
of $_____ 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 $___ 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 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 "Federal Income Tax
Consequences--Special Tax Considerations Applicable to Residual Certificates"
herein and under "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.
The "Record Date" for each Distribution Date (i) with respect to any Book-Entry
Certificate will be the close of business on the business day immediately
preceding such Distribution Date or (ii) with respect to any other class of
Certificates, including any Definitive Certificates, will be the close of
business on the last business day of the month preceding the month in which such
Distribution Date occurs. Such distributions will be made either (a) by check
mailed to the address of each such Certificateholder as it appears in the
Certificate Register or (b) upon written request to the Trustee at least five
business days prior to the relevant Record Date by any holder of Certificates
having an 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
S-25
<PAGE>
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
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
S-26
<PAGE>
respect to Voting Rights, to the extent that Participants whose holdings of
Book-Entry Certificates evidence such Voting Rights, authorize divergent action.
DTC management is aware that some computer applications, systems and
similar items for processing data ("Systems") that are dependent upon calendar
dates, including dates before, on and after January 1, 2000, may encounter "Year
2000 problems". DTC has informed its Participants and other members of the
financial community (collectively, the "Industry") that it has developed and is
implementing a program so that its Systems, as the same relate to the timely
payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries and settlement of trades within DTC ("DTC
Services"), continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to, issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on which DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being Year 2000 compliant and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty or contract modification of any kind.
The Depositor, the 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 $______, except that any beneficial ownership
represented by a Book- Entry Certificate in an amount less than $______
immediately prior to the issuance of a Definitive
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Certificate shall be issued in a minimum denomination equal to the amount of
such beneficial ownership.
DISTRIBUTIONS--GENERAL
The "Due Period" with respect to any Distribution Date commences on the
second day of the month immediately preceding the month in which such
Distribution Date occurs and ends on the first day of the month in which such
Distribution Date occurs. The "Prepayment Period" with respect to any
Distribution Date is the calendar month immediately preceding the month in which
such Distribution Date occurs. The "Determination Date" with respect to any
Distribution Date is on the 15th day of the month in which such Distribution
Date occurs or, if such day is not a business day, on the immediately preceding
business day.
PASS-THROUGH RATES
The Pass-Through Rate for each class of Certificates (other than the Class
XS Certificates) is ____% per annum. The Pass-Through Rate applicable to the
calculation of the Interest Distribution Amount for the Class XS Certificates
for any Distribution Date is the rate per annum expressed as the percentage
equivalent of a fraction, the numerator of which is equal to (i) (A) the amount
of interest accrued on the Mortgage Loans for the immediately preceding calendar
month at the Net Mortgage Rate minus (B) the aggregate amount of interest
payable on the Certificates (other than the XS Certificates), and the
denominator of which is equal to (ii) the Notional Amount of the Class XS
Certificates. The "Net Mortgage Rate" on any Mortgage Loan is equal to the then
applicable Mortgage Rate thereon minus the sum of (i) the Servicing Fee Rate and
(ii) the Trustee's Fee Rate. The "Mortgage Rate" on each Mortgage Loan is the
per annum rate of interest specified in the related mortgage note. The Servicing
Fee Rate on each Mortgage Loan is equal to ____% per annum. The Trustee's Fee
Rate for each Mortgage Loan is equal to ______% per annum. The initial variable
Pass-Through Rate for the Class IO Certificates is approximately ______% per
annum.
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 _________
____, a cash amount equal to interest on such Mortgage Loan, net of the amount
of any prepayment charges received on the Mortgage Loans and 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.
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 the first
Distribution Date, the Residual Certificates.
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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 applicable 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
applicable Master Servicer will be allocated among the holders of the
Certificates on a pro rata basis based on the respective amounts of interest
accrued on such Certificates for such Distribution Date. In addition, any
shortfalls resulting from the application of the Relief Act will be allocated
among the holders of all of the Certificates on a pro rata basis as described
above.
The 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 Certificates for any
Distribution Date is the rate per annum expressed as the percentage equivalent
of a fraction, the numerator of which is equal to (i) (A) the amount of interest
accrued on the Mortgage Loans for the immediately preceding calendar month at
the Net Mortgage Rate minus (B) the aggregate amount of interest payable on the
Certificates (other than the XS Certificates), and the denominator of which is
equal to (ii) the Notional Amount of 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 ______% per
annum. The initial variable Pass-Through Rate for the Class XS Certificates is
approximately _______% per annum.
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, reduced by the aggregate
of (a) all amounts allocable to principal previously distributed with respect to
such Certificate and (b) without duplication of amounts
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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 Certificates as of any date of
determination is equal to the aggregate principal balance of the then
outstanding Mortgage Loans. Reference to the Notional Amount of the Class XS
Certificates is solely for convenience in certain calculations and does not
represent the right to receive any distributions allocable to principal.
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".
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Holders of the Class XS Certificates are not entitled to receive any
distributions allocable to principal.
The Senior Percentage, which initially will equal approximately _____%, and
will in no event exceed ___%, 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
___% 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 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 ________ ____ will
equal ___%. 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 _____ year after the Closing Date, the Senior
Percentage for such Distribution Date plus ___% of the Subordinate Percentage
for such Distribution Date; for any Distribution Date during the _______ year
after the Closing Date, the Senior Percentage for such Distribution Date plus
__% of the Subordinate Percentage for such Distribution Date; for any
Distribution Date during the ______ year after the Closing Date, the Senior
Percentage for such Distribution Date plus __% of the Subordinate Percentage for
such Distribution Date; for any Distribution Date during the _______ year after
the Closing Date, the Senior Percentage for such Distribution Date plus __% 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 ___%). 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
____ years will be as follows: for any Distribution Date during the _____ year
after the Closing Date, __% 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, __% of the initial sum of the Certificate
Principal Balances of the Subordinate Certificates; for any Distribution Date
during the ______ year after the Closing Date, __% of the initial sum of the
Certificate Principal Balances of the Subordinate Certificates; and for any
Distribution Date during the _____ year after the Closing Date, __% 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
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<PAGE>
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 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 ________ ____, an amount equal to
the entire Certificate Principal Balance thereof;
(ii) Second, to the holders of the Lockout Certificates, the Lockout
Distribution Percentage of the Senior Principal Distribution Amount, until
the 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, to the holders of the Lockout Certificates, until the
Certificate Principal Balance thereof has 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" will be calculated for each
Distribution Date to be the percentage equal to the aggregate Certificate
Principal Balance of the Lockout Certificates divided by the sum of the
aggregate Certificate Principal Balances of the Class A Certificates. The
"Lockout Distribution Percentage" for any Distribution Date occurring prior to
the Distribution Date in _________ ____ will be equal to 0%. The "Lockout
Distribution Percentage" for any Distribution Date occurring after the first
____ years following the Closing Date will be as follows: for any
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<PAGE>
Distribution Date during the _______ year after the Closing Date, __% of the
Lockout Certificate Percentage for such Distribution Date; for any Distribution
Date during the ______ year after the Closing Date, __% of the Lockout
Certificate Percentage for such Distribution Date; for any Distribution Date
during the _______ year after the Closing Date, ___% of the Lockout Certificate
Percentage for such Distribution Date, and for any Distribution Date thereafter,
the lesser of (x) 300% of the Lockout Certificate Percentage and (y) 100%.
Notwithstanding the foregoing, if the Certificate Principal Balances of the
Class A Certificates (other than the Lockout Certificates) have been reduced to
zero, the 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 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".
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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
____%, approximately ____%, approximately ____%, approximately ____%,
approximately ____% and approximately ____%, 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 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 ____% 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 ____% 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 ____% 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
____% 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
____% 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 ________ ____, 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.
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P&I ADVANCES
Subject to the following limitations, each 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 master serviced by it and that were delinquent on the related
Determination Date, plus certain amounts representing assumed payments not
covered by any current net income on the Mortgaged Properties acquired by
foreclosure or deed in lieu of foreclosure (any such advance, a "P&I Advance").
P&I Advances are required to be made only to the extent they are deemed by
the applicable 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. Neither 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 applicable 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 applicable Master Servicer to be nonrecoverable from related late
collections, insurance proceeds or liquidation proceeds may be reimbursed to
such Master Servicer out of any funds in the Certificate Account prior to the
distributions on the Certificates. In the event either 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) on a pro rata basis. Any allocation of a Realized Loss to
a Certificate will be made by reducing the Certificate Principal Balance thereof
by the amount so allocated as of the Distribution Date in the month following
the calendar month in which such Realized Loss was incurred.
An allocation of a Realized Loss on a pro rata basis 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
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<PAGE>
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 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 $_________. As of any
date of determination following the Cut-off Date, the Special Hazard Amount
shall equal approximately $_________ 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 $_________. 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 ____% of
the aggregate principal balance of all 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) ____% 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
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<PAGE>
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) ____% 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 $_______. As of any date
of determination, the Bankruptcy Amount shall equal the initial Bankruptcy
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 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;
(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,
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<PAGE>
seizure or destruction under quarantine or customs regulations,
confiscation by order of any government or public authority, or risks of
contraband or illegal transactions or trade.
"Excess Special Hazard Losses" are Special Hazard Losses in excess of the
Special Hazard Amount.
A "Fraud Loss" is a loss incurred on a defaulted Mortgage Loan as to which
there was intentional fraud, dishonesty or misrepresentation in the origination
of such Mortgage Loan.
"Excess Fraud Losses" are Fraud Losses in excess of the Fraud Loss Amount.
A "Bankruptcy Loss" is a Deficient Valuation or a Debt Service Reduction.
With respect to any Mortgage Loan, a "Deficient Valuation" is a valuation by a
court of competent jurisdiction of the Mortgaged Property in an amount less than
the then outstanding indebtedness under the Mortgage Loan, which valuation
results from a proceeding initiated under the United States Bankruptcy Code. A
"Debt Service Reduction" is any reduction in the amount which a mortgagor is
obligated to pay on a monthly basis with respect to a Mortgage Loan as a result
of any proceeding initiated under the United States Bankruptcy Code, other than
a reduction attributable to a Deficient Valuation.
"Excess Bankruptcy Losses" are Bankruptcy Losses in excess of the
Bankruptcy Amount.
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 "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 "Federal Income Tax Consequences--Special Tax
Considerations Applicable to the Residual Certificates" herein and "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
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<PAGE>
(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.
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 MASTER SERVICER
The information set forth in the following paragraphs has been provided by
________________. None of the Depositor, the Mortgage Loan Seller, the Trustee
or any of their respective affiliates has made or will make any representation
as to the accuracy or completeness of such information.
The following table summarizes the Master Servicer's 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 the
Master Servicer from other loan originators.
<TABLE>
<CAPTION>
PERIOD ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Originations.........
Sales................
</TABLE>
The following table sets forth the Master Servicer's delinquency and loss
experience at the dates indicated on its servicing portfolio of mortgage loans
originated under the Master Servicer Programs (the majority of such mortgage
loans reflected in the following table are adjustable rate mortgage loans):
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<PAGE>
<TABLE>
<CAPTION>
AT
SEPTEMBER
AT DECEMBER 31, 30,
------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal
Balance................................
Number of Loans..........................
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding Principal
Balance.......................
Delinquency as a Percentage
of Number of Loans............
61-90 Days
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
91 Days or More
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
Total Delinquencies:
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
FORECLOSURES PENDING(1)
Principal Balance...............
Number of Loans.................
Foreclosures Pending as a
Percentage of Total
Outstanding Principal
Balance.........................
Foreclosures Pending as
a Percentage of Number of
Loans...........................
NET LOAN LOSSES for the Period(2)
NET LOAN LOSSES as a Percentage
of Total Outstanding Principal
Balance................................
</TABLE>
- --------------
(1) Mortgage loans which are in foreclosure but as to which title to the
mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set forth
above.
(2) Net Loan Losses is calculated for loans conveyed to REMIC trust funds as
the aggregate of the net loan loss for all such loans liquidated during the
period indicated. The net loan loss for any such loan is equal to the
difference between (a) the principal balance plus accrued interest through
the date of liquidation plus all liquidation expenses related to such loan
and (b) all amounts received in connection with the liquidation of such
loan. The majority of ___________ loans serviced by __________ have been
conveyed to REMIC trust funds.
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<PAGE>
The following table sets forth the Master Servicer's delinquency and loss
experience at the dates indicated on its entire residential (including
multi-family) mortgage loan servicing portfolio:
<TABLE>
<CAPTION>
AT
SEPTEMBER
AT DECEMBER 31, 30,
-------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal
Balance...............................
Number of Loans.........................
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal
Balance.......................
Delinquency as a Percentage
of Number of Loans............
61-90 Days
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
91 Days or More
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
Total Delinquencies:
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
FORECLOSURES PENDING(1)
Principal Balance...............
Number of Loans.................
Foreclosures Pending as a
Percentage of Total
Outstanding Principal
Balance.......................
Foreclosures Pending as
a Percentage of Number of
Loans...........................
NET LOAN LOSSES for the
Period(2).............................
NET LOAN LOSSES as a
Percentage of Total Outstanding
Principal Balance.....................
</TABLE>
S-41
<PAGE>
- -----------------
(1) Mortgage loans which are in foreclosure but as to which title to the
mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set forth
above.
(2) Net Loan Losses is calculated for loans conveyed to REMIC trust funds as
the aggregate of the net loan loss for all such loans liquidated during the
period indicated. The net loan loss for any such loan is equal to the
difference between (a) the principal balance plus accrued interest through
the date of liquidation plus all liquidation expenses related to such loan
and (b) all amounts received in connection with the liquidation of such
loan. The majority of residential loans serviced by __________ have been
conveyed to REMIC trust funds.
THE TRUSTEE
___________________, 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 .
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 ______% 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 either of the Master Servicer's obligations and
duties under the Agreement, (ii) that constitutes a specific liability of
Trustee under the Agreement or (iii) incurred by reason of willful misfeasance,
bad faith or negligence in the performance of the Trustee's duties under the
Agreement or as a result of a breach, or by reason of reckless disregard, of the
Trustee's obligations and duties under the Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to each Master Servicer in respect of
its servicing activities for the Certificates will be equal to accrued interest
at the Servicing Fee Rate of ____% per annum with respect to each Mortgage Loan
master serviced by it for each calendar month on the same principal balance on
which interest on such Mortgage Loan accrues for such calendar month (the
"Servicing Fee"). As additional servicing compensation, each Master Servicer is
entitled to retain all assumption fees and late payment charges in respect of
Mortgage Loans master serviced by it, 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 master
serviced by it. Each Master Servicer is obligated to offset any Prepayment
Interest Shortfall in respect of Mortgage Loans master serviced by it on any
Distribution Date (payments made by such Master Servicer in satisfaction of such
obligation, "Compensating Interest") to the extent of its aggregate Servicing
Fee for such Distribution Date. Each Master Servicer is obligated to pay certain
insurance premiums and certain ongoing expenses associated with the Mortgage
Pool in respect of Mortgage Loans master serviced by it and incurred by such
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 "Federal Income Tax Consequences" herein
regarding certain taxes payable by the Master Servicer.
VOTING RIGHTS
At all times, __% of all Voting Rights will be allocated among the holders
of the Certificates (other than the Class XS Certificates and the Residual
Certificates) in proportion to the then
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<PAGE>
outstanding Certificate Principal Balances of their respective Certificates, __%
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 __% 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 will have the
right to purchase the Mortgage Loans and any properties acquired in respect
thereof on any Distribution Date, once the aggregate principal balance of the
Mortgage Loans and such properties at the time of purchase is reduced to less
than __% of the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date. If the Master Servicer elects to exercise the foregoing option,
such election will effect the termination of the Trust Fund and the early
retirement of the Certificates. In the event the Master Servicer exercise such
option, notwithstanding the terms of the Prospectus, the purchase price payable
in connection therewith generally will be equal to par 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, and 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, 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 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. 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 person or persons named in the
Agreement. See "Description of the Certificates--Termination" in the Prospectus.
FEDERAL INCOME TAX CONSEQUENCES
A separate elections will be made to treat designated portions of the Trust
Fund as a real estate mortgage investment conduit ("REMICI") 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, the REMIC 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 Certificates will be the
sole class of "residual interests" in the REMIC and (ii) the Senior Certificates
and the Subordinate Certificates will evidence the "regular interests" in, and
will be treated as debt instruments of, the REMIC. See "Federal Income Tax
Consequences--REMIC--Classification of REMICs" in the Prospectus.
For federal income tax reporting purposes, the 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 ____% of the Prepayment Vector. No representation
is made that the Mortgage Loans will prepay at that rate or
S-43
<PAGE>
at any other rate. See "Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Regular Certificates--Original Issue Discount" in the
Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. 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 suggest that original issue discount with respect to
securities such as the Class XS Certificates that represent multiple
uncertificated REMIC regular interests, in which ownership interests will be
issued simultaneously to the same buyer should be computed on an aggregate
method. In the absence of further guidance from the IRS, original issue discount
with respect to the uncertificated regular interests represented by the Class XS
Certificates will be reported to the IRS and the Certificateholders on an
aggregate method based on a single overall constant yield and the prepayment
assumption stated above, treating all such uncertificated regular interests as a
single debt instrument as set forth in the OID Regulations.
The OID Regulations in some circumstances permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that of the issuer. Accordingly, it is possible that holders of Offered
Certificates issued with original issue discount may be able to select a method
for recognizing original issue discount that differs from that used in preparing
reports to Certificateholders and the IRS. Prospective purchasers of Offered
Certificates issued with original issue discount are advised to consult their
tax advisors concerning the tax treatment of such Certificates in this regard.
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 "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 "Federal Income Tax
S-44
<PAGE>
Consequences--REMICs--Characterization of Investments in REMIC Certificates" in
the Prospectus.
It is not anticipated that the REMIC will engage in any transactions that
would subject it to the prohibited transactions tax as defined in Section
860F(a)(2) of the Code, the contributions tax as defined in Section 860G(d) of
the Code or the tax on net income from foreclosure property as defined in
Section 860G(c) of the Code. However, in the event that any such tax is imposed
on the REMIC, 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 "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 "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 "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 "Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Residual Certificates--Noneconomic REMIC Residual Certificates"
in the Prospectus and "ERISA Considerations" and "Description of the
Certificates--Restrictions on Transfer of the Residual Certificates" herein for
additional restrictions on transfer of the Residual Certificates.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, unless "no significant purpose of the
transfer was to impede the assessment or collection of tax". Based on the REMIC
Regulations, the Residual Certificates will constitute noneconomic residual
interests during some or all of their terms for purposes of the REMIC
Regulations and, accordingly, unless no significant purpose of a transfer is to
impede the 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 Residual Certificates will be required to report taxable
income and pay tax with respect to the early accrual periods of the REMIC's term
that significantly exceeds the amount of cash distributions received by such
holders from the REMIC with respect to such periods. Furthermore, the tax on
such income will exceed the cash distributions with respect to such periods.
S-45
<PAGE>
Consequently, holders of Residual Certificates should have other sources of
funds sufficient to pay any federal income taxes due in the earlier years of the
REMIC as a result of their ownership of Class R Certificates. In addition, the
required inclusion of this amount of taxable income during the REMIC's earlier
accrual periods and the deferral of corresponding tax losses or deductions until
later accrual periods or until the ultimate sale or disposition of a Residual
Certificate (or possibly later under the "wash sale" rules of Section 1091 of
the Code) may cause the after-tax rate of return of a holder of a Residual
Certificate to be zero or negative even where such holders' pre-tax rate of
return is positive. That is, on a present value basis, the resulting tax
liabilities of a holder of a Residual Certificate will substantially exceed the
sum of any tax benefits and the amount of any cash distributions on such
Residual Certificates over their life.
An individual, trust or estate that holds (whether directly or indirectly
through certain pass-through entities) a Residual Certificate 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 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. See "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 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 "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 "Federal Income Tax
Consequences--REMICs" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated _________ __, ____ (the "Underwriting Agreement"), the
Depositor has agreed to sell, and Salomon Smith Barney Inc. (the "Underwriter")
has agreed to purchase the Offered Certificates. The Underwriter is obligated to
purchase all Offered Certificates of the respective classes offered hereby if it
purchases any. The Underwriter is an affiliate of the Depositor.
Distribution of the Offered Certificates will be made from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the Depositor, will be
approximately _________% 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 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
S-46
<PAGE>
will be made through the facilities of DTC, and that delivery of each other
class of Offered Certificates and the Residual Certificates will be made at the
offices of the Underwriter, Seven World Trade Center, New York, New York 10048,
in each case, on or about the Closing Date.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended, or will contribute to payments the
Underwriter may be required to make in respect thereof.
SECONDARY MARKET
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates--Reports to Certificateholders", which will
include information as to the outstanding principal balance of the Offered
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Offered
Certificates will be available through any other source. In addition, the
Depositor is not aware of any source through which price information about the
Offered Certificates will be generally available on an ongoing basis. The
limited nature of such information regarding the Offered Certificates may
adversely affect the liquidity of the Offered Certificates, even if a secondary
market for the Offered Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be passed
upon for the Depositor and the Underwriter by Thacher Proffitt & Wood, New York,
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 _________________
("_____") and "AAA" by ____________ ("____"), that the Class XS Certificates be
rated "AAAr" by ________ and "AAA" by ______, that the Class B-1 Certificates be
rated at least "AA" by _________ and at least "AA" by _______, that the Class
B-2 Certificates be rated at least "A" by _________ and at least "A" by
________, and that the Class B-3 Certificates be rated at least "BBB" by
__________.
The ratings of _________ and ________ 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. In
addition, the ratings on the Residual Certificates do not address the likelihood
of receipt by the holders of the Residual Certificates of any amounts in excess
of their initial Certificate Balance thereof and interest thereon. [The "r" of
the "AAAr" rating of the Class XS Certificates by ____________ is attached to
highlight derivative, hybrid, and certain other certificates that _____________
believes may experience high volatility or high variability in expected returns
due to non-credit risks. Examples of
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<PAGE>
such obligations are: securities whose principal or interest return is 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.
The Depositor makes no representations as to the proper
characterization of any class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Offered Certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent any class of Offered
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions.
See "Legal Investment" in the Prospectus.
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 91-23 (the "Exemption"), as described under "ERISA
Considerations" in the Prospectus,
S-48
<PAGE>
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 (as
described in the Prospectus), including the requirement that any such Plan must
be an "accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
A fiduciary of a Plan contemplating purchasing 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 the Subordinate Certificates or the Residual
Certificates by, on behalf of or with Plan Assets of any Plan may result in
prohibited transactions or the imposition of excise taxes or civil penalties.
Therefore, the Agreement provides that transfers of Subordinate or Residual
Certificates to a Plan, a trustee or other person acting on behalf of any Plan
or to any person using Plan Assets to effect such acquisition will not be
registered by the Trustee unless the purchaser thereof provides the Depositor,
the Trustee 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 (which in the case of the Class B-1 Certificates, the
Class B-2 Certificates and the Class B-3 Certificates, the purchaser will be
deemed to have represented such certification of facts) substantially to the
effect that the purchase of Offered 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 Offered Certificates is an "insurance company general account" (as
such term is defined in PTCE 95-60), (ii) the conditions set forth in Sections I
and III of 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 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
S-49
<PAGE>
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, before purchasing a Subordinate Certificate or Residual
Certificate, a fiduciary of a Plan should itself confirm that the conditions to
such purchase described above would be satisfied. Any Plan fiduciary that
proposes to cause a Plan to purchase a Certificate should consult with its
counsel with respect to the potential applicability to such investment of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to the proposed investment. For further information regarding the ERISA
considerations of investing in the Certificates, see "ERISA Considerations" in
the Prospectus.
S-50
<PAGE>
$____________ (APPROXIMATE)
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES ____-__
PROSPECTUS SUPPLEMENT
DATED _________ ___, ____
MASTER SERVICER
SALOMON SMITH BARNEY
UNDERWRITER
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE CERTIFICATES OFFERED HEREBY IN ANY STATE WHERE THE OFFER
IS NOT PERMITTED.
WE DO NOT CLAIM THE ACCURACY OF THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS AS OF ANY DATE OTHER THAN THE DATES STATED ON
THEIR COVER PAGES.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
Offered Certificates, whether or not participating in this offering, may be
required to deliver a prospectus supplement and prospectus until _______ ___,
____.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Subject to Completion, Dated September 7, 1999
[Version 2]
Prospectus Supplement
(To Prospectus dated , ____)
$___________ (APPROXIMATE)
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES ____-___
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
MASTER SERVICER
- --------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ IN THIS
PROSPECTUS SUPPLEMENT AND PAGE __ IN THE PROSPECTUS.
The certificates will represent interests only in a trust consisting primarily
of mortgage loans and will not represent ownership
interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the certificates
offered hereby only if accompanied by the prospectus.
- --------------------------------------------------------------------------------
THE TRUST --
o will consist primarily of a pool of one- to four-family fixed-rate, first
lien and second lien residential mortgage loans; and
o will be represented by _______ classes of certificates, _______ of
which are offered hereby.
THE OFFERED CERTIFICATES --
o will represent senior interests in the trust and will receive
distributions from the assets of the trust;
o will have credit enhancement in the forms of (i) a certificate insurance
policy issued by ______________ and (ii) overcollateralization; and
o will receive monthly distributions commencing on _______ __, ____.
Salomon Smith Barney Inc. (the "Underwriter") will offer the Class A-1
Certificates, the Class A-2 Certificates, the Class A-3 Certificates, the Class
A-4 Certificates, the Class A-5 Certificates, the Class A-6 Certificates and the
Class A-7 Certificates (collectively, the "Offered Certificates") from time to
time to the public in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. The proceeds to the Depositor from the sale
of such certificates, before deducting expenses, will be approximately _____% of
the initial principal balance of such certificates, plus accrued interest on
such certificates. The Underwriter's commission will be any positive difference
between the price it pays to the Depositor for such certificates and the amount
it receives from the sale of such certificates to the public. See "Method of
Distribution" herein.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF
THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE>
SALOMON SMITH BARNEY
Underwriter
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD NOT
ASSUME THAT THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS DOCUMENT.
We provide information to you about the Offered Certificates in two separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to this series of certificates; and
o this prospectus supplement, which describes the specific terms of this
series of certificates.
Salomon Brothers Mortgage Securities VII, Inc.'s principal offices are located
at Seven World Trade Center, New York, New York 10048 and its phone number is
(212) 783-5635.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
SUMMARY OF PROSPECTUS SUPPLEMENT............................................S-__
RISK FACTORS................................................................S-__
USE OF PROCEEDS.............................................................S-__
THE MORTGAGE POOL...........................................................S-__
YIELD ON THE CERTIFICATES...................................................S-__
DESCRIPTION OF THE CERTIFICATES.............................................S-__
POOLING AND SERVICING AGREEMENT.............................................S-__
THE INSURER.................................................................S-__
FEDERAL INCOME TAX CONSEQUENCES.............................................S-__
METHOD OF DISTRIBUTION......................................................S-__
SECONDARY MARKET............................................................S-__
LEGAL OPINIONS..............................................................S-__
EXPERTS.....................................................................S-__
RATINGS.....................................................................S-__
LEGAL INVESTMENT............................................................S-__
ERISA CONSIDERATIONS........................................................S-__
S-2
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS A VERY BROAD OVERVIEW OF THE CERTIFICATES
OFFERED HEREBY AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF
THE OFFERED CERTIFICATES, READ CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND
THE ENTIRE ACCOMPANYING PROSPECTUS. Capitalized terms used but not defined
herein have the meanings assigned to them in the prospectus. An Index of
Principal Definitions is included at the end of the prospectus.
Title of Series.............................Salomon Brothers Mortgage Securities
VII, Inc., Mortgage Pass-Through
Certificates, Series ____-___.
Cut-off Date................................________ __, ____.
Closing Date................................On or about _______ __, ____.
Depositor...................................Salomon Brothers Mortgage Securities
VII, Inc. (the "Depositor"), an
indirect wholly-owned subsidiary of
Salomon Smith Barney Holdings Inc.
and an affiliate of Salomon Smith
Barney Inc. The Depositor will
deposit the mortgage loans into the
trust. See "The Depositor" in the
prospectus.
Mortgage Loan Seller........................[Salomon Brothers Realty Corp.] (the
"Mortgage Loan Seller"), an indirect
wholly owned subsidiary of Salomon
Smith Barney Holdings Inc. and an
affiliate of the Depositor and
Salomon Smith Barney Inc.
Master Servicer.............................________________ (the "Master
Servicer"). See "The Mortgage
Pool--Underwriting Standards;
Representations" and "Pooling and
Servicing Agreement--____________"
herein.
Originators and Servicers...................______________ and ____________
(each, an "Originator" and each, a
"Servicer"). See "The Mortgage
Pool--Underwriting Standards;
Representations" and "Pooling and
Servicing Agreement--______________"
and "--______________" herein.
Trustee....................................._________________ (the "Trustee"), a
national banking association, will
be the Trustee of the trust. See
"Pooling and Servicing
Agreement--The Trustee" herein.
Trust Administrator........................._________________ (the "Trust
Administrator"), a national banking
association, will perform certain
administrative functions on behalf
of the Trustee and will act as the
initial paying agent, certificate
registrar and custodian. See
"Pooling and Servicing
Agreement--Trust Administrator"
herein.
Insurer....................................._________________ (the "Insurer").
See "The Insurer" herein.
S-3
<PAGE>
Distribution Dates..........................Distributions on the Offered
Certificates will be made on the
25th day of each month, or, if such
day is not a business day, on the
next succeeding business day,
beginning in _______ ----.
Offered Certificates........................Each class of Offered Certificates
will have the approximate initial
certificate principal balance and
fixed pass-through rate set forth in
the table below, [subject to the
indicated limitation in the case of
the Class A-6 Certificates].
<TABLE>
<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............ $___________ _____% A-5 . . . . . . $__________ _____%
A-2............ $___________ _____% A-6 . . . . . . $__________ _____%(2)
A-3............ _____% A-7 . . . . . . $__________ _____%
$-----------
A-4............ $___________ _____%
==============================================================================================================
</TABLE>
(1) Approximate.
(2) The Pass-Through Rate will equal the lesser of the rate stated above and
the weighted average net mortgage rate.
- ----------------------
THE TRUST
The Depositor will establish a trust with respect to the Series
____-___Certificates, pursuant to a pooling and servicing agreement dated as of
_______ __, ____ among the Depositor, the Servicers, the Trust Administrator and
the Trustee. There are _____ classes of certificates representing the trust. See
"Description of the Certificates" herein.
Each Series ____-___ Certificate will evidence a partial undivided interest in
the trust. Distributions of interest and/or principal on the Offered
Certificates will be made only from payments received in connection with the
mortgage loans described below and payments under the certificate insurance
policy (the "Policy").
THE MORTGAGE LOANS
The trust will contain approximately _____ conventional, one- to four-family,
fixed-rate mortgage loans secured by first liens and second liens on residential
real properties. The mortgage loans have an aggregate principal balance of
approximately $___________ as of _______ __, ____.
The mortgage loans have original terms to maturity of not greater than [30]
years and the following characteristics as of _______ __,
- ----:
Range of mortgage rates _____% to ______%.
(approximate):
Weighted average mortgage _____%.
rate (approximate):
Weighted average remaining __ years and __
term to stated maturity months.
(approximate):
Second lien mortgage loans ____%.
(approximate):
Balloon loans (approximate): _____%.
For additional information regarding the mortgage loans, see "The Mortgage Pool"
herein.
S-4
<PAGE>
THE CERTIFICATES
OFFERED CERTIFICATES. The Offered Certificates will have the characteristics
shown in the table above in this prospectus supplement. The Offered Certificates
will be sold by the Depositor to the Underwriter on the closing date.
The Offered Certificates will initially be represented by one or more global
certificates registered in the name of CEDE & Co., as nominee of the Depository
Trust Company in minimum denominations of $[10,000] and integral multiples of
$[1.00] in excess thereof. See "Description of the Certificates --Registration
of the Offered Certificates" herein.
CLASS CE CERTIFICATES. The Class CE Certificates are one of the ______ classes
of certificates representing the trust, but are not offered hereby. The Class CE
Certificates will have an initial certificate principal balance of approximately
$__________, which is equal to the initial overcollateralization required by the
pooling and servicing agreement. The Class CE Certificates initially evidence an
interest of approximately ____% in the trust. The Class CE Certificates will be
sold by the Depositor to Salomon Smith Barney Inc. on the closing date.
CLASS P CERTIFICATES. The Class P Certificates are one of the ______ classes of
certificates representing the trust, but are not offered hereby. The Class P
Certificates will have an initial certificate principal balance of $___ and will
not be entitled to distributions in respect of interest. The Class P
Certificates will be entitled to all prepayment charges received in respect of
the mortgage loans. The Class P Certificates will be sold by the Depositor to
Salomon Smith Barney Inc. on the closing date.
RESIDUAL CERTIFICATES. The Class R-I Certificates, the Class R-II Certificates
and the Class R-III Certificates are the classes of certificates representing
the residual interests in the trust, but are not offered hereby. Such
certificates will be sold by the Depositor to Salomon Smith Barney Inc. on the
closing date.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Offered
Certificates consists of the Policy and overcollateralization, each as described
below and under "Description of the Certificates--Credit Enhancement" and
"--Overcollateralization Provisions" herein.
OVERCOLLATERALIZATION. The aggregate principal balance of the mortgage loans as
of _______ __, ____ will exceed the aggregate certificate principal balance of
the Offered Certificates and the Class P Certificates on the closing date by
approximately $__________, which is equal to the initial certificate principal
balance of the Class CE Certificates. Such amount represents approximately ____%
of the aggregate principal balance of the mortgage loans as of ________ __, ____
and is the initial amount of overcollateralization required to be provided by
the mortgage pool under the pooling and servicing agreement.
The pooling and servicing agreement provides, however, that subject to certain
trigger tests set forth therein, the required level of overcollateralization may
increase or decrease over time. See "Description of the
Certificates--Overcollateralization Provisions" herein.
CERTIFICATE INSURANCE POLICY. The Offered Certificates will be entitled to the
benefit of the Policy to be issued by _____________. The Insurer will issue the
Policy as a means of providing additional credit enhancement to the Offered
Certificates. The Policy will irrevocably and unconditionally guarantee payment
for the benefit of the holders of the Offered Certificates of an amount that
will cover (i) any interest shortfalls (except for
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certain shortfalls as described herein) allocated to the Offered Certificates,
(ii) the amount by which (a) the outstanding principal amount of the Offered
Certificates exceeds (b) the principal amount of the mortgage loans and (iii)
without duplication of the amount specified in clause (ii), the outstanding
principal amount of the Offered Certificates to the extent unpaid on the final
distribution date or the earlier termination of the trust pursuant to the terms
of the pooling and servicing agreement. See "Description of the
Certificates--Financial Guaranty Insurance Policy" herein.
ALLOCATION OF LOSSES; SUBORDINATION. If, on any distribution date, there is not
sufficient excess interest or overcollateralization to absorb realized losses on
the mortgage loans as described under "Description of the
Certificates--Overcollateralization Provisions" herein, then realized losses on
the mortgage loans will be allocated to the Offered Certificates. The pooling
and servicing agreement does not permit the allocation of realized losses on the
mortgage loans to the Class P Certificates. Subject to the terms of the Policy,
all realized losses allocated to the Offered Certificates will be covered by the
Policy. See "Description of the Certificates --Allocation of Losses;
Subordination" and "--Financial Guaranty Insurance Policy" herein.
P&I ADVANCES
Each Servicer is required to advance delinquent payments of principal and
interest on the mortgage loans that each services, subject to the limitations
described herein. Each Servicer is entitled to be reimbursed for such advances,
and therefore such advances are not a form of credit enhancement. See
"Description of the Certificates--P&I Advances" herein and "Description of the
Securities--Advances in respect of Delinquencies" in the prospectus.
OPTIONAL TERMINATION
At its option, the majority holder of the Class CE Certificates (or if such
holder does not exercise such option, the Master Servicer or the Insurer) may
purchase all of the mortgage loans, together with any properties in respect
thereof acquired on behalf of the trust, and thereby effect termination and
early retirement of the Certificates, after the aggregate principal balance of
the mortgage loans (and properties acquired in respect thereof) remaining in the
trust has been reduced to less than __% or __% (as further provided herein) of
the aggregate principal balance of the mortgage loans as of _______ __, ____.
See "Pooling and Servicing Agreement-- Termination" herein and "Description of
the Securities-- Termination" in the prospectus.
FEDERAL INCOME TAX CONSEQUENCES
Three separate elections will be made to treat designated portions of the trust
as real estate mortgage investment conduits for federal income tax purposes. See
"Federal Income Tax Consequences--Characterization of Investments in REMIC
Certificates" in the prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Federal Income Tax Consequences"
herein and in the Prospectus.
RATINGS
It is a condition to the issuance of the certificates that the Offered
Certificates receive a rating of "Aaa" from _____________ ("______") and a
rating of "AAA" from
- ------------- ("------------").
The ratings on the Offered Certificates are based in part on the ratings of the
claims-paying ability of the Insurer by _______ and
- ----------.
A security rating does not address the frequency of prepayments on the mortgage
loans or the corresponding effect on yield to
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investors. See "Yield on the Certificates" and "Ratings" herein and "Yield
Considerations" in the prospectus.
LEGAL INVESTMENT
The Offered Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
because the mortgage pool includes certain mortgage loans that are secured by
subordinate liens on the related mortgaged properties. See "Legal Investment"
herein and in the prospectus.
ERISA CONSIDERATIONS
The U.S. Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption 91-23, to the Underwriter. Such exemption generally
exempts from the application of certain of the prohibited transaction provisions
of Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the excise taxes imposed on such prohibited transactions
by Section 4975(a) and (b) of the Internal Revenue Code of 1986 (the "Code") and
Section 502(i) of ERISA, transactions relating to the purchase, sale and holding
of pass-through certificates underwritten by the Underwriter. Such exemption
generally applies to certificates such as the Offered Certificates, and the
servicing and operation of asset pools such as the mortgage pool, provided that
certain conditions are satisfied. See "ERISA Considerations" herein and in the
prospectus.
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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.
[Appropriate Risk Factors as necessary]
[THE UNDERWRITING STANDARDS OF THE MORTGAGE LOANS ARE NOT AS STRINGENT AS THOSE
UNDERWRITTEN IN A MORE TRADITIONAL MANNER, OR UNDERWRITTEN TO THE STANDARDS OF
FANNIE MAE AND FREDDIE MAC, WHICH MAY RESULT IN LOSSES ALLOCATED TO THE OFFERED
CERTIFICATEHOLDERS
The Originators' underwriting standards are primarily intended to assess
the value of the mortgaged property and to evaluate the adequacy of such
property as collateral for the mortgage loan. The Originators provide loans
primarily to borrowers who do not qualify for loans conforming to Fannie Mae and
Freddie Mac guidelines but who generally have equity in their property. While
the Originators' primary consideration in underwriting a mortgage loan is the
value of the mortgaged property, each Originator also considers, among other
things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the type and use of the mortgaged property.
Neither Originator's underwriting standards prohibit a mortgagor from obtaining
secondary financing at the time of origination of such Originator's first lien,
which secondary financing would reduce the equity the mortgagor would otherwise
have in the related mortgaged property as indicated in the related Originator's
loan-to-value ratio determination.
As a result of such underwriting standards, the mortgage loans in the
mortgage pool are likely to experience rates of delinquency, foreclosure and
bankruptcy that are higher, and that may be substantially higher, than those
experienced by mortgage loans underwritten in a more traditional manner.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the mortgage loans in the mortgage pool than on mortgage loans originated in
a more traditional manner. No assurance can be given that the values of the
related mortgaged properties have remained or will remain at the levels in
effect on the dates of origination of the related mortgage loans. See "The
Mortgage Pool--Underwriting Standards; Representations" herein].
[CERTAIN MORTGAGE LOANS HAVE HIGH LOAN-TO-VALUE RATIOS WHICH MAY PRESENT A
GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately _____% of the mortgage loans, by aggregate principal balance
as of _______ __, ____, had a loan-to-value ratio (or a combined loan-to-value
ratio, in the case of any second lien mortgage loan) at origination in excess of
80%. No mortgage loan in the mortgage pool with a loan-to-value ratio (or a
combined loan-to-value ratio, in the case of any second lien mortgage loan) at
origination in excess of 80% will be covered by a primary mortgage insurance
policy. No first lien mortgage loan will have a loan-to-value ratio exceeding
__% at origination and no second lien mortgage loan will have a combined
loan-to-value ratio exceeding _____% at origination. Mortgage loans with higher
loan-to-value ratios may present a greater risk of loss. In addition, an overall
decline in the residential real estate market, a rise in interest rates over a
period of time and the general condition of a mortgaged property, as well as
other factors, may have the effect of reducing the value of such mortgaged
property from the appraised value at the time the mortgage loan was originated.
If there is a reduction in value of the mortgaged property, the loan-to-value
ratio may increase over what it was at the time the mortgage loan was
originated. Such an
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increase may reduce the likelihood of liquidation or other proceeds being
sufficient to satisfy the mortgage loan. There can be no assurance that the
loan-to-value ratio of any mortgage loan determined at any time after
origination is less than or equal to its original loan-to-value ratio. See "The
Mortgage Pool--General" herein].
[CERTAIN MORTGAGE LOANS ARE DELINQUENT AS OF THE CUT-OFF DATE, WHICH MAY PRESENT
A GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately ____% of the mortgage loans, by aggregate principal balance
as of _______ __, ____, were thirty days or more but less than sixty days
delinquent in their monthly payments as of ______ __, ____. Approximately ____%
of the mortgage loans, by aggregate principal balance as of _______ __, ____,
were sixty days or more but less than ninety days delinquent in their monthly
payments as of the _______ __, ____. However, investors in the mortgage loans
should realize that approximately _____% of the mortgage loans, by aggregate
principal balance as of _______ __, ____, have a first payment date occurring on
or after _______ __, ____ and, therefore, such mortgage loans could not have
been delinquent as of _______ __, ____].
[THE MORTGAGE LOANS ARE CONCENTRATED IN THE STATE OF ________ AND THE STATE OF
______, WHICH MAY PRESENT A GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE
LOANS
Approximately _____% and _____% of the mortgage loans, in each case, by
aggregate principal balance as of _______ __, ____, are secured by mortgaged
properties located in the State of ________ and the State of ________,
respectively. The aggregate principal balance of mortgage loans in the ________
zip code with the largest amount of such mortgage loans, by aggregate principal
balance as of ________ __, ____, was approximately $_________. If the _________
or ________ residential real estate market should experience an overall decline
in property values after the dates of origination of the mortgage loans, the
rates of delinquencies, foreclosures, bankruptcies and losses on the mortgage
loans may increase over historical levels of comparable type loans, and may
increase substantially].
[CERTAIN OF THE MORTGAGE LOANS ARE BALLOON LOANS, WHICH MAY PRESENT A GREATER
RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately _____% of the mortgage loans, by aggregate principal balance
as of _______ __, ____, are mortgage loans with balloon payments. Because
borrowers of mortgage loans with balloon payments are required to make
substantial single payments upon maturity, it is possible that the default risk
associated with such mortgage loans is greater than that associated with
fully-amortizing mortgage loans].
[CERTAIN MORTGAGE LOANS ARE SECURED BY SECOND LIENS ON THE RELATED MORTGAGED
PROPERTY, WHICH MAY PRESENT A GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE
LOANS
Approximately ____% of the mortgage loans, by aggregate principal balance
as of _______ __, ____, are secured by second liens on the related mortgaged
properties. The proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the outstanding balance of such
mortgage loans only to the extent that the claims of the related senior
mortgages have been satisfied in full, including any related foreclosure costs.
In circumstances when it is determined to be uneconomical to foreclose on the
mortgaged property, the related Servicer may write off the entire outstanding
balance of such mortgage loan as a bad debt. The foregoing considerations will
be particularly applicable to mortgage loans secured by second liens that have
high combined loan-to-value ratios because it is comparatively more likely that
the related Servicer would determine foreclosure to be uneconomical in the case
of such mortgage loans. The rate of default of second mortgage loans may be
greater than that of mortgage loans secured by first liens
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on comparable properties. See "Risk Factors--Risks Associated with Junior Lien
Mortgage Loans" in the Prospectus].
[THE CERTIFICATES ARE OBLIGATIONS OF THE TRUST ONLY
The certificates will not represent an interest in or obligation of the
Depositor, the Servicers, the Mortgage Loan Seller, the Trustee, the Trust
Administrator or any of their respective affiliates. Neither the certificates
nor the underlying mortgage loans will be guaranteed or insured by any
governmental agency or instrumentality, or by the Depositor, the Servicers, the
Trustee, the Trust Administrator or any of their respective affiliates. The
Offered Certificates are covered by the Policy, as and to the extent described
under the caption "Description of the Certificates--Financial Guaranty Insurance
Policy" herein. Proceeds of the assets included in the trust and proceeds from
the Policy will be the sole source of payments on the Offered Certificates, and
there will be no recourse to the Depositor, the Servicers, the Mortgage Loan
Seller, the Trustee, the Trust Administrator or any other entity in the event
that such proceeds are insufficient or otherwise unavailable to make all
payments provided for under the Offered Certificates].
[THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES WILL
BE AFFECTED BY PREPAYMENT SPEEDS AND BY THE PRIORITY OF PAYMENT ON SUCH
CERTIFICATES
The rate and timing of distributions allocable to principal on the Offered
Certificates will depend, in general, on the rate and timing of principal
payments (including prepayments and collections upon defaults, liquidations and
repurchases) on the mortgage loans and the allocation thereof to pay principal
on the Offered Certificates as provided herein. As is the case with mortgage
pass-through certificates generally, the Offered Certificates are subject to
substantial inherent cash-flow uncertainties because the mortgage loans may be
prepaid at any time. However, with respect to approximately _____% of the
mortgage loans, by aggregate principal balance as of _______ __, ____, a
prepayment may subject the related mortgagor to a prepayment charge, which may
act as a deterrent to prepayment of such mortgage loan. See "The Mortgage Pool"
herein.
Generally, when prevailing interest rates are increasing, prepayment rates
on mortgage loans tend to decrease; a decrease in the prepayment rates on the
mortgage loans will result in a reduced rate of return of principal to investors
in the Offered Certificates at a time when reinvestment at such higher
prevailing rates would be desirable. Conversely, when prevailing interest rates
are declining, prepayment rates on mortgage loans tend to increase; an increase
in the prepayment rates on the mortgage loans will result in a greater rate of
return of principal to investors in the Offered Certificates at a time when
reinvestment at comparable yields may not be possible.
Except as otherwise described herein, distributions of principal will be
made to the classes of Offered Certificates according to the priorities
described herein, rather than on a PRO RATA basis among such classes. The timing
of commencement of principal distributions and the weighted average life of each
such class of certificates will be affected by the rates of prepayment on the
mortgage loans experienced both before and after the commencement of principal
distributions on such class.
During certain periods, no principal payments or a disproportionately small
portion of the amount of principal then payable to the Offered Certificates will
be distributed on the Class A-7 Certificates. During certain other periods, a
disproportionately large portion of the amount of principal then payable to the
Offered Certificates will be distributed on the Class A-7 Certificates as more
fully described herein.
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For further information regarding the effect of principal prepayments on
the weighted average lives of the Offered Certificates, see "Yield on the
Certificates" herein, including the table entitled "Percent of Initial
Certificate Principal Balance Outstanding at the Following Percentages of the
Prepayment Assumption"].
[THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON A VARIETY OF
FACTORS
The yield to maturity on the Offered Certificates will depend, in general,
on:
o the applicable purchase price; and
o the rate and timing of principal payments (including prepayments and
collections upon defaults, liquidations and repurchases) on the
mortgage loans, payments by the Insurer, and the allocation thereof to
reduce the certificate principal balance of such certificates, as well
as other factors.
The yield to investors on the Offered Certificates will be adversely
affected by any allocation thereto of interest shortfalls on the mortgage loans
not covered by the Insurer.
In general, if the Offered Certificates are purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if the Offered Certificates
are purchased at a discount and principal distributions thereon occur at a rate
slower than that anticipated at the time of purchase, the investor's actual
yield to maturity will be lower than that originally assumed.
The proceeds to the Depositor from the sale of the Offered Certificates
were determined based on a number of assumptions, including a prepayment
assumption of ___% of the prepayment vector (as more fully described herein) and
weighted average lives corresponding thereto. No representation is made that the
mortgage loans will prepay at such rate or at any other rate. The yield
assumptions for the Offered Certificates will vary as determined at the time of
sale].
[THE YIELD TO MATURITY ON CERTAIN CLASSES OF THE OFFERED CERTIFICATES WILL BE
PARTICULARLY SENSITIVE TO THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS,
ESPECIALLY THE CLASS A-7 CERTIFICATES
The multiple class structure of the Offered Certificates causes the yield
of certain classes to be particularly sensitive to changes in the rates of
prepayments of the mortgage loans. Because distributions of principal will be
made to the classes of Offered Certificates according to the priorities
described herein, the yield to maturity on such classes of certificates will be
sensitive to the rates of prepayment on the mortgage loans experienced both
before and after the commencement of principal distributions on such class.
In particular, the Class A-7 Certificates do not receive (unless the
certificate principal balances of the other classes of Offered Certificates have
been reduced to zero) any portion of principal payments prior to the
distribution date in _______ ____. In addition, the Class A-7 Certificates will
receive (unless the certificate principal balances of the other classes of
Offered Certificates have been reduced to zero) a disproportionately small or
large portion of the amount of principal then payable to the Offered
Certificates thereafter. Therefore, the weighted average life of the Class A-7
Certificates will be longer or shorter than would otherwise be the case. The
effect on the market value of the Class A-7 Certificates of changes in market
interest rates or market yields for similar securities may be greater or lesser
than for the other classes of Offered Certificates entitled to principal
distributions].
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[VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE
MORTGAGE LOANS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosure, and require licensing of the Originators. In
addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the mortgage loans.
The mortgage loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers
regarding the terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age,
race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under
the Consumer Credit Protection Act, in the extension of credit;
and
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience.
Approximately ____% of the mortgage loans, by aggregate principal balance
as of _______ __, ____, will be subject to the Riegle Community Development and
Regulatory Improvement Act of 1994 (the "Riegle Act"), which incorporates the
Home Ownership and Equity Protection Act of 1994. The Riegle Act adds certain
additional provisions to Regulation Z, which is the implementing regulation of
the Federal Truth-in-Lending Act. These provisions impose additional disclosure
and other requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates or high up-front fees and charges. In general,
mortgage loans within the purview of the Riegle Act have annual percentage rates
over 10% greater than the yield on treasury securities of comparable maturity
and/or fees and points which exceed the greater of 8% of the total loan amount
or $400. The provisions of the Riegle Act apply on a mandatory basis to all
applicable mortgage loans originated on or after October 1, 1995. These
provisions can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws, policies
and principles may limit the ability of the trust to collect all or part of the
principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the related
Originator to damages and administrative enforcement.
Each Originator will represent that as of the closing date, each mortgage
loan originated by it is in compliance with applicable federal and state laws
and regulations. In the event of a breach of such representation, such
Originator will be obligated to cure such breach or repurchase or replace the
affected mortgage loan in the manner described in the prospectus].
[IF THE INSURER FAILS TO MEET ITS OBLIGATIONS UNDER THE POLICY, HOLDERS OF THE
OFFERED CERTIFICATES MAY EXPERIENCE A LOSS ON THEIR INVESTMENT
If the protection created by the overcollateralization is insufficient and
the Insurer is unable to meet its obligations under the Policy, then you could
experience a loss of some of your investment.
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In addition, any reduction in a rating of the claims-paying ability of the
Insurer may result in a reduction in the rating of the Offered Certificates].
[YEAR 2000 SYSTEMS RISK COULD AFFECT THE ABILITY OF THE SERVICERS TO PERFORM
THEIR DUTIES
As is the case with most companies using computers in their operations,
each Servicer is faced with the task of completing its compliance goals in
connection with the year 2000 issue. The year 2000 issue is the result of prior
computer programs being written using two digits, rather than four digits, to
define the applicable year. Any of the Servicers' computer programs that have
time- sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. Any such occurrence could result in major computer system
failure or miscalculations. Each Servicer is presently engaged in various
procedures to ensure that its computer systems and software will be year 2000
compliant. However, in the event that the related Servicer or any of its
suppliers, customers, brokers or agents do not successfully and timely achieve
year 2000 compliance, the performance of obligations of such Servicer under the
pooling and servicing agreement could be materially adversely affected].
USE OF PROCEEDS
[Salomon Brothers Realty Corp.] (the "Mortgage Loan Seller") will sell the
Mortgage Loans (as defined herein) to the Salomon Brothers Mortgage Securities
VII, Inc. (the "Depositor") and the Depositor will convey the Mortgage Loans to
the Trust Fund (as defined herein) in exchange for and concurrently with the
delivery of the Certificates (as defined herein). Net proceeds from the sale of
the Certificates will be applied by the Depositor to the purchase of the
Mortgage Loans from the Mortgage Loan Seller. Such net proceeds will represent
the purchase price to be paid by the Depositor to the Mortgage Loan Seller for
the Mortgage Loans. Such Mortgage Loans were previously purchased by the
Mortgage Loan Seller either directly or indirectly from _____________ and
______________ (in such capacities, each an "Originator").
THE MORTGAGE POOL
GENERAL
The pool of Mortgage Loans (the "Mortgage Pool") will consist of
approximately ----- conventional, one- to four-family, fixed-rate mortgage loans
(the "Mortgage Loans") secured by first liens or second liens on residential
real properties (the "Mortgaged Properties") and having an aggregate principal
balance as of _______ __, ____ (the "Cut-off Date") of approximately
$___________, after application of scheduled payments due on or before the
Cut-off Date whether or not received and subject to a permitted variance of plus
or minus [5]%. The Mortgage Loans have original terms to maturity of not greater
than [30] years.
References to percentages of the Mortgage Loans, unless otherwise noted,
are calculated based on the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date.
The Mortgage Loans are secured by first or second mortgages or deeds of
trust or other similar security instruments creating first liens or second liens
on residential properties consisting of attached, detached or semi-detached,
one- to four-family dwelling units, townhouses, individual condominium units,
individual units in planned unit developments and manufactured housing. The
Mortgage Loans to be included in the Mortgage Pool will be acquired by the
Depositor from the Mortgage Loan Seller, who acquired the Mortgage Loans either
directly or indirectly from the Originators. _______________ will act as the
master servicer (in such capacity, the "Master
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Servicer") pursuant to the Agreement (as defined herein) for the Mortgage Loans
and each of the Master Servicer and ________________ will act as the servicer
(in such capacities, each, a "Servicer") pursuant to the Agreement for the
Mortgage Loans originated by it. See "--Underwriting Standards; Representations"
herein
__________ Mortgage Loans, representing approximately ____% of the Mortgage
Loans, have first payment dates occurring in _________ ____. With respect to
such Mortgage Loans, no principal amortization payments will be distributed in
_______ ____ unless principal payments thereon are received in the Prepayment
Period applicable to the Distribution Date occurring in _______ ____. On the
Closing Date, however, cash will be deposited with the Trust Administrator in an
amount equal to interest accrued on such Mortgage Loans (net of the related
Servicing Fee (as defined herein)) for the related Interest Accrual Period for
distribution to the holders of the Offered Certificates on the first
Distribution Date.
The Mortgage Loans have scheduled monthly payments due generally on the
first day of the month (with respect to each Mortgage Loan, a "Due Date"). Each
Mortgage Loan will contain a customary "due-on-sale" clause.
Approximately _____% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment charge (a "Prepayment Charge") in limited
circumstances on certain prepayments as provided in the related Mortgage Note.
Such Mortgage Loans provide for payment of a Prepayment Charge on certain
partial prepayments and all prepayments in full made within a specified period
not in excess of ____ years from the date of origination of such Mortgage Loan,
as provided in the related Mortgage Note. The amount of the Prepayment Charge is
as provided in the related Mortgage Note, but is generally equal to _____
month's interest on any amounts prepaid in excess of __% of the then outstanding
principal balance of the related Mortgage Loan in any __ month period, as
permitted by law. The holders of the Class P Certificates will be entitled to
all Prepayment Charges received on the Mortgage Loans, and such amounts will not
be available for distribution on the other classes of Certificates. Under
certain instances, as described in the Agreement, the applicable Servicer may
waive the payment of any otherwise applicable Prepayment Charge. Investors
should conduct their own analysis of the effect, if any, that the Prepayment
Charges, and decisions by the Servicers with respect to the waiver thereof, may
have on the prepayment performance of the Mortgage Loans. The Depositor makes no
representation as to the effect that the Prepayment Charges, and decisions by
the Servicers with respect to the waiver thereof, may have on the prepayment
performance of the Mortgage Loans.
None of the Mortgage Loans are Buydown Mortgage Loans.
Approximately _____% of the Mortgage Loans are balloon loans ("Balloon
Loans"). Each Balloon Loan amortizes over ___ months, but the final payment (the
"Balloon Payment") on each Balloon Loan is due and payable on the ___th month.
The amount of the Balloon Payment on each Balloon Loan is substantially in
excess of the amount of the scheduled monthly payment on such Balloon Loan for
the period prior to the Due Date of such Balloon Payment.
The average principal balance of the Mortgage Loans at origination was
approximately $______. No Mortgage Loan had a principal balance at origination
greater than approximately $_________ or less than approximately $_____. The
average principal balance of the Mortgage Loans as of the Cut-off Date was
approximately $______. No Mortgage Loan had a principal balance as of the
Cut-off Date greater than approximately $_________ or less than approximately
$-----.
S-14
<PAGE>
The Mortgage Loans had Mortgage Rates as of the Cut-off Date ranging from
approximately _____% per annum to approximately ______% per annum, and the
weighted average Mortgage Rate was approximately _____% per annum.
The weighted average loan-to-value ratio (or combined loan-to-value ratio,
in the case of second lien Mortgage Loans) of the Mortgage Loans at origination
was approximately _____%. At origination, no Mortgage Loan will have a
loan-to-value ratio (or combined loan-to-value ratio, in the case of any second
lien Mortgage Loan) greater than approximately _____% or less than approximately
____%.
Approximately ____% of the Mortgage Loans are secured by second liens on
the related Mortgaged Property.
The weighted average remaining term to stated maturity of the Mortgage
Loans will be approximately __ years and __ months as of the Cut-off Date. None
of the Mortgage Loans will have a first Due Date prior to ______ ____ or after
_________ ____, or will have a remaining term to stated maturity of less than __
years and __ months or greater than [30] years as of the Cut-off Date. The
latest maturity date of any Mortgage Loan is _______ ____.
The Mortgage Loans are expected to have the following characteristics as of
the Cut-off Date (the sum in any column may not equal the total indicated due to
rounding):
S-15
<PAGE>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF
ORIGINAL AGGREGATE
NUMBER PRINCIPAL ORIGINAL
RANGE ($) OF LOANS BALANCE PRINCIPAL BALANCE
--------- -------- -------- ------------------
- ......
- ......
- ......
- ......
Total..................
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE ($) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------- -------- ----------------- -----------------
- ......
- ......
- ......
- ......
Total..................
S-16
<PAGE>
MORTGAGE RATES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------- -------- ---------------- ----------------
- ......
- ......
- ......
- ......
Total..................
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS(1)
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN-TO-VALUE RATIO (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------------- -------- ------------------ -----------------
- .......................
- .......................
- .......................
- .......................
Total................
(1) References to loan-to-value ratios are references to combined loan-to-value
ratios with respect to second lien Mortgage Loans.
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------- -------- ------------------ -----------------
.......................
.......................
.......................
.......................
Total.............
S-17
<PAGE>
MORTGAGED PROPERTY TYPES OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------- -------- ------------------ -----------------
........................
........................
........................
........................
........................
Total..............
MORTGAGED PROPERTY OCCUPANCY STATUS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------- -------- ------------------ -----------------
........................
........................
........................
Total..............
The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
PURPOSE OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------ -------- ------------------ -----------------
........................
........................
........................
Total..............
LOAN PROGRAMS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PROGRAM OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------ -------- ------------------ -----------------
........................
........................
Total..............
S-18
<PAGE>
RISK CATEGORIES OF THE _____________ MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------- -------- ------------------ -----------------
........................
........................
........................
........................
........................
........................
........................
Total..............
* Underwritten pursuant to the Mortgage Credit Only program.
** Underwritten pursuant to the Home Saver program.
RISK CATEGORIES OF THE __________ MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------- -------- ------------------ -----------------
........................
........................
........................
........................
........................
Total..............
UNDERWRITING STANDARDS; REPRESENTATIONS
The Mortgage Loans will be acquired by the Depositor from the Mortgage Loan
Seller. The Mortgage Loan Seller will have acquired, either directly or
indirectly, approximately _____% of the Mortgage Loans (the "___________
Mortgage Loans"), by aggregate principal balance as of the Cut-off Date, from
______________ ("_________"). The Mortgage Loan Seller will have acquired
approximately _____% of the Mortgage Loans (the "__________ Mortgage Loans"), by
aggregate principal balance as of the Cut-off Date, from ______________
("________"). All of the Mortgage Loans were originated or acquired by the
Originators generally in accordance with the underwriting criteria described
below.
The information set forth below with regard to the Originators'
underwriting standards has been provided to the Depositor or compiled from
information provided to the Depositor by the Originators. None of the Depositor,
the Trustee, the Trust Administrator, the Mortgage Loan Seller, the Underwriter
or any of their respective affiliates has made any independent investigation of
such information or has made or will make any representation as to the accuracy
or completeness of such information.
The Originators' underwriting standards are primarily intended to assess
the value of the mortgaged property and to evaluate the adequacy of such
property as collateral for the mortgage loan. All of the Mortgage Loans were
also underwritten with a view toward the resale thereof in the
S-19
<PAGE>
secondary mortgage market. While the Originators' primary consideration in
underwriting a mortgage loan is the value of the mortgaged property, the
Originators also consider, among other things, a mortgagor's credit history,
repayment ability and debt service-to-income ratio, as well as the type and use
of the mortgaged property. The Mortgage Loans generally bear higher rates of
interest than mortgage loans that are originated in accordance with Fannie Mae
and Freddie Mac standards, which is likely to result in rates of delinquencies
and foreclosures that are higher, and that may be substantially higher, than
those experienced by portfolios of mortgage loans underwritten in a more
traditional manner.
As a result of the Originators' underwriting criteria, changes in the
values of Mortgaged Properties may have a greater effect on the delinquency,
foreclosure and loss experience on the Mortgage Loans than such changes would be
expected to have on mortgage loans that are originated in a more traditional
manner. No assurance can be given that the values of the related Mortgaged
Properties have remained or will remain at the levels in effect on the dates of
origination of the related Mortgage Loans.
[ORIGINATOR'S UNDERWRITING PROGRAMS]
[Discussion of Underwriting Programs used by Originator 1 to originate
mortgage loans such as those in the securitization]
[ORIGINATOR'S UNDERWRITING PROGRAMS]
[Discussion of Underwriting Programs used by Originator 2 to originate
mortgage loans such as those in the securitization]
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted as of the
close of business on the Cutoff Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Certificates,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise if the Depositor deems such removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the Mortgage Pool prior to the issuance of the
Certificates unless including such mortgage loans would materially alter the
characteristics of the Mortgage Pool as described herein. The Depositor believes
that the information set forth herein will be representative of the
characteristics of the Mortgage Pool as it will be constituted at the time the
Certificates are issued, although the range of Mortgage Rates and maturities and
certain other characteristics of the Mortgage Loans may vary.
S-20
<PAGE>
YIELD ON THE CERTIFICATES
DELAY IN DISTRIBUTIONS ON THE OFFERED CERTIFICATES
The effective yield to holders of the Offered Certificates of each class
will be less than the yields otherwise produced by their respective Pass-Through
Rates (as defined herein) and purchase prices because (i) on the first
Distribution Date one month's interest is payable thereon even though __ days
will have elapsed from the date on which interest begins to accrue thereon, (ii)
on each succeeding Distribution Date the interest payable thereon is the
interest accrued during the month preceding the month of such Distribution Date,
which ends 24 days prior to such Distribution Date and (iii) during each
Interest Accrual Period (as defined herein) (other than the first Interest
Accrual Period), interest accrues on a Certificate Principal Balance that may be
less than the Certificate Principal Balance of such class actually outstanding
for the first 24 days of such Interest Accrual Period.
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of such prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan, the
mortgagor is not charged interest on the amount of such prepayment for the month
in which such prepayment is made. In addition, the application of the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"), to any
Mortgage Loan will adversely affect, for an indeterminate period of time, the
ability of applicable Servicer to collect full amounts of interest on such
Mortgage Loan. See "Certain Legal Aspects of the Mortgage Loans--Soldiers' and
Sailors' Civil Relief Act of 1940" in the Prospectus. Each Servicer is obligated
to pay from its own funds only those interest shortfalls attributable to full
and partial prepayments by the mortgagors on the related Mortgage Loans, but
only to the extent of its Servicing Fee for the related Due Period (as defined
herein). See "Pooling and Servicing Agreement--Servicing and Other Compensation
and Payment of Expenses" herein. Accordingly, the effect of (i) any principal
prepayments on the Mortgage Loans, to the extent that any resulting shortfall (a
"Prepayment Interest Shortfall") exceeds any payments made by the applicable
Servicer from its own funds ("Compensating Interest") or (ii) any shortfalls
resulting from the application of the Relief Act, will be to reduce the
aggregate amount of interest collected that is available for distribution to
Certificateholders. Any such shortfalls will be allocated among the Certificates
as provided under "Description of the Certificates--Interest Distributions on
the Offered Certificates" and "--Overcollateralization Provisions" herein. The
Policy will not cover any shortfalls resulting from application of the Relief
Act.
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Offered Certificates, the aggregate
amount of distributions on the Offered Certificates and the yield to maturity of
the Offered Certificates will be related to the rate and timing of payments of
principal on the Mortgage Loans. Furthermore, since mortgage loans secured by
second liens are not generally viewed by borrowers as permanent financing and
generally carry a high rate of interest, the Mortgage Loans may experience a
higher rate of prepayments than traditional mortgage loans. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of such Mortgage Loans and by the rate of principal
prepayments thereon (including for this purpose, payments resulting from
refinancings, liquidations of the Mortgage Loans due to defaults, casualties,
condemnations and repurchases, whether optional or required, by the Depositor,
the Originators, the Mortgage Loan Seller, the majority holder of the Class CE
Certificates, the Insurer or the Master Servicer, as the
S-21
<PAGE>
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 _____% of the Mortgage Loans, by aggregate principal balance as
of the Cut-off Date, a prepayment may subject the related mortgagor to a
Prepayment Charge.
Prepayments, liquidations and repurchases of the Mortgage Loans will result
in distributions in respect of principal to the holders of the Offered
Certificates that otherwise would be distributed over the remaining terms of the
Mortgage Loans. See "Maturity and Prepayment Considerations" in the Prospectus.
Since the rates of payment of principal on the Mortgage Loans will depend on
future events and a variety of factors (as described more fully herein and in
the Prospectus under "Yield Considerations" and "Maturity and Prepayment
Considerations"), no assurance can be given as to such rate or the rate of
principal prepayments. The extent to which the yield to maturity of the Offered
Certificates may vary from the anticipated yield will depend upon the degree to
which the Offered Certificates are purchased at a discount or premium and the
degree to which the timing of payments thereon is sensitive to prepayments on
the Mortgage Loans. Further, an investor should consider, in the case of any
Offered Certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on the Mortgage Loans could result in an
actual yield to such investor that is lower than the anticipated yield and, in
the case of any Offered Certificate purchased at a premium, the risk that a
faster than anticipated rate of principal payments could result in an actual
yield to such investor that is lower than the anticipated yield. In general, the
earlier a prepayment of principal is made on the Mortgage Loans, the greater the
effect on the yield to maturity of the Offered Certificates. As a result, the
effect on an investor's yield of principal payments occurring at a rate higher
(or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Offered Certificates would not be
fully offset by a subsequent like reduction (or increase) in the rate of
principal payments.
It is highly unlikely that the Mortgage Loans will prepay at any constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate. Moreover, the timing of prepayments on the Mortgage Loans may
significantly affect the actual yield to maturity on the Offered Certificates,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation.
The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment (and refinancing) would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans would be expected to decrease. Other factors affecting prepayment of
mortgage loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. There can be no certainty as to the rate of prepayments on the
Mortgage Loans during any period or over the life of the Certificates. See
"Yield Considerations" and "Maturity and Prepayment Considerations" in the
Prospectus.
Because principal distributions are paid to certain classes of Offered
Certificates before other such classes, holders of classes of Offered
Certificates having a later priority of payment bear a greater risk of losses
(because such Certificates will represent an increasing percentage interest in
the Trust Fund during the period prior to the commencement of distributions of
principal thereon) than holders of classes having earlier priorities for
distribution of principal. In particular, with respect to the Lockout
Certificates (as defined herein), as described under "Description of the
Certificates--Principal Distributions on the Offered Certificates" herein,
during certain periods, no principal payments or a disproportionately small
portion of the amount of principal then payable to the Offered Certificates will
be distributed on the Lockout Certificates, and during certain other periods, a
disproportionately large portion of the amount of principal then payable to the
Offered
S-22
<PAGE>
Certificates will be distributed on the Lockout Certificates. Unless the
Certificate Principal Balances of the Offered Certificates (other than the
Lockout Certificates) have been reduced to zero, the Lockout Certificates will
not be entitled to receive any distributions of principal payments prior to the
Distribution Date in _______ ____.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years and the rate of defaults and the severity of
losses on mortgage loans secured by second liens may be substantially higher
than mortgage loans secured by first liens. In addition, default rates may be
higher for mortgage loans used to refinance an existing mortgage loan. In the
event of a mortgagor's default on a Mortgage Loan, other than as provided by the
Policy as described herein, there can be no assurance that recourse will be
available beyond the specific Mortgaged Property pledged as security for
repayment. See "The Mortgage Pool--Underwriting Standards; Representations"
herein.
MARKET INTEREST RATE CONSIDERATIONS
Because the Mortgage Rates on the Mortgage Loans and the Pass-Through Rates
on the Offered Certificates are fixed, such rates will not change in response to
changes in market interest rates. Accordingly, if mortgage market interest rates
or market yield for securities similar to such Offered Certificates were to
rise, the market value of such Offered Certificates may decline.
BALLOON PAYMENTS
The Mortgage Loans with Balloon Payments will not be fully-amortizing
over their terms to maturity, and will require substantial principal payments at
their stated maturity. Mortgage Loans of this type involve a greater degree of
risk than self-amortizing loans because the ability of a borrower to make a
Balloon Payment typically will depend upon the borrower's ability either to
fully refinance the loan or to sell the related Mortgaged Property at a price
sufficient to permit the borrower to make the Balloon Payment. The ability of a
borrower to accomplish either of these goals will be affected by a number of
factors, including the value of the related Mortgaged Property, the level of
available mortgage rates at the time of sale or refinancing, the borrower's
equity in the related Mortgaged Property, tax laws, prevailing general economic
conditions and the availability of credit for loans secured by residential
property. Because the ability of a borrower to make a Balloon Payment typically
will depend upon the borrower's ability to either refinance the loan or to sell
the related Mortgaged Property, there is a risk that the Balloon Loans may
default at maturity. Any defaulted Balloon Payment that extends the maturity of
a Mortgage Loan may delay distributions of principal on the Offered Certificates
and thereby extend the weighted average life of such Certificates and, if such
Certificates were purchased at a discount, reduce the yield thereon.
WEIGHTED AVERAGE LIVES
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of each class
of Offered Certificates will be influenced by the rate at which principal on the
Mortgage Loans is paid, which may be in the form of scheduled payments or
prepayments (including repurchases and prepayments of principal by the borrower
as well as amounts received by virtue of condemnation, insurance or foreclosure
with respect to the Mortgage Loans), and the timing thereof.
Except as otherwise described under "Description of the
Certificates--Principal Distributions on the Offered Certificates" herein,
distributions of principal will be made to the classes of the Offered
Certificates according to the priorities described herein, rather than on a PRO
RATA basis among such
S-23
<PAGE>
classes, unless a Insurer Default (as defined herein) exists. The timing of
commencement of principal distributions to each class of the Offered
Certificates and the weighted average life of each such class will be affected
by the rates of prepayment on the Mortgage Loans experienced both before and
after the commencement of principal distributions on each such class. Moreover,
because the Lockout Certificates do not receive (unless the Certificate
Principal Balances of the Offered Certificates, other than the Lockout
Certificates, have been reduced to zero) any portion of principal payments prior
to the Distribution Date occurring in _______ ____ and thereafter will receive
(unless the Certificate Principal Balances of the Offered Certificates, other
than the Lockout Certificates, have been reduced to zero) a disproportionately
small or large portion of principal payments, the weighted average life of the
Lockout Certificates will be longer or shorter than would otherwise be the case,
and the effect on the market value of the Lockout Certificates of changes in
market interest rates or market yields for similar securities may be greater or
lesser than for the other classes of Offered Certificates entitled to principal
distributions.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") assumes a prepayment rate for the Mortgage Loans of
___% of the Prepayment Vector. A ___% Prepayment Vector assumes that the
outstanding balance of a pool of mortgage loans prepays at a rate of ____% CPR
in the first month of the life of such pool, such rate increasing by an
additional approximate ____% CPR (precisely __/__, expressed as a percentage)
each month thereafter through the eleventh month of the life of such pool, and
such rate thereafter remaining constant at __% CPR for the remainder of the life
of such pool. A __% Prepayment Vector assumes, for example, that the outstanding
balance of a pool of mortgage loans prepays at a rate of ____% CPR in the first
month of the life of such pool, such rate increasing by an additional
approximate ____% CPR (precisely __/__, expressed as a percentage) each month
thereafter through the eleventh month of the life of such pool, and such rate
thereafter remaining constant at _____% 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 __% CPR or any other CPR percentage
is to assume that the stated percentage of the outstanding principal balance of
the pool is prepaid over the course of a year.
The tables following the next paragraph indicate the percentage of the
initial Certificate Principal Balance of the Offered Certificates that would be
outstanding after each of the dates shown at various percentages of the
Prepayment Assumption and the corresponding weighted average lives of such
Certificates. The tables are based on the following assumptions (the "Modeling
Assumptions"): (i) the Mortgage Pool consists of ______ Mortgage Loans with the
characteristics set forth below, (ii) distributions on such Certificates are
received, in cash, on the 25th day of each month, commencing in _______ ____,
(iii) the Mortgage Loans prepay at the percentages of the Prepayment Assumption
indicated, (iv) no defaults or delinquencies occur in the payment by mortgagors
of principal and interest on the Mortgage Loans and no shortfalls due to the
application of the Relief Act are incurred, (v) none of the Depositor, the
Originators, the Mortgage Loan Seller, the majority holder of the Class CE
Certificates, the Insurer, the Servicers, the Master Servicer or any other
person purchases from the Trust Fund (as defined herein) any Mortgage Loan
pursuant to any obligation or option under the Agreement, except as indicated in
footnote two in the tables below, (vi) scheduled monthly payments on the
Mortgage Loans are received on the first day of each month commencing in _______
____, 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 _______
____, and include 30 days' interest thereon, (viii) the scheduled monthly
payment for each Mortgage Loan is calculated based on its principal balance,
Mortgage Rate, original term to stated
S-24
<PAGE>
maturity and remaining term to stated maturity such that the Mortgage Loan will
amortize in amounts sufficient to repay the remaining principal balance of such
Mortgage Loan by its remaining term to stated maturity, (ix) the Certificates
are purchased on _______ __, ____, (x) the Servicing Fee Rate is equal to ____%
per annum, the Master Servicing Fee Rate is equal to ____% per annum on the
Mortgage Loans directly serviced by ________ and is equal to ____% per annum on
the Mortgage Loans serviced by __________, the Administration Fee Rate is equal
to ______% per annum and the amount of the premium payable to the Insurer is as
described under the heading "Pooling and Servicing Agreement--Certain Matters
Regarding the Insurer", (xi) the first _____ Mortgage Loans in the table below
are Mortgage Loans that do not by their terms have Prepayment Charges and the
last _____ Mortgage Loans in the table below are Mortgage Loans that by their
terms do have Prepayment Charges, (xii) the _____ Mortgage Loan in the table
below is a Balloon Loan with a Balloon Payment of $_______ and the _____
Mortgage Loan in the table below is a Balloon Loan with a Balloon Payment of
$_______ and (xiii) the _____, _____, _____, ______, _____ and _____ Mortgage
Loans in the table below are Mortgage Loans that have been originated by
__________ and the _____, _____, _____, _____, _____ and ______ Mortgage Loans
in the table below are Mortgage Loans that have been originated by _________.
ASSUMED MORTGAGE LOAN CHARACTERISTICS
PRINCIPAL BALANCE ORIGINAL TERM REMAINING TERM
AS OF THE MORTGAGE TO MATURITY TO MATURITY
CUT-OFF DATE RATE (MONTHS) (MONTHS)
------------ ---- -------- --------
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the tables. Any such
discrepancy may have an effect upon the percentages of the initial Certificate
Principal Balance outstanding (and the weighted average lives) of the Offered
Certificates set forth in the tables. In addition, since the actual Mortgage
Loans included in the Mortgage Pool will have characteristics that differ from
those assumed in preparing the tables set forth below, the Offered Certificates
may mature earlier or later than indicated by the tables. Based on the foregoing
assumptions, the tables indicate the weighted average lives of the Offered
Certificates and sets forth the percentages of the initial Certificate Principal
Balance of the Offered Certificates that would be outstanding after each of the
Distribution Dates shown, at various percentages of the Prepayment Assumption.
Neither the prepayment model used herein nor any other prepayment model or
assumption purports to be an historical description of prepayment experience or
a prediction of the anticipated rate of prepayment of any pool of mortgage
loans, including the Mortgage Loans included in the Mortgage Pool. Variations in
the prepayment experience and the balance of the Mortgage Loans that prepay may
increase or decrease the percentages of initial Certificate Principal Balances
(and weighted average lives) shown in the following table. Such variations may
occur even if the average prepayment experience of all the Mortgage Loans equals
any of the specified percentages of the Prepayment Assumption.
S-25
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES CLASS A-3 CERTIFICATES CLASS A-4 CERTIFICATES
--------------------------- -------------------------- --------------------------- -----------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200% 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
- ----------------- --------------- ----------- -------- ------ ---------- -------- ------------------ -- ----- -------------------
<S> <C>
Closing Date......
..................
..................
..................
..................
</TABLE>
Weighted Average Life
in Years(1)............
Weighted Average Life
in Years(2)............
- -----------------
* Represents less than one-half of one percent.
(1) The weighted average life of a Certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the Certificate to the related Distribution Date,
(b) adding the results and (c) dividing the sum by the initial Certificate
Principal Balance of the Certificate.
(2) Calculated pursuant to footnote one but assumes the majority holder of the
Class CE Certificates exercises its option to purchase the Mortgage Loans
on the earliest possible Distribution Date on which it is permitted to
exercise such option. See "Pooling and Servicing Agreement --Termination"
herein.
(TABLE CONTINUED ON NEXT PAGE.)
S-26
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-5 CERTIFICATES CLASS A-6 CERTIFICATES CLASS A-7 CERTIFICATES
--------------------------- -------------------------- ---------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
- ----------------- --------------- ----------- -------- ------ ---------- -------- ------------------
<S> <C>
Closing Date......
..................
..................
..................
..................
</TABLE>
Weighted Average Life
in Years(1)............
Weighted Average Life
in Years(2)............
- -----------------
* Represents less than one-half of one percent.
(1) The weighted average life of a Certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the Certificate to the related Distribution Date,
(b) adding the results and (c) dividing the sum by the initial Certificate
Principal Balance of the Certificate.
(2) Calculated pursuant to footnote one but assumes the majority holder of the
Class CE Certificates exercises its option to purchase the Mortgage Loans
on the earliest possible Distribution Date on which it is permitted to
exercise such option. See "Pooling and Servicing Agreement --Termination"
herein.
(TABLE CONTINUED FROM PRIOR PAGE.)
S-27
<PAGE>
There is no assurance that prepayments of the Mortgage Loans will conform
to any of the levels of the Prepayment Assumption indicated in the tables above,
or to any other level, or that the actual weighted average lives of the Offered
Certificates will conform to any of the weighted average lives set forth in the
tables above. Furthermore, the information contained in the tables with respect
to the weighted average lives of the Offered Certificates is not necessarily
indicative of the weighted average lives that might be calculated or projected
under different or varying prepayment assumptions.
The characteristics of the Mortgage Loans will differ from those assumed in
preparing the tables above. In addition, it is unlikely that any Mortgage Loan
will prepay at any constant percentage until maturity, that all of the Mortgage
Loans will prepay at the same rate. The timing of changes in the rate of
prepayments may significantly affect the actual yield to maturity to investors,
even if the average rate of principal prepayments is consistent with the
expectations of investors.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Salomon Brothers Mortgage Securities VII, Inc., Mortgage Pass-Through
Certificates, Series ____-___ (the "Certificates") will consist of ______
classes of certificates, designated as: (i) the Class A-1 Certificates, the
Class A-2 Certificates, the Class A-3 Certificates, the Class A-4 Certificates,
the Class A-5 Certificates, the Class A-6 Certificates (collectively, the
"Senior Sequential Certificates"); (ii) the Class A-7 Certificates (the "Lockout
Certificates", and collectively with the Senior Sequential Certificates, the
"Offered Certificates"); (iii) the Class CE Certificates; (iv) the Class P
Certificates and (v) the Class R-I Certificates, the Class R-II Certificates and
the Class R-III Certificates (collectively, the "Residual Certificates"). Only
the Offered Certificates are offered hereby. The Class CE Certificates, the
Class P Certificates and the Residual Certificates, which are not being offered
hereby, will be sold by the Depositor to Salomon Smith Barney Inc. on the
Closing Date.
Distributions on the Offered Certificates will be made on the 25th day of
each month, or, if such day is not a business day, on the next succeeding
business day, beginning in _______ ____ (each, a "Distribution Date").
The Certificates represent in the aggregate the entire beneficial ownership
interest in a trust fund (the "Trust Fund") consisting primarily of the Mortgage
Pool of conventional, one- to four-family, fixed-rate, first lien and second
lien mortgage loans having original terms to maturity of not greater than [30]
years. The Certificates have an aggregate principal balance as of the Cut-off
Date of approximately $___________, subject to a permitted variance as described
under "The Mortgage Pool" herein.
Each class of Offered Certificates will have the approximate initial
Certificate Principal Balance and Pass-Through Rate as set forth under "Summary
of Prospectus Supplement--Offered Certificates" above. The Pass-Through Rate on
the Class A-6 Certificates for any Distribution Date will be a rate per annum be
equal to the lesser of (i) _____% and (ii) the Net WAC Pass-Through Rate for
such Distribution Date. The Offered Certificates in the aggregate evidence an
initial undivided interest of approximately _____% in the Trust Fund and the
Class CE Certificates evidence an initial undivided interest of approximately
____% in the Trust Fund.
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<PAGE>
The "Net WAC Pass-Through Rate" for any Distribution Date is a rate per
annum equal to the fraction, expressed as a percentage, the numerator of which
is (i) an amount equal to (A) 1/12 of the aggregate Scheduled Principal Balance
(as defined herein) of the then outstanding Mortgage Loans multiplied by the
weighted average of the Expense Adjusted Mortgage Rates on the then outstanding
Mortgage Loans minus (B) the amount of the premium payable to the Insurer with
respect to the Policy for such Distribution Date, and the denominator of which
is (ii) 1/12 of the aggregate Scheduled Principal Balance of the then
outstanding Mortgage Loans.
The "Expense Adjusted Mortgage Rate" on any Mortgage Loan is equal to the
then applicable Mortgage Rate thereon minus the sum of (i) the Administration
Fee Rate, (ii) the Servicing Fee Rate and (iii) the Master Servicing Fee Rate.
For any Distribution Date, the Administration Fee Rate is equal to _____% per
annum, the Servicing Fee Rate is equal to ____% per annum and the Master
Servicing Fee Rate is equal to ____% per annum with respect to each Mortgage
Loan serviced by _________. See "Pooling and Servicing Agreement--The Trustee",
"--The Trust Administrator" and "--Servicing and Other Compensation and Payment
of Expenses" herein. The amount of the premium payable to the Insurer with
respect to the Policy for any Distribution Date is described under "Pooling and
Servicing Agreement--Certain Matters Regarding the Insurer" herein.
The Offered Certificates will be issued, maintained and transferred on the
book-entry records of the Depository Trust Company ("DTC") and its Participants
(as defined herein) in minimum denominations of $[10,000] and integral multiples
of $[1.00] in excess thereof.
The Offered Certificates will initially be represented by one or more
global certificates registered in the name of the nominee of DTC (together with
any successor clearing agency selected by the Depositor, the "Clearing Agency"),
except as provided below. The Depositor has been informed by DTC that DTC's
nominee will be CEDE & Co. ("CEDE"). No person acquiring an interest in any
Offered Certificate (a "Certificate Owner") will be entitled to receive a
certificate representing such person's interest, except as set forth below under
"--Definitive Certificates". Unless and until a certificate is issued in fully
registered certificated form (a "Definitive Certificate") under the limited
circumstances described herein, all references to actions by Certificateholders
with respect to the Offered Certificates shall refer to actions taken by DTC
upon instructions from its Participants, and all references herein to
distributions, notices, reports and statements to Certificateholders with
respect to the Offered Certificates shall refer to distributions, notices,
reports and statements to DTC or CEDE, as the registered holder of the Offered
Certificates, for distribution to Certificate Owners in accordance with DTC
procedures. See "--Registration of the Offered Certificates" and "--Definitive
Certificates" herein.
Any Definitive Certificates will be transferable and exchangeable at the
offices of the Trust Administrator. No service charge will be imposed for any
registration of transfer or exchange, but the Trust Administrator may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
All distributions to holders of the Certificates, other than the final
distribution on any class of Certificates, will be made by the Trust
Administrator on behalf of the Trustee to the persons in whose names such
Certificates are registered at the close of business on each Record Date. The
"Record Date" for each Distribution Date (i) with respect to any book-entry
Certificate will be the close of business on the business day immediately
preceding such Distribution Date or (ii) with respect to any other class of
Certificates, including any Definitive Certificates, will be the close of
business on the last business day of the month preceding the month in which such
Distribution Date occurs. Such distributions will be made either (a) by check
mailed to the address of each such Certificateholder as it appears in the
Certificate Register or (b) upon written request to the Trust Administrator at
least five business days prior to the relevant Record Date by any holder of
S-29
<PAGE>
Certificates having an aggregate initial Certificate Principal Balance that is
in excess of the lesser of (i) $5,000,000 or (ii) two-thirds of the initial
aggregate Certificate Principal Balance of such class of Certificates, by wire
transfer in immediately available funds to the account of such Certificateholder
specified in the request. The final distribution on any class of Certificates
will be made in like manner, but only upon presentment and surrender of such
Certificates at the corporate trust office of the Trust Administrator or such
other location specified in the notice to Certificateholders of such final
distribution.
REGISTRATION OF THE OFFERED CERTIFICATES
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and to facilitate the
clearance and settlement of securities transactions between Participants through
electronic book entries, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers (including
Salomon Smith Barney Inc.), banks, trust companies and clearing corporations.
Indirect access to the DTC system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Certificate Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, the Offered Certificates may do so only through Participants and Indirect
Participants. In addition, Certificate Owners will receive all distributions of
principal of and interest on the Offered Certificates from the Trust
Administrator through DTC and DTC Participants. The Trust Administrator will
forward payments to DTC in same day funds and DTC will forward such payments to
Participants in next day funds settled through the New York Clearing House. Each
Participant will be responsible for disbursing such payments to Indirect
Participants or to Certificate Owners. Unless and until Definitive Certificates
are issued, it is anticipated that the only Certificateholder of the Offered
Certificates will be CEDE, as nominee of DTC. Certificate Owners will not be
recognized by the Trust Administrator as Certificateholders, as such term is
used in the Agreement, and Certificate Owners will be permitted to exercise the
rights of Certificateholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Offered Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and Indirect Participants with which Certificate Owners have
accounts with respect to the Offered Certificates similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will not
possess Definitive Certificates, the Rules provide a mechanism by which
Certificate Owners through their Participants and Indirect Participants will
receive payments and will be able to transfer their interest.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and on behalf of certain banks, the ability of a
Certificate Owner to pledge Offered Certificates to persons or entities that do
not participate in the DTC system, or to otherwise act with respect to such
Certificates, may be limited due to the absence of physical certificates for the
Offered Certificates. In addition, under a book-entry format, Certificate Owners
may experience
S-30
<PAGE>
delays in their receipt of payments since distribution will be made by the Trust
Administrator to CEDE, as nominee for DTC.
Under the Rules, DTC will take action permitted to be taken by a
Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC account the Offered Certificates are credited.
Additionally, under the Rules, DTC will take such actions with respect to
specified Voting Rights only at the direction of and on behalf of Participants
whose holdings of Offered Certificates evidence such specified Voting Rights.
DTC may take conflicting actions with respect to Voting Rights to the extent
that Participants whose holdings of Offered Certificates evidence such Voting
Rights, authorize divergent action.
DTC management is aware that some computer applications, systems and
similar items for processing data ("Systems") that are dependent upon calendar
dates, including dates before, on and after January 1, 2000, may encounter "Year
2000 problems". DTC has informed its Participants and other members of the
financial community (collectively, the "Industry") that it has developed and is
implementing a program so that its Systems, as the same relate to the timely
payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries and settlement of trades within DTC ("DTC
Services"), continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to, issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on which DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being Year 2000 compliant and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty or contract modification of any kind.
The Depositor, the Servicers, the Trustee, the Trust Administrator, the
Originators, the Insurer and the Mortgage Loan Seller will have no liability for
any actions taken by DTC or its nominee, including, without limitation, actions
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the Offered Certificates held by CEDE, as
nominee for DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
DEFINITIVE CERTIFICATES
Definitive Certificates will be issued to Certificate Owners or their
nominees, rather than to DTC or its nominee, only if (i) the Depositor advises
the Trust Administrator in writing that DTC is no longer willing or able to
discharge properly its responsibilities as Clearing Agency with respect to the
Offered Certificates and the Depositor is unable to locate a qualified
successor, (ii) the Depositor, at its option, advises the Trust Administrator in
writing that it elects to terminate the book-entry system through DTC, or (iii)
after the occurrence of an Event of Default, Certificate Owners representing in
the aggregate not less than 51% of the Voting Rights of the Offered Certificates
advise the Trust
S-31
<PAGE>
Administrator and DTC through Participants, in writing, that the continuation of
a book-entry system through DTC (or a successor thereto) is no longer in the
Certificate Owners' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trust Administrator is required to notify all Certificate Owners
through Participants of the availability of Definitive Certificates. Upon
surrender by DTC of the Definitive Certificates representing the Offered
Certificates and receipt of instructions for re-registration, the Trust
Administrator will reissue the Offered Certificates as Definitive Certificates
issued in the respective principal amounts owned by individual Certificate
Owners, and thereafter the Trust Administrator will recognize the holders of
such Definitive Certificates as Certificateholders under the Agreement. Such
Definitive Certificates will be issued in minimum denominations of $10,000,
except that any beneficial ownership represented by a Offered Certificate in an
amount less than $10,000 immediately prior to the issuance of a Definitive
Certificate shall be issued in a minimum denomination equal to the amount
represented by such Offered Certificate.
DISTRIBUTIONS--GENERAL
The "Due Period" with respect to any Distribution Date commences on the
second day of the month immediately preceding the month in which such
Distribution Date occurs and ends on the first day of the month in which such
Distribution Date occurs. The "Prepayment Period" with respect to any
Distribution Date is the calendar month immediately preceding the month in which
such Distribution Date occurs. The "Determination Date" with respect to any
Distribution Date is on the 15th day of the month in which such Distribution
Date occurs or, if such day is not a business day, on the immediately preceding
business day.
INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES
Distributions in respect of interest will be made on each Distribution Date
to the holders of each class of Offered Certificates in an amount (allocable
among such Certificates PRO RATA in accordance with the respective amounts
payable as to each in respect of interest) equal to the Interest Distribution
Amount for such class for such Distribution Date.
The "Interest Distribution Amount" for the Offered Certificates of any
class on any Distribution Date is equal to interest accrued during the related
Interest Accrual Period on the Certificate Principal Balance of such
Certificates immediately prior to such Distribution Date at the Pass- Through
Rate for such class, reduced (to not less than zero), in the case of each such
class, by the allocable share for such class of shortfalls resulting from the
application of the Relief Act, plus any undistributed Interest Distribution
Amount for such class from any previous Distribution Dates. On any Distribution
Date, any shortfalls resulting from the application of the Relief Act will be
allocated, first, to the interest distribution amount with respect to the Class
CE Certificates, and thereafter, to the Interest Distribution Amounts with
respect to the Offered Certificates on a PRO RATA basis based on the respective
amounts of interest accrued on such Certificates for such Distribution Date. On
any Distribution Date, any Prepayment Interest Shortfalls to the extent not
covered by Compensating Interest (as defined herein) paid by the Servicers will
be allocated to the interest distribution amount with respect to the Class CE
Certificates. The holders of the Offered Certificates will be entitled to
reimbursement for any shortfalls resulting from application of the Relief Act,
subject to available funds, in the priority described under
"--Overcollateralization Provisions" herein. The Pass-Through Rate applicable to
the calculation on the Interest Distribution Amount for each class of Offered
Certificates is fixed and set forth under "Summary of Prospectus
Supplement--Offered Certificates" above; subject to the Net WAC Pass-Through
Rate in the case of the Class A-6 Certificates.
S-32
<PAGE>
The "Interest Accrual Period" for any Distribution Date and the Offered
Certificates of any class is the one-month period preceding the month in which
such Distribution Date occurs, and all distributions of interest on the Offered
Certificates will be based on a 360-day year consisting of twelve 30-day months.
Except as otherwise described herein, on any Distribution Date, distributions of
the Interest Distribution Amount for a class of Certificates will be made in
respect of such class of Certificates, to the extent provided herein, on a PARI
PASSU basis, based on the Certificate Principal Balance of the Certificates of
each such class.
Subject to the terms of the Policy, any interest losses incurred by the
Offered Certificates (other than shortfalls resulting from the application of
the Relief Act) will be covered under the Policy. Notwithstanding the foregoing,
however, if payments are not made as required under the Policy, any such
interest losses may be borne by the Offered Certificates to the extent the
amount of such losses is not paid from Net Monthly Excess Cashflow (as defined
herein), in the priority described under "--Overcollateralization Provisions"
herein.
The Certificate Principal Balance of an Offered Certificate outstanding at
any time represents the then maximum amount that the holder thereof is entitled
to receive as distributions allocable to principal from the cash flow on the
Mortgage Loans and the other assets in the Trust Fund. The Certificate Principal
Balance of any class of Offered Certificates as of any date of determination is
equal to the initial Certificate Principal Balance thereof reduced by the
aggregate of (a) all amounts allocable to principal previously distributed with
respect to such Certificate and (b) any reductions in the Certificate Principal
Balance thereof deemed to have occurred in connection with allocations of
Realized Losses in the manner described herein. The Certificate Principal
Balance of the Class CE Certificates as of any date of determination is equal to
the excess, if any, of (a) the then aggregate principal balance of the Mortgage
Loans over (b) the then aggregate Certificate Principal Balance of the Offered
Certificates and the Class P Certificates.
PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES
On each Distribution Date, the Principal Distribution Amount will be
distributed to the holders of the Offered Certificates then entitled to such
distributions. The "Principal Distribution Amount" for any Distribution Date
will be the lesser of:
(a) the excess of the Available Distribution Amount over the aggregate
of the Interest Distribution Amounts for the Offered Certificates; and
(b) THE SUM OF:
(i) the principal portion of all scheduled monthly payments on
the Mortgage Loans due during the related Due Period, whether or
not received on or prior to the related Determination Date;
(ii) the principal portion of all proceeds received in respect
of the repurchase of a Mortgage Loan (or, in the case of a
substitution, certain amounts representing a principal adjustment)
as required by the Agreement during the related Prepayment Period;
(iii) the principal portion of all other unscheduled
collections, including insurance proceeds, liquidation proceeds
and all full and partial principal prepayments, received during
the related Prepayment Period, to the extent applied as recoveries
of principal on the Mortgage Loans;
S-33
<PAGE>
(iv) the principal portion of any Realized Losses incurred or
deemed to have been incurred on any Mortgage Loans in the calendar
month preceding such Distribution Date to the extent covered by
Net Monthly Excess Cashflow for such Distribution Date; and
(v) the amount of any Overcollateralization Increase Amount
(as defined herein) for such Distribution Date;
MINUS
(vi) the amount of any Overcollateralization Reduction Amount
(as defined herein) for such Distribution Date.
Notwithstanding the foregoing, as described under "--Overcollateralization
Provisions" herein, no amounts will be distributed to the holders of the Offered
Certificates pursuant to clause (v) above except to the extent of any Net
Monthly Excess Cashflow remaining after payment to the holders of the Offered
Certificates of all amounts in respect of Realized Losses pursuant to clause
(iv) above and payment to the Insurer of any Cumulative Insurance Payments. As
of any Distribution Date, "Cumulative Insurance Payments" refers to the
aggregate of any payments made by the Insurer under the Policy to the extent not
previously reimbursed, plus interest thereon.
In no event will the Principal Distribution Amount with respect to any
Distribution Date be (x) less than zero or (y) greater than the then outstanding
aggregate Certificate Principal Balance of the
Offered Certificates.
The "Available Distribution Amount" for any Distribution Date is equal to
the sum, net of amounts reimbursable therefrom to the Master Servicer, the
Servicers, the Trust Administrator or the Trustee, of (i) the aggregate amount
of scheduled monthly payments on the Mortgage Loans due on the related Due Date
and received on or prior to the related Determination Date, after deduction of
the Servicing Fees, the Master Servicing Fee, the Administration Fee and the
premium payable with respect to the Policy, (ii) certain unscheduled payments in
respect of the Mortgage Loans, including prepayments, insurance proceeds,
liquidation proceeds and proceeds from repurchases of and substitutions for the
Mortgage Loans occurring during the preceding calendar month and (iii) all P&I
Advances with respect to the Mortgage Loans received for such Distribution Date.
The holders of the Class P Certificates will be entitled to all Prepayment
Charges received on the Mortgage Loans and such amounts will not be available
for distribution on the Offered Certificates.
The "Scheduled Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date
(after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received), reduced by (x) the principal portion of
all monthly payments due on or before the date of determination, whether or not
received, (y) all amounts allocable to unscheduled principal that were received
prior to the calendar month in which the date of determination occurs and (z)
any Bankruptcy Loss (as defined herein) occurring out of a Deficient Valuation
(as defined herein) that was incurred prior to the calendar month in which the
date of determination occurs.
In addition, on each Distribution Date, funds received as a result of a
claim under the Policy in respect of the principal portion of Realized Losses
allocated to the Offered Certificates will be distributed by the Trust
Administrator on behalf of the Trustee to the holders of such Certificates. See
"--Financial Guaranty Insurance Policy" herein.
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<PAGE>
Distributions of the Principal Distribution Amount (and any amounts
distributable in accordance with clauses FIRST and THIRD under
"--Overcollateralization Provisions" herein) on the Offered Certificates on each
Distribution Date will be made as follows:
(i) First, to the holders of the Lockout Certificates, the Lockout
Distribution Percentage of the Principal Distribution Amount, until the
Certificate Principal Balance thereof has been reduced to zero;
(ii) Second, to the holders of the Class A-1 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(iii)Third, to the holders of the Class A-2 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(iv) Fourth, to the holders of the Class A-3 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(v) Fifth, to the holders of the Class A-4 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(vi) Sixth, to the holders of the Class A-5 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(vii) Seventh, to the holders of the Class A-6 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and
(viii) Eighth, to the holders of the Lockout Certificates, until the
Certificate Principal Balance thereof has been reduced to zero.
Notwithstanding the foregoing priorities, if an Insurer Default exists, the
priority of distributions of principal among the Offered Certificates will be
disregarded and distributions allocable to principal will be paid on each
succeeding Distribution Date to holders of the Offered Certificates, on a PRO
RATA basis, based on the Certificate Principal Balances thereof.
The "Lockout Certificate Percentage" for the Lockout Certificates will be
calculated for each Distribution Date to be the percentage equal to the
aggregate Certificate Principal Balance of the Lockout Certificates immediately
prior to such Distribution Date divided by the sum of the aggregate Certificate
Principal Balances of the Offered Certificates immediately prior to such
Distribution Date. The "Lockout Distribution Percentage" for the Lockout
Certificates and for any Distribution Date occurring prior to the Distribution
Date in ________ ____ will be equal to 0%. The "Lockout Distribution Percentage"
for any Distribution Date occurring after the first three years following the
Closing Date will be as follows: for any Distribution Date during the _____ or
_____ year after the Closing Date, __% of the Lockout Certificate Percentage for
such Distribution Date; for any Distribution Date during the _____ year after
the Closing Date, __% of the Lockout Certificate Percentage for such
Distribution Date; for any Distribution Date during the _______ year after the
Closing Date, ___% of the Lockout Certificate Percentage for such Distribution
Date, and for any Distribution Date thereafter, the lesser of (x) ___% of the
Lockout Certificate Percentage and (y) ___%. Notwithstanding the foregoing, if
the Certificate Principal Balances of the Offered Certificates (other than the
Lockout Certificates) have been reduced to zero, the Lockout Distribution
Percentage will be equal to ___%.
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<PAGE>
OVERCOLLATERALIZATION PROVISIONS
The weighted average Mortgage Rate (net of the Administration Fee Rate, the
Servicing Fee Rate, the Master Servicing Fee Rate and the amount of the premium
payable to the Insurer) for the Mortgage Loans is generally expected to be
higher than the weighted average of the Pass-Through Rate on the Offered
Certificates, thus generating excess interest collections which, in the absence
of Realized Losses, will not be necessary to fund interest distributions on the
Offered Certificates. The Agreement requires that, on each Distribution Date,
the Net Monthly Excess Cashflow, if any, be applied on such Distribution Date as
an accelerated payment of principal on the Offered Certificates, but only to the
limited extent hereafter described. The "Net Monthly Excess Cashflow" for any
Distribution Date is equal to the sum of (a) any Overcollateralization Reduction
Amount and (b) the excess of (x) the Available Distribution Amount for such
Distribution Date over (y) the sum for such Distribution Date of the aggregate
of the Interest Distribution Amounts payable to the holders of the Offered
Certificates and the sum of the amounts described in clauses (b)(i) through
(iii) of the definition of Principal Distribution Amount.
With respect to any Distribution Date, any Net Monthly Excess Cashflow (or,
in the case of clause FIRST below, the Net Monthly Excess Cashflow exclusive of
any Overcollateralization Reduction Amount) shall be paid as follows:
FIRST, to the holders of the class or classes of Offered Certificates then
entitled to receive distributions in respect of principal, in an amount
equal to the principal portion of any Realized Losses incurred or deemed to
have been incurred on the Mortgage Loans;
SECOND, to the Insurer, in an amount equal to any Cumulative Insurance
Payments;
THIRD, to the holders of the class or classes of Offered Certificates then
entitled to receive distributions in respect of principal, in an amount
equal to the Overcollateralization Increase Amount;
FOURTH, to the holders of the Offered Certificates, in an amount equal to
such Certificates' allocated share of any shortfalls resulting from the
application of the Relief Act with respect to the Mortgage Loans;
FIFTH, to the Insurer, for any amounts remaining due to the Insurer under
the terms of the Insurance Agreement (as defined herein);
SIXTH, to the holders of the Class CE Certificates as provided in the
Agreement; and
SEVENTH, to the holders of the Residual Certificates, any remaining
amounts; provided that if such Distribution Date is the Distribution Date
immediately following the expiration of the latest Prepayment Charge term
or any Distribution Date thereafter, then any such remaining amounts will
be distributed FIRST, to the holders of the Class P Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and SECOND,
to the holders of the Residual Certificates.
With respect to any Distribution Date, the excess, if any, of (a) the
aggregate principal balance of the Mortgage Loans immediately following such
Distribution Date, over (b) the sum of the aggregate Certificate Principal
Balances of the Offered Certificates and the Class P Certificates as of such
date, after taking into account the payment of the amounts described in clauses
(b)(i) through (iv) of the definition of Principal Distribution Amount on such
Distribution Date, is the "Overcollateralized Amount" for the Offered
Certificates as of such Distribution Date. As of the
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<PAGE>
Closing Date, the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date will exceed the sum of the aggregate Certificate Principal Balances
of the Offered Certificates and the Class P Certificates by an amount equal to
approximately $__________, which is equal to the initial Certificate Principal
Balance of the Class CE Certificates. Such amount represents approximately ____%
of the aggregate principal balance of the Mortgage Loans as of the Cut-off Date
and is the initial amount of overcollateralization required to be provided by
the Mortgage Pool under the Agreement. Under the Agreement, the
Overcollateralized Amount is required to be maintained at the "Required
Overcollateralized Amount". In the event that Realized Losses are incurred on
the Mortgage Loans, such Realized Losses may result in an overcollateralization
deficiency since such Realized Losses will reduce the principal balance of the
Mortgage Loans without a corresponding reduction to the aggregate Certificate
Principal Balances of the Offered Certificates. In such event, the Agreement
requires the payment from Net Monthly Excess Cashflow, subject to available
funds, of an amount equal to such overcollateralization deficiency, which shall
constitute a principal distribution on the Offered Certificates in reduction of
the Certificate Principal Balances thereof. This has the effect of accelerating
the amortization of the Offered Certificates relative to the amortization of the
Mortgage Loans, and of increasing the Overcollateralized Amount. With respect to
the Offered Certificates and any Distribution Date, any amount of Net Monthly
Excess Cashflow actually applied as an accelerated payment of principal to the
extent the Required Overcollateralized Amount exceeds the Overcollateralized
Amount as of such Distribution Date is an "Overcollateralization Increase
Amount".
With respect to any Distribution Date, the Required Overcollateralized
Amount for the Offered Certificates will be an amount equal to approximately
____% of the aggregate principal balance of the Mortgage Loans as of the Cut-off
Date, subject to increase ("step up") or, after __ months, decrease ("step
down"), upon the occurrence of certain loss and delinquency triggers with
respect to the Mortgage Pool set forth in the Agreement.
In the event that the Required Overcollateralized Amount is required to
step up on any Distribution Date, the Agreement provides that all Net Monthly
Excess Cashflow remaining after the distributions described in clauses FIRST and
SECOND above will be distributed in respect of the Overcollateralization
Increase Amount for the Offered Certificates until the Overcollateralized Amount
is equal to the stepped up Required Overcollateralized Amount. This has the
effect of accelerating the amortization of the Offered Certificates relative to
the amortization of the Mortgage Loans, and of increasing the Overcollateralized
Amount.
In the event that the Required Overcollateralized Amount is permitted to
step down on any Distribution Date, the Agreement provides that a portion of the
principal which would otherwise be distributed to the holders of the Offered
Certificates on such Distribution Date shall be distributed to the holders of
the Class CE Certificates on such Distribution Date. With respect to each such
Distribution Date, the Principal Distribution Amount will be reduced by the
amount by which the Overcollateralized Amount exceeds the Required
Overcollateralized Amount (the "Overcollateralization Reduction Amount") after
taking into account all other distributions to be made on such Distribution
Date. Any such Overcollateralization Reduction Amount shall be distributed as
part of Net Monthly Excess Cashflow pursuant to the priorities set forth above.
This has the effect of decelerating the amortization of the Offered Certificates
relative to the amortization of the Mortgage Loans and of reducing the
Overcollateralized Amount.
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<PAGE>
FINANCIAL GUARANTY INSURANCE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy. A form of
the Policy may be obtained, upon request, from the Depositor.
Simultaneously with the issuance of the Offered Certificates, the Insurer
will deliver the Policy to the Trust Administrator for the benefit of the
holders of the Offered Certificates. Under the Policy, the Insurer will
irrevocably and unconditionally guarantee payment to the Trust Administrator on
behalf of the Trustee on each Distribution Date for the benefit of the holders
of the Offered Certificates, the full and complete payment of Insured Payments
with respect to the Offered Certificates calculated in accordance with the
original terms of the Offered Certificates when issued and without regard to any
amendment or modification of the Offered Certificates or the Agreement except
amendments or modifications to which the Insurer has given its prior written
consent. "Insured Payments" shall mean with respect to the Offered Certificates
as of any Distribution Date, the sum of (i) any shortfall in amounts available
in the Distribution Account (as defined in the Agreement) to pay the Interest
Distribution Amount on such Certificates for the related Interest Accrual
Period, (ii) the excess, if any, of (a) the aggregate Certificate Principal
Balance of the Offered Certificates then outstanding over (b) the aggregate
principal balances of the Mortgage Loans then outstanding and (iii) without
duplication of the amount specified in clause (ii), the aggregate Certificate
Principal Balance of the Offered Certificates to the extent unpaid on the final
Distribution Date or the earlier termination of the Trust Fund pursuant to the
terms of the Agreement. The Policy does not cover Relief Act Shortfalls.
If any Insured Payment is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law, the Insurer will pay such
amount out of funds of the Insurer on the later of (a) the date when due to be
paid pursuant to the Order referred to below or (b) the first to occur of (i)
the fourth Business Day following Receipt by the Insurer from the Trust
Administrator of (A) a certified copy of the order of the court or other
governmental body which exercised jurisdiction to the effect that a holder of
Offered Certificates is required to return principal or interest distributed
with respect to an Offered Certificate during the Term of the Policy because
such distributions were avoidable preferences under applicable bankruptcy law
(the "Order"), (B) a certificate of such holder of Offered Certificates that the
Order has been entered and is not subject to any stay, and (C) an assignment
duly executed and delivered by such holder of Offered Certificates, in such form
as is reasonably required by the Insurer and provided to such holder of Offered
Certificates by the Insurer, irrevocably assigning to the Insurer all rights and
claims of such holder of Offered Certificates relating to or arising under the
Offered Certificates against the debtor which made such preference payment or
otherwise with respect to such preference payment, or (ii) the date of Receipt
by the Insurer from the Trust Administrator of the items referred to in clauses
(A), (B) and (C) above if, at least four Business Days prior to such date of
Receipt, the Insurer shall have Received written notice from the Trust
Administrator that such items were to be delivered on such date and such date
was specified in such notice. Such payment shall be disbursed to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order
and not to the Trust Administrator or holder of Offered Certificates directly,
unless a holder of Offered Certificates has previously paid such amount to the
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the Order, in which case such payment shall be disbursed to the Trust
Administrator for distribution to such holder of the Offered Certificates upon
proof of such payment reasonably satisfactory to the Insurer. In connection with
the foregoing, the Insurer shall have the rights provided pursuant to the
Agreement.
Payment of claims under the Policy made in respect of Insured Payments will
be made by the Insurer following Receipt by the Insurer of the appropriate
notice for payment on the later to occur of
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<PAGE>
(a) 12:00 noon, New York City time, on the second Business Day following Receipt
of such notice for payment, and (b) 12:00 noon, New York City time, on the
relevant Distribution Date.
The terms "Receipt" and "Received", with respect to the Policy, means
actual delivery to the Insurer and to its fiscal agent appointed by the Insurer
at its option, if any, prior to 12:00 p.m., New York City time, on a Business
Day; delivery either on a day that is not a Business Day or after 12:00 p.m.,
New York City time, shall be deemed to be Receipt on the next succeeding
Business Day. If any notice or certificate given under the Policy by the Trust
Administrator is not in proper form or is not properly completed, executed or
delivered, it shall be deemed not to have been Received, and the Insurer or the
fiscal agent shall promptly so advise the Trust Administrator and the Trust
Administrator may submit an amended notice.
Under the Policy, "Business Day" means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the City of New York, New
York, the State of New York or in the city in which the corporate trust office
of the Trust Administrator is located, are authorized or obligated by law or
executive order to be closed. The Insurer's obligations under the Policy to make
Insured Payments shall be discharged to the extent funds are transferred to the
Trust Administrator as provided in the Policy, whether or not such funds are
properly applied by the Trust Administrator.
"Term of the Policy" means the period from and including the date of
issuance of the Policy to and including the date on which the Certificate
Principal Balances of the Offered Certificates are reduced to zero, plus such
additional period, to the extent specified in the Policy, during which any
payment on the Offered Certificates could be avoided in whole or in part as a
preference payment.
The Insurer shall be subrogated to the rights of the holders of the Offered
Certificates to receive payments of principal and interest, as applicable, with
respect to distributions on such Certificates to the extent of any payment by
the Insurer under the Policy. To the extent the Insurer makes Insured Payments,
either directly or indirectly (as by paying through the Trust Administrator), to
the holders of the Offered Certificates, the Insurer will be subrogated to the
rights of the holders of the Offered Certificates, as applicable, with respect
to such Insured Payment and shall be deemed to the extent of the payments so
made to be a registered holder of the Offered Certificates for purposes of
payment.
Claims under the Policy constitute direct unsecured and unsubordinated
obligations of the Insurer, and will rank not less than PARI PASSU with any
other unsecured and unsubordinated indebtedness of the Insurer except for
certain obligations in respect to tax and other payments to which preference is
or may become afforded by statute. The terms of the Policy cannot be modified,
altered or affected by any other agreement or instrument, or by the merger,
consolidation or dissolution of the Depositor. The Policy by its terms may not
be canceled or revoked prior to distribution in full of all Guaranteed
Distributions (as defined therein). The Policy is governed by the laws of the
State of New York. The Policy is not covered by the property/casualty insurance
security fund specified in Article 76 of the New York Insurance Law.
To the fullest extent permitted by applicable law, the Insurer agrees under
the Policy not to assert, and waives, for the benefit of each holder of the
Offered Certificates, all its rights (whether by counterclaim, setoff or
otherwise) and defenses (including, without limitation, the defense of fraud),
whether acquired by subrogation, assignment or otherwise, to the extent that
such rights and defenses may be available to the Insurer to avoid payment of its
obligations under the Policy in accordance with the express provisions of the
Policy.
Pursuant to the terms of the Agreement, unless an Insurer Default exists,
the Insurer will be entitled to exercise certain rights of the holders of the
Offered Certificates, without the consent of
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<PAGE>
such Certificateholders, and the holders of the Offered Certificates may
exercise such rights only with the prior written consent of the Insurer. See
"Pooling and Servicing Agreement--Voting Rights" and "--Certain Matters
Regarding the Insurer" herein.
The Depositor, the Mortgage Loan Seller, the Servicers and the Insurer will
enter into an Insurance and Indemnity Agreement (the "Insurance Agreement")
pursuant to which the Depositor, the Mortgage Loan Seller and the Servicers will
agree to reimburse, with interest, the Insurer for amounts paid pursuant to
claims under the Policy. The Depositor, the Mortgage Loan Seller and the
Servicers will further agree to pay the Insurer all reasonable charges and
expenses which the Insurer may pay or incur relative to any amounts paid under
the Policy or otherwise in connection with the transaction and to indemnify the
Insurer against certain liabilities. Except to the extent provided therein,
amounts owing under the Insurance Agreement will be payable solely from the
Trust Fund. An event of default by either Servicer under the Insurance Agreement
will constitute an Event of Default by such Servicer under the Agreement and
allow the Insurer, among other things, to direct the Trustee to terminate such
Servicer. An "event of default" by each Servicer under the Insurance Agreement
includes (i) such Servicer's failure to pay when due any amount owed under the
Insurance Agreement or certain other documents, (ii) such Servicer's untruth or
incorrectness in any material respect of any representation or warranty of such
Servicer in the Insurance Agreement, the Agreement (in its capacity as Servicer)
or certain other documents, (iii) such Servicer's failure to perform or to
observe any covenant or agreement in the Insurance Agreement, the Agreement (in
its capacity as Servicer) and certain other documents, (iv) such Servicer's
failure to pay its debts in general or the occurrence of certain events of
insolvency or bankruptcy with respect to such Servicer and (v) the occurrence of
an Event of Default relating to such Servicer under the Agreement or certain
other documents.
ALLOCATION OF LOSSES; SUBORDINATION
With respect to any defaulted Mortgage Loan that is finally liquidated
through foreclosure sale, disposition of the related Mortgaged Property (if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure) or
otherwise, the amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the
Servicers for P&I Advances, servicing advances and other related expenses,
including attorney's fees) towards interest and principal owing on the Mortgage
Loan. Such amount of loss realized and any Bankruptcy Losses are referred to
herein as "Realized Losses". In the event that amounts recovered in connection
with the final liquidation of a defaulted Mortgage Loan are insufficient to
reimburse the Servicers for P&I Advances and servicing advances, such amounts
may be reimbursed to the Servicers out of any funds in the Certificate Account
prior to the distribution on the Certificates.
Any Realized Losses on the Mortgage Loans will be allocated on any
Distribution Date, FIRST, to Net Monthly Excess Cashflow, SECOND, to the Class
CE Certificates until the Certificate Principal Balance thereof has been reduced
to zero, and THIRD, to the Offered Certificates on a PRO RATA basis. The
Agreement does not permit the allocation of any Realized Losses to the Class P
Certificates. The Policy will cover any Realized Losses allocable to the Offered
Certificates pursuant to clause THIRD above. Notwithstanding the foregoing,
however, if payments are not made as required under the Policy, Realized Losses
will be allocated to the Offered Certificates.
If Realized Losses have been allocated to the Offered Certificates and the
Insurer has defaulted in its obligation to cover such Realized Losses, such
amounts with respect to such Certificates will no longer accrue interest nor
will such amounts be reinstated thereafter (even if Net Monthly Excess
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<PAGE>
Cashflow and/or the Overcollateralized Amount are greater than zero on any
subsequent Distribution Dates).
Any allocation of a Realized Loss to a Certificate will be made by reducing
the Certificate Principal Balance thereof by the amount so allocated as of the
Distribution Date in the month following the calendar month in which such
Realized Loss was incurred. An allocation of a Realized Loss on a PRO RATA basis
between two or more classes of Certificates means an allocation to each such
class of Certificates on the basis of its then outstanding Certificate Principal
Balance prior to giving effect to distributions to be made on such Distribution
Date. Notwithstanding anything to the contrary described herein, in no event
will the Certificate Principal Balance of an Offered Certificate be reduced more
than once in respect of any particular amount both (i) allocable to such Offered
Certificate in respect of Realized Losses and (ii) payable as principal to the
holder of such Offered Certificate from Net Monthly Excess Cashflow or from
amounts paid under the Policy.
A "Bankruptcy Loss" is a Deficient Valuation or a Debt Service Reduction.
With respect to any Mortgage Loan, a "Deficient Valuation" is a valuation by a
court of competent jurisdiction of the Mortgaged Property in an amount less than
the then outstanding indebtedness under the Mortgage Loan, which valuation
results from a proceeding initiated under the United States Bankruptcy Code. A
"Debt Service Reduction" is any reduction in the amount which a mortgagor is
obligated to pay on a monthly basis with respect to a Mortgage Loan as a result
of any proceeding initiated under the United States Bankruptcy Code, other than
a reduction attributable to a Deficient Valuation.
P&I ADVANCES
Subject to the following limitations, each Servicer will be obligated to
advance or cause to be advanced on or before each Distribution Date its own
funds, or funds in the Certificate Account that are not included in the
Available Distribution Amount for such Distribution Date, in an amount equal to
the aggregate of all payments of principal and interest, net of the Servicing
Fee, that were due during the related Due Period on the Mortgage Loans serviced
by it and that were delinquent on the related Determination Date, plus certain
amounts representing assumed payments not covered by any current net income on
the Mortgaged Properties acquired by foreclosure or deed in lieu of foreclosure
(any such advance, a "P&I Advance"). With respect to a delinquent Balloon
Payment, the related Servicer is not required to make a P&I Advance of such
delinquent Balloon Payment. The related Servicer will, however, make monthly P&I
Advances with respect to a Balloon Loan with delinquent Balloon Payments, in
each case in an amount equal to the assumed monthly principal and interest
payment (net of the related Servicing Fee) that would have been due during the
related Due Period based on the original principal amortization schedule for
such Balloon Loan.
P&I Advances are required to be made only to the extent they are deemed by
the applicable Servicer to be recoverable from related late collections,
insurance proceeds or liquidation proceeds. The purpose of making such P&I
Advances is to maintain a regular cash flow to the Certificateholders, rather
than to guarantee or insure against losses. Neither Servicer will be required to
make any P&I Advances with respect to reductions in the amount of the monthly
payments on the Mortgage Loans due to bankruptcy proceedings or the application
of the Relief Act.
All P&I Advances will be reimbursable to the applicable Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
serviced by it as to which such unreimbursed P&I Advance was made. In addition,
any P&I Advances previously made in respect of any Mortgage Loan that are deemed
by applicable Servicer to be nonrecoverable from related late collections,
insurance proceeds or liquidation proceeds may be reimbursed to such Servicer
out of any funds in the Certificate Account prior to the distributions on the
Certificates. In the event that
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<PAGE>
either Servicer fails in its obligation to make any required advance, the Trust
Administrator will be obligated to make any such advance and in the event that
the Trust Administrator fails in its obligation to make any such advance, the
Trustee will be obligated to make any such advance, in each case to the extent
required in the Agreement. Notwithstanding the foregoing, in the event _______
fails in its obligation to make any required advance as Servicer, the Master
Servicer will be obligated to make any such advance prior to the obligation of
the Trust Administrator or the Trustee to make such advances as provided above.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of _______ __, ____ (the "Agreement"), among the Depositor,
the Servicers, the Trust Administrator and the Trustee, a form of which is filed
as an exhibit to the Registration Statement. A Current Report on Form 8-K
relating to the Certificates containing a copy of the Agreement as executed will
be filed by the Depositor with the Securities and Exchange Commission within
fifteen days of the initial issuance of the Certificates. The Trust Fund created
under the Agreement will consist of (i) all of the Depositor's right, title and
interest in the Mortgage Loans, the related Mortgage Notes, Mortgages and other
related documents, (ii) all payments on or collections in respect of the
Mortgage Loans due after the Cut-off Date, together with any proceeds thereof,
(iii) any Mortgaged Properties acquired on behalf of Certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues received
thereon, (iv) the rights of the Trustee under all insurance policies required to
be maintained pursuant to the Agreement and (v) certain of the rights of the
Depositor under the Mortgage Loan Purchase Agreement among the Depositor, the
Mortgage Loan Seller and ___________ and under the Mortgage Loan Purchase
Agreement among the Depositor, the Mortgage Loan Seller and ___________.
Reference is made to the Prospectus for important information in addition to
that set forth herein regarding the Trust Fund, the terms and conditions of the
Agreement and the Offered Certificates. The Offered Certificates will be
transferable and exchangeable at the corporate trust offices of the Trust
Administrator, located in ______, __________. The Depositor will provide to a
prospective or actual Certificateholder without charge, on written request, a
copy (without exhibits) of the Agreement. Requests should be addressed to the
Secretary, Salomon Brothers Mortgage Securities VII, Inc., Seven World Trade
Center, New York, New York 10048.
ASSIGNMENT OF THE MORTGAGE LOANS
The Depositor will deliver to the Trust Administrator, as custodian for the
Trustee, with respect to each Mortgage Loan (i) the mortgage note endorsed
without recourse to the Trustee to reflect the transfer of the Mortgage Loan,
(ii) the original mortgage with evidence of recording indicated thereon and
(iii) an assignment of the mortgage in recordable form to the Trustee,
reflecting the transfer of the Mortgage Loan. Such assignments of Mortgage Loans
are required to be recorded by or on behalf of the Depositor in the appropriate
offices for real property records.
[ORIGINATOR 1]
The information set forth in the following paragraphs has been provided by
_________. None of the Depositor, the Trustee, the Trust Administrator, the
other Servicer or the Insurer or any of their
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<PAGE>
respective affiliates has made or will make any representation as to the
accuracy or completeness of such information.
DELINQUENCY AND FORECLOSURE EXPERIENCE
OF _________'S SERVICING PORTFOLIO AS OF SEPTEMBER 30, 1998
Percentage
Dollar of Total
Amount Servicing Portfolio
------ -------------------
Delinquency(1)
30-59 Days %
60-89 Days $ %
90 Days or more %
$
$
Loans in Foreclosure(2) %
$
REO Properties(2) %
$
Total Servicing Portfolio $
- -------------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period exclude
loans in foreclosure.
(2) The percentage of loans in foreclosure and REO properties is based on the
dollar amount of loans in foreclosure and REO properties as a percentage of
the total dollar amount of the mortgage loans in the servicing portfolio as
of the date indicated.
[ORIGINATOR 2]
The information set forth in the following paragraphs has been provided by
the _________. None of the Depositor, the Trustee, the Mortgage Loan Seller, the
Master Servicer or any of their respective affiliates has made or will make any
representation as to the accuracy or completeness of such information.
----------------------------
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
At December 31, At December 31,
1995 1996
---------------------------------------------------------------------------------------
Percent Percent Percent Percent
By No. By Dollar By No. By Dollar By No. By Dollar By No. By Dollar
of Loans Loans of Loans Loans of Loans Loans of Loans Loans
---------------------------------------------------------------------------------------
<S> <C>
Total Portfolio........
Period of Delinquency
31-59 Days..........
60-89 Days..........
90 days or more.....
Total Delinquent Loans.
Loans in Foreclosure(1)
</TABLE>
<TABLE>
<CAPTION>
At December 31, At September 30,
1997 1998
---------------------------------------------------------------------------------------
Percent Percent Percent Percent
By No. By Dollar By No. By Dollar By No. By Dollar By No. By Dollar
of Loans Loans of Loans Loans of Loans Loans of Loans Loans
---------------------------------------------------------------------------------------
<S> <C>
Total Portfolio........
Period of Delinquency
31-59 Days..........
60-89 Days..........
90 days or more.....
Total Delinquent Loans.
Loans in Foreclosure(1)
</TABLE>
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<PAGE>
(1) Loans in foreclosure are also included under the heading "Total Delinquent
Loans".
------------------------
<TABLE>
<CAPTION>
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
At December 31, At December 31, At December 31, At September 30,
1995 1996 1997 1998
-------------------------------------------------------------------------------------------------
By Dollar By Dollar By Dollar By Dollar
By No. Amount By No. Amount By No. Amount By No. Amount
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------------------------------------------------------------------------------------------------
<S> <C>
Total Portfolio
Foreclosed Loans(1)
Foreclosure Ratio(2)
</TABLE>
- -------------------
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by _______, by investors or by an insurer following
foreclosure or delivery of a deed in lieu of foreclosure.
(2) The Foreclosure Ratio is equal to the aggregate principal balance or number
of Foreclosed Loans divided by the aggregate principal balance, or number,
as applicable, of mortgage loans in the Total Portfolio at the end of the
indicated period.
----------------------------
<TABLE>
<CAPTION>
LOAN LOSS EXPERIENCE ON _________'S
SERVICING PORTFOLIO OF MORTGAGE LOANS
(DOLLARS IN THOUSANDS)
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------------------------------------------------------
1995 1996 1997 1998
-------------------------------------------------------------------------------------
<S> <C>
Total Portfolio(1)
Net Losses(2)(3)
Net Losses as a Percentage of
Total Portfolio(4)
</TABLE>
- -------------
(1) "Total Portfolio" on the date stated above is the principal balances of the
mortgage loans outstanding on the last day of the period.
(2) "Net Losses" means "Gross Losses" minus "Recoveries." "Gross Losses" are
actual losses incurred on liquidated properties for each respective period.
Losses are calculated after repayment of all principal, foreclosure costs
and accrued interest to the date of liquidation. "Recoveries" are
recoveries from liquidation proceeds and deficiency judgments.
(3) "Net Losses" are computed on a loan-by-loan basis and are reported with
respect to the period in which the loan is liquidated. If additional costs
are incurred or recoveries are received after the end of the period, the
amounts are adjusted with respect to the period in which the related loan
was liquidated. Accordingly, the Net Losses reported in the table may
change in future periods. The information in this table reflects costs and
recoveries through November 30, 1998.
(4) For the nine months ended September 30, 1998, "Net Losses" as a Percentage
of Total Portfolio" was annualized by multiplying "Net Losses" by 1.33
before calculating the percentage of "Net Losses as a Percentage of Total
Portfolio".
----------------------------
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<PAGE>
THE TRUSTEE
_______________, 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 _________________, and its telephone number
is __________. In the event the Trust Administrator advises the Trustee that it
is unable to continue to perform its obligations pursuant to the terms of the
Agreement prior to the appointment of a successor, the Trustee shall be
obligated to perform such obligations until a new trust administrator is
appointed.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Agreement will be equal to the related portion of accrued
interest at the Administration Fee Rate of ______% per annum on the Scheduled
Principal Balance of the Mortgage Loans (the "Administration Fee"). The
Agreement will provide that the Trustee and any director, officer, employee or
agent of the Trustee will be indemnified by the Trust Fund and will be held
harmless against any loss, liability or expense (not including expenses,
disbursements and advances incurred or made by the Trustee, including the
compensation and the expenses and disbursements of its agents and counsel, in
the ordinary course of the Trustee's performance in accordance with the
provisions of the Agreement) incurred by the Trustee in connection with any
pending or threatened claim or legal action arising out of or in connection with
the acceptance or administration of its obligations and duties under the
Agreement, other than any loss, liability or expense (i) resulting from a breach
of either Servicer's or the Trust Administrator's obligations and duties under
the Agreement, (ii) that constitutes a specific liability of the Trustee under
the Agreement or (iii) incurred by reason of willful misfeasance, bad faith or
negligence in the performance of the Trustee's duties under the Agreement or as
a result of a breach, or by reason of reckless disregard, of the Trustee's
obligations and duties under the Agreement.
THE TRUST ADMINISTRATOR
_______________, a national banking association, will act as Trust
Administrator for the Certificates pursuant to the Agreement. The Trust
Administrator's offices for notices under the Agreement are located at
__________________, and its telephone number is ______________. The Trust
Administrator will perform certain administrative functions on behalf of the
Trustee and will act as initial paying agent, certificate registrar and
custodian.
The principal compensation to be paid to the Trust Administrator in respect
of its obligations under the Agreement will be equal to the related portion of
the Administration Fee. The Agreement will provide that the Trust Administrator
and any director, officer, employee or agent of the Trust Administrator will be
indemnified by the Trust Fund and will be held harmless against any loss,
liability or expense (not including expenses, disbursements and advances
incurred or made by the Trust Administrator, including the compensation and the
expenses and disbursements of its agents and counsel, in the ordinary course of
the Trust Administrator's performance in accordance with the provisions of the
Agreement) incurred by the Trust Administrator in connection with any pending or
threatened claim or legal action arising out of or in connection with the
acceptance or administration of its obligations and duties under the Agreement,
other than any loss, liability or expense (i) resulting from a breach of either
Servicer's or the Trustee's obligations and duties under the Agreement, (ii)
that constitutes a specific liability of the Trust Administrator under the
Agreement or (iii) incurred by reason of willful misfeasance, bad faith or
negligence in the performance of the Trust Administrator's duties under the
Agreement or as a result of a breach, or by reason of reckless disregard, of the
Trust Administrator's obligations and duties under the Agreement.
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<PAGE>
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to ___________, in its capacity as
Master Servicer, will be equal to accrued interest at the Master Servicing Fee
Rate of ____% per annum with respect to each Mortgage Loan serviced by _________
on the Scheduled Principal Balance of each such Mortgage Loan (the "Master
Servicing Fee"). The principal compensation to be paid to each of __________ and
___________, in its capacity as a Servicer, in respect of its servicing
activities for the Certificates will be equal to accrued interest at the
Servicing Fee Rate of ____% per annum with respect to each Mortgage Loan
serviced by it on the Scheduled Principal Balance of each such Mortgage Loan
(the "Servicing Fee"). As additional servicing compensation, each Servicer is
entitled to retain all assumption fees, late payment charges and other
miscellaneous servicing fees in respect of the Mortgage Loans serviced by it
(with the exception of Prepayment Charges, which will be distributed to the
holders of the Class P Certificates) to the extent collected from mortgagors,
together with any interest or other income earned on funds held in the
Certificate Account and any escrow accounts in respect of the Mortgage Loans
serviced by it.
Each Servicer is obligated to offset any Prepayment Interest Shortfall in
respect of the Mortgage Loans serviced by it on any Distribution Date (payments
made by such Servicer in satisfaction of such obligation, "Compensating
Interest") to the extent of its Servicing Fee for such Distribution Date. Each
Servicer is obligated to pay certain insurance premiums and certain ongoing
expenses associated with the Mortgage Pool in respect of the Mortgage Loans
serviced by it and incurred by such Servicer in connection with its
responsibilities under the Agreement and is entitled to reimbursement therefor
as provided in the Agreement. See "Description of the Securities--Retained
Interest; Servicing Compensation and Payment of Expenses" in the Prospectus for
information regarding expenses payable by the Servicers and "Federal Income Tax
Consequences" herein regarding certain taxes payable by the Servicers.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
The Master Servicer has the option to purchase from the Trust Fund any
Mortgage Loan that is 90 days or more delinquent, which the Master Servicer
determines in good faith will otherwise become subject to foreclosure
proceedings; provided, however, that (i) the Master Servicer shall purchase any
such Mortgage Loans on the basis of delinquency, purchasing the most delinquent
Mortgage Loans first and (ii) after it has purchased __% of the Mortgage Loans,
by aggregate principal balance as of the Cut-off Date, pursuant to clause (i)
above, the Master Servicer must also obtain the consent of the Insurer prior to
any further purchases of delinquent Mortgage Loans. Notwithstanding the
foregoing, prior to purchasing any Mortgage Loan serviced by ___________, the
Master Servicer must give ___________ the right of first refusal to purchase
such Mortgage Loan.
EVENTS OF DEFAULT
In addition to those Events of Default (as defined in the Prospectus)
described under "Description of the Securities--Events of Default" in the
Prospectus, upon the occurrence of certain loss and delinquency triggers with
respect to the Mortgage Loans serviced by the related Servicer or upon the
occurrence of certain other defaults set forth in the Agreement, each Servicer
may be removed as servicer of such Mortgage Loans in accordance with the terms
of the Agreement and the Insurance Agreement. In addition, if ______________ is
terminated in its capacity as Servicer under the Agreement, it shall also be
terminated as Master Servicer.
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<PAGE>
Pursuant to the Agreement, each Servicer covenants and agrees to act as a
Servicer for an initial term from the Closing Date to __________ __, ____, which
term shall be extendable by the Insurer for successive terms of three (3)
calendar months thereafter, until the termination of the Trust Fund. Each such
notice of extension (a "Servicer Extension Notice") shall be delivered by the
Insurer to the Trustee, the Trust Administrator and the related Servicer. Each
Servicer will, upon its receipt of any such Servicer Extension Notice, become
bound for the duration of the term covered by such Servicer Extension Notice to
continue as a Servicer subject to and in accordance with the other provisions of
the Agreement. If as of the fifteenth (15th) day prior to the last day of any
term of such Servicer, the Trust Administrator shall not have received any
Servicer Extension Notice from the Insurer, the Trust Administrator will, within
five (5) days thereafter, give written notice of such non-receipt to the
Insurer, the related Servicer and the Trustee. The failure of the Insurer to
deliver a Servicer Extension Notice by the end of a calendar term shall result
in the termination of the related Servicer.
Any successor to either Servicer appointed under the Agreement must be a
housing loan servicing institution acceptable to each Rating Agency (as defined
in the Prospectus) with a net worth at the time of such appointment of at least
$15,000,000. See "Description of the Securities--Rights Upon Event of Default"
in the Prospectus.
VOTING RIGHTS
At all times, __% of all Voting Rights will be allocated among the holders
of the Offered Certificates and the Class CE Certificates in proportion to the
then outstanding Certificate Principal Balances of their respective
Certificates, __% of all Voting Rights will be allocated to the holders of the
Class P Certificates in proportion to the then outstanding Certificate Principal
Balances of their respective Certificates and __/__ of __% of all Voting Rights
will be allocated among the holders of each class of Residual Certificates in
proportion to the percentage interests in such classes evidenced by their
respective Certificates. Unless an Insurer Default exists, the Insurer will be
entitled to exercise certain voting and other rights of the holders of the
Offered Certificates. See "--Certain Matters Regarding the Insurer" herein.
CERTAIN MATTERS REGARDING THE INSURER
Under the Agreement, on each Distribution Date, the Trust Administrator is
required to pay to the Insurer a premium with respect to the Policy equal to
__/__ times ____% per annum times the Certificate Principal Balance of the
Offered Certificates.
Pursuant to the terms of the Agreement, unless there exists a continuance
of any failure by the Insurer to make a required payment under the Policy or
there exists a proceeding in bankruptcy by or against the Insurer (either such
condition, an "Insurer Default"), the Insurer will be entitled to exercise,
among others, the following rights of the holders of the Offered Certificates,
without the consent of such holders, and the holders of the Offered Certificates
may exercise such rights only with the prior written consent of the Insurer: (i)
the right to direct the Trustee to terminate the rights and obligations of the
either Servicer under the Agreement in the event of a default by such Servicer;
(ii) the right to consent to or direct any waivers of defaults by either
Servicer; (iii) the right to remove the Trustee or the Trust Administrator
pursuant to the Agreement; and (iv) the right to institute proceedings against
either Servicer in the event of default by such Servicer and refusal of the
Trustee to institute such proceedings. In addition, unless an Insurer Default
exists, the Insurer will have the right to direct all matters relating to any
proceeding seeking the avoidance as a
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preferential transfer under applicable bankruptcy, insolvency, receivership or
similar law of any distribution made with respect to the Offered Certificates,
and, unless an Insurer Default exists, the Insurer's consent will be required
prior to, among other things, (i) the removal of the Trustee or the Trust
Administrator, (ii) the appointment of any successor Trustee, Trust
Administrator or Servicer, as the case may be, or (iii) any amendment to the
Agreement.
TERMINATION
The circumstances under which the obligations created by the Agreement will
terminate in respect of the Certificates are described in "Description of the
Securities--Termination" in the Prospectus. The majority holder of the Class CE
Certificates (or if such holder does not exercise such option, the Master
Servicer or the Insurer) will have the right to purchase all remaining Mortgage
Loans and any properties acquired in respect thereof and thereby effect early
retirement of the Certificates on any Distribution Date following the Due Period
during which the aggregate principal balance of the Mortgage Loans (and
properties acquired in respect thereof) remaining in the Trust Fund at the time
of purchase is reduced to less than __%, in the event the majority holder of the
Class CE Certificates exercises such option, or __%, in the event the Master
Servicer or the Insurer exercises such option, of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date. In the event the majority
holder of the Class CE Certificates exercises such option, the purchase price
payable in connection therewith generally will be equal to par, and in the event
the Master Servicer or the Insurer exercises such option, the purchase price
payable in connection therewith generally will be equal to the greater of par or
the fair market value of the Mortgage Loans and such properties, in each case
plus accrued interest for each Mortgage Loan at the related Mortgage Rate to but
not including the first day of the month in which such repurchase price is
distributed, together with any amounts due to the Servicers for unpaid Servicing
Fees and any unreimbursed advances and any amounts due to ___________, in its
capacity as Master Servicer for any unpaid Master Servicing Fees. In the event
the majority holder of the Class CE Certificates or the Master Servicer or the
Insurer exercises such option, the portion of the purchase price allocable to
the Offered Certificates will be, to the extent of available funds (including
funds paid under the Policy), (i) 100% of the then outstanding Certificate
Principal Balance thereof, plus (ii) one month's interest on the then
outstanding Certificate Principal Balance thereof at the then applicable
Pass-Through Rate for such class, plus (iii) any previously accrued but unpaid
interest thereon to which the holders of such Certificates are entitled. The
holders of the Residual Certificates shall pledge any amount received in a
termination in excess of par to the holders of the Class CE Certificates. In no
event will the trust created by the Agreement continue beyond the expiration of
21 years from the death of the survivor of the persons named in the Agreement.
See "Description of the Securities--Termination" in the Prospectus.
THE INSURER
The following information has been supplied by __________________ (the
"Insurer") for inclusion in this Prospectus Supplement. No representation is
made by the Depositor or the Underwriter as to the accuracy and completeness of
such information.
GENERAL
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The principal executive offices of the Insurer are located at
_______________, and its telephone number at that location is __________.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the Insurer or any of its
domestic or Bermuda operating insurance company subsidiaries are generally
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, the Insurer reinsures a
portion of its liabilities under certain of its financial guaranty insurance
policies with other reinsurers under various treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by the Insurer as
a risk management device and to comply with certain statutory and rating agency
requirements; it does not alter or limit the Insurer's obligations under any
financial guaranty insurance policy.
RATINGS
The Insurer's insurance financial strength is rated "Aaa" by _________. The
Insurer's insurer financial strength is rated "AAA" by each of ____________ and
____________. The Insurer's claims-paying ability is rated "AAA" by ___________
and ___________ and
- ---------------.
Such ratings reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies. See "Ratings".
CAPITALIZATION
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
ACTUAL AS ADJUSTED(1)
(UNAUDITED)
(IN THOUSANDS)
----------------------------
<S> <C> <C>
Deferred Premium Revenue
(net of prepaid reinsurance premiums)................................ $ $
--------------- ----------
Surplus Notes.............................................................
Minority Interest.........................................................
Shareholder's Equity
Common Stock.........................................................
Additional Paid-In Capital...........................................
Accumulated Other Comprehensive Income (net of
deferred income taxes)...............................................
Accumulated Earnings.................................................
Total Shareholder's Equity................................................
Total Deferred Premium Revenue, Surplus Notes, Minority
Interest and Shareholder's Equity.........................................
</TABLE>
- ------------------
(1) Adjusted to give effect to the ____________ (a) purchase by _________ of $__
million of surplus notes from the Insurer in connection with the formation of a
new indirect _________ subsidiary of the Insurer, initially capitalized with
$___ million, including
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a $__ million minority interest owned by ____________, and (b) contribution by
_______ to the capital of the Insurer of approximately $__ million, representing
a portion of the proceeds from the sale by Holdings of $___ million of _______%
Senior Quarterly Income Debt Securities due ____.
For further information concerning the Insurer, see the Consolidated
Financial Statements of the Insurer and subsidiaries, and the notes thereto,
incorporated by reference herein. The Insurer's financial statements are
included as exhibits in the Annual Reports on Form 10-K and the Quarterly
Reports on Form 10-Q filed with the Securities and Exchange Commission (the
"Commission") and may be reviewed at the EDGAR web site maintained by the
Commission and at Holding's website, http://www._______.com. Copies of the
statutory quarterly and annual financial statements filed with the State of New
York Insurance Department by the Insurer are available upon request to the State
of New York Insurance Department.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described under "Incorporation of Certain
Information by Reference" in the Prospectus, the consolidated financial
statements of the Insurer and subsidiaries included in or as exhibits to the
following documents which have been filed with the Securities and Exchange
Commission by _________, are hereby incorporated by reference in this Prospectus
Supplement, which together with the Prospectus, forms a part of the Depositor's
Registration Statement: (a) the Annual Report on Form 10-K for the year ended
December 31, 1997 and (b) the Quarterly Report on Form 10-Q for the period ended
September 30, 1998.
All financial statements of the Insurer and subsidiaries included in
documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the
Offered Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
The Depositor will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon oral or written request of such person,
a copy of any or all of the foregoing financial statements incorporated by
reference. Requests for such copies should be directed to the Secretary, Salomon
Brothers Mortgage Securities VII, Inc., Seven World Trade Center, New York, New
York 10048.
INSURANCE REGULATION
The Insurer is licensed and subject to regulation as a financial guaranty
insurance corporation under the laws of the State of New York, its state of
domicile. In addition, the Insurer and its insurance subsidiaries are subject to
regulation by insurance laws of the various other jurisdictions in which they
are licensed to do business. As a financial guaranty insurance corporation
licensed to do business in the State of New York, the Insurer is subject to
Article 69 of the New York Insurance Law which, among other things, limits the
business of each such insurer to financial guaranty insurance and related lines,
requires that each such insurer maintain a minimum surplus to policyholders,
establishes contingency, loss and unearned premium reserve requirements for each
such insurer, and limits the size of individual transactions ("single risks")
and the volume of transactions ("aggregate risks") that may be underwritten by
each such insurer. Other provisions of the New York Insurance Law, applicable to
non-life insurance companies such as the Insurer, regulate, among other things,
permitted investments, payment of dividends, transactions with affiliates,
mergers, consolidations, acquisitions or sales of assets and incurrence of
liability for borrowings.
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FEDERAL INCOME TAX CONSEQUENCES
Three separate elections will be made to treat designated portions of the
Trust Fund as real estate mortgage investment conduits ("REMIC I", "REMIC II"
and "REMIC III", respectively, and each a "REMIC") for federal income tax
purposes. Upon the issuance of the Offered Certificates, Thacher Proffitt &
Wood, counsel to the Depositor, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the Agreement, for federal
income tax purposes, each of REMIC I, REMIC II and REMIC III will qualify as a
REMIC under Sections 860A through 860G of the Internal Revenue Code of 1986 (the
"Code").
For federal income tax purposes, (i) the Class R-I Certificates will be the
sole class of "residual interests" in REMIC I, (ii) separate non-certificated
regular interests in REMIC I will be issued and will be the "regular interests"
in REMIC I, (iii) the Class R-II Certificates will be the sole class of
"residual interests" in REMIC II, (iv) separate non-certificated regular
interests in REMIC II will be issued and will be the "regular interests" in
REMIC II, (v) the Class R-III Certificates will be the sole class of "residual
interests" in REMIC III, and (vi) the Offered Certificates, the Class CE
Certificates and the Class P Certificates will be the "regular interests" in,
and will be treated as debt instruments of, REMIC III. See "Federal Income Tax
Consequences--REMIC--Classification of REMICs" in the Prospectus.
For federal income tax reporting purposes, the Offered Certificates will
not be treated as having been issued with original issue discount. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, premium and market discount, if any, for federal income
tax purposes will be based on the assumption that subsequent to the date of any
determination the Mortgage Loans will prepay at a constant rate equal to ___% of
the Prepayment Vector. No representation is made that the Mortgage Loans will
prepay at such rate or at any other rate. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. The OID
Regulations in some circumstances permit the holder of a debt instrument to
recognize original issue discount under a method that differs from that of the
issuer. Accordingly, it is possible that holders of Offered Certificates issued
with original issue discount may be able to select a method for recognizing
original issue discount that differs from that used in preparing reports to
Certificateholders and the IRS. Prospective purchasers of Offered Certificates
issued with original issue discount are advised to consult their tax advisors
concerning the tax treatment of such Certificates in this regard.
The Offered Certificates may be treated for federal income tax purposes as
having been issued at a premium. Whether any holder of a Offered Certificate
will be treated as holding a Certificate with amortizable bond premium will
depend on such Certificateholder's purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
Certificateholder. Holders of Offered Certificates should consult their own tax
advisors regarding the possibility of making an election to amortize such
premium. See "Federal Income Tax Consequences-- REMICs--Taxation of Owners of
REMIC Regular Certificates--Premium" in the Prospectus.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code, generally in the same proportion that the assets in the Trust Fund
would be so treated. In addition, interest on the Offered Certificates will be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code, generally to the extent that the Offered
Certificates are treated as "real estate assets" under Section 856(c)(4)(A) of
the Code. The
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<PAGE>
Offered Certificates will also be treated as "qualified mortgages" under Section
860G(a)(3) of the Code. See "Federal Income Tax Consequences--
REMICs--Characterization of Investments in REMIC Certificates" in the
Prospectus.
It is not anticipated that any of REMIC I, REMIC II or REMIC III will
engage in any transactions that would subject it to the prohibited transactions
tax as defined in Section 860F(a)(2) of the Code, the contributions tax as
defined in Section 860G(d) of the Code or the tax on net income from foreclosure
property as defined in Section 860G(c) of the Code. However, in the event that
any such tax is imposed on REMIC I, REMIC II or REMIC III, such tax will be
borne (i) by the Trust Administrator, if the Trust Administrator has breached
its obligations with respect to REMIC compliance under the Agreement, (ii) by
__________, if ____________, in its capacity as Master Servicer or as a
Servicer, has breached its obligations with respect to REMIC compliance under
the Agreement, (iii) by ___________, if ___________, in its capacity as a
Servicer has breached its obligations with respect to REMIC compliance under the
Agreement, (iv) by the Trustee, if the Trustee has breached its obligations with
respect to REMIC compliance under the Agreement and (v) otherwise by the Trust
Fund, with a resulting reduction in amounts otherwise distributable to holders
of the related Offered Certificates. See "Description of the Securities--
General" and "Federal Income Tax Consequences--REMICs--Prohibited Transactions
and Other Possible REMIC Taxes" in the Prospectus.
The responsibility for filing annual federal information returns and other
reports will be borne by the Trustee, the Trust Administrator or the Master
Servicer. See "Federal Income Tax Consequences--REMICs-- Reporting and Other
Administrative Matters" in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Federal Income Tax
Consequences--REMICs" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated _________ __, ____ (the "Underwriting Agreement"), the
Depositor has agreed to sell, and Salomon Smith Barney Inc. (the "Underwriter")
has agreed to purchase the Offered Certificates. The Underwriter is obligated to
purchase all Offered Certificates if it purchases any. The Underwriter is an
affiliate of the Depositor.
Distribution of the Offered Certificates will be made from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the Depositor, will be 99.50%
of the aggregate initial Certificate Principal Balance of the Offered
Certificates, plus accrued interest thereon. In connection with the purchase and
sale of the Offered Certificates, the Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting discounts.
The Offered Certificates are offered subject to receipt and acceptance by
the Underwriter, to prior sale and to the Underwriter's right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Offered Certificates will be made
through the facilities of DTC on or about the Closing Date.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended, or will contribute to payments the
Underwriter may be required to make in respect thereof.
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<PAGE>
SECONDARY MARKET
There is currently no secondary market for the Offered Certificates and
there can be no assurance that a secondary market for the Offered Certificates
will develop or, if it does develop, that it will continue. The Underwriter
intends to establish a market in the Offered Certificates but it is not
obligated to do so. The primary source of information available to investors
concerning the Offered Certificates will be the monthly statements discussed in
the Prospectus under "Description of the Securities--Reports to
Certificateholders", which will include information as to the outstanding
principal balance of the Offered Certificates and the status of the applicable
form of credit enhancement. There can be no assurance that any additional
information regarding the Offered Certificates will be available through any
other source. In addition, the Depositor is not aware of any source through
which price information about the Offered Certificates will be generally
available on an ongoing basis. The limited nature of such information regarding
the Offered Certificates may adversely affect the liquidity of the Offered
Certificates, even if a secondary market for the Offered Certificates becomes
available.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be passed
upon for the Depositor and the Underwriter by Thacher Proffitt & Wood, New York,
New York.
EXPERTS
The consolidated balance sheets of the Insurer and subsidiaries as of
December 31, 1997 and 1996 and the related consolidated statements of income,
changes in shareholder's equity, and cash flows for each of the three years in
the period ended December 31, 1997, incorporated by reference in this Prospectus
Supplement, have been incorporated herein in reliance on the report of
_______________, independent accountants, given on the authority of that firm as
experts in accounting and auditing.
RATINGS
It is a condition to the issuance of the Certificates that the Offered
Certificates be rated "Aaa" by ____________ ("______") and "AAA" by
_____________ ("________").
The ratings of ________ and ___________ assigned to mortgage pass-through
certificates address the likelihood of the receipt by Certificateholders of all
distributions to which such Certificateholders are entitled. The rating process
addresses structural and legal aspects associated with the Certificates,
including the nature of the underlying mortgage loans. The ratings assigned to
mortgage pass-through certificates do not represent any assessment of the
likelihood that principal prepayments will be made by the mortgagors or the
degree to which such prepayments will differ from that originally anticipated.
The ratings assigned by __________ and _________ on the Offered Certificates are
based in part upon the Insurer's claims paying ability. Any change in the
ratings of the Insurer by _________ or ___________ may result in a change in the
ratings on the Offered Certificates. The ratings do not address the possibility
that Certificateholders might suffer a lower than anticipated yield due to
non-credit events.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should
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<PAGE>
be evaluated independently of any other security rating. In the event that the
ratings initially assigned to the Offered Certificates are subsequently lowered
for any reason, no person or entity is obligated to provide any additional
credit support or credit enhancement with respect to the Offered Certificates.
The Depositor has not requested that any rating agency rate the Offered
Certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the Offered Certificates, or, if it
does, what rating would be assigned by any such other rating agency. A rating on
the Offered Certificates by another rating agency, if assigned at all, may be
lower than the ratings assigned to the Offered Certificates as stated above.
LEGAL INVESTMENT
The Offered Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
because the Mortgage Pool includes certain Mortgage Loans that are secured by
subordinate liens on the related Mortgaged Properties.
The Depositor makes no representations as to the proper characterization of
any class of Offered Certificates for legal investment or other purposes, or as
to the ability of particular investors to purchase any class of Offered
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Offered Certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent any class of Offered Certificates constitutes a legal
investment or is subject to investment, capital or other restrictions. On
December 1, 1998, the Office of Thrift Supervision (the "OTS") issued Thrift
Bulletin 13a, entitled "Management of Interest Rate Risk, Investment Securities,
and Derivatives Activities" ("TB 13a"), which is applicable to thrift
institutions regulated by the OTS. TB 13a should be reviewed by any such thrift
institution prior to investing in the Offered Certificates.
See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or any other plan or arrangement
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code (each, a "Plan") or any person investing
Plan Assets of any Plan (as defined in the Prospectus under "ERISA
Considerations") should carefully review with its legal advisors whether the
purchase, sale or holding of Certificates will give rise to a prohibited
transaction under ERISA or Section 4975 of the Code.
The U.S. Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption 91-23 (the "Exemption"), as described under "ERISA
Considerations" in the Prospectus, to the Underwriter. The Exemption generally
exempts from the application of certain of the prohibited transaction provisions
of Section 406 of ERISA, and the excise taxes imposed on such prohibited
transactions by Section 4975(a) and (b) of the Code and Section 502(i) of ERISA,
transactions relating to the purchase, sale and holding of pass-through
certificates underwritten by the Underwriter, such as the Offered Certificates,
and the servicing and operation of asset pools such as the Mortgage Pool,
provided that certain conditions are satisfied. The purchase of the Offered
Certificates by, on behalf of or with the Plan Assets of any Plan may qualify
for exemptive relief under the Exemption. However, the Exemption contains a
number of conditions which must be met for the Exemption to apply (as described
in the Prospectus), including the requirement that any such Plan must be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
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Securities and Exchange Commission under the Securities Act of 1933, as amended.
A fiduciary of a Plan contemplating purchasing an Offered Certificate must make
its own determination that the conditions set forth in the Exemption will be
satisfied with respect to the Offered Certificates.
Before purchasing an Offered Certificate, a fiduciary of a Plan should
itself confirm (a) that the Offered Certificates constitute "certificates" for
purposes of the Exemption and (b) that the specific and general conditions of
the Exemption and the other requirements set forth in the Exemption would be
satisfied. Any Plan fiduciary that proposes to cause a Plan to purchase a
Certificate should consult with its counsel with respect to the potential
applicability to such investment of the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Code to the proposed investment. For
further information regarding the ERISA considerations of investing in the
Certificates, see "ERISA Considerations" in the Prospectus.
S-55
<PAGE>
$___________ (APPROXIMATE)
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES ____-___
PROSPECTUS SUPPLEMENT
DATED _______ __, ____
MASTER SERVICER
SALOMON SMITH BARNEY
UNDERWRITER
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE CERTIFICATES OFFERED HEREBY IN ANY STATE WHERE THE OFFER
IS NOT PERMITTED.
WE DO NOT CLAIM THE ACCURACY OF THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS AS OF ANY DATE OTHER THAN THE DATES STATED ON
THEIR COVER PAGES.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
Offered Certificates, whether or not participating in this offering, may be
required to deliver a prospectus supplement and prospectus until ______ __,
- ----.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Subject to Completion, Dated September 7, 1999
[Version 3]
Prospectus Supplement
(To Prospectus dated , ____)
$_______________ (APPROXIMATE)
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES ____-
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
MASTER SERVICER
- --------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ IN THIS
PROSPECTUS SUPPLEMENT AND PAGE __ IN THE PROSPECTUS.
The certificates will represent interests only in a trust consisting primarily
of mortgage loans and will not represent ownership interests in or obligations
of any other entity.
This prospectus supplement may be used to offer and sell the certificates
offered hereby only if accompanied by the prospectus.
- --------------------------------------------------------------------------------
THE TRUST --
o will consist primarily of a mortgage pool of one- to four-family
[adjustable-rate] mortgage loans; and
o will be represented by ______ classes of certificates, ______ of which
are offered hereby.
THE OFFERED CERTIFICATES --
o will represent senior, subordinate or residual interests in the trust and
will receive distributions from the assets of the trust; and
o will receive monthly distributions commencing on ________, __ ____
CREDIT ENHANCEMENT --
o the senior certificates will have credit enhancement in the form of
subordination; and
o the subordinate certificates will have credit enhancement in the form of
subordination provided by certain classes of non-offered subordinate
certificates and offered subordinate certificates with lower payment
priorities;
Salomon Smith Barney Inc. (the "Underwriter") will offer the Class A
Certificates (the "Offered Certificates") from time to time to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. The proceeds to the Depositor from the sale of such certificates,
before deducting expenses, will be approximately _____% of the initial principal
balance of such certificates, plus accrued interest on such certificates. The
Underwriter's commission will be any positive difference between the price it
pays to the Depositor for such certificates and the amount it receives from the
sale of such certificates to the public. See "Method of Distribution" herein.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF
THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE>
SALOMON SMITH BARNEY
Underwriter
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD NOT
ASSUME THAT THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS DOCUMENT.
We provide information to you about the Offered Certificates in two separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to this series of certificates; and
o this prospectus supplement, which describes the specific terms of this
series of certificates.
Salomon Brothers Mortgage Securities VII, Inc.'s principal offices are located
at Seven World Trade Center, New York, New York 10048 and its phone number is
(212) 783-5635.
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
SUMMARY OF PROSPECTUS SUPPLEMENT............................................S-__
RISK FACTORS................................................................S-__
USE OF PROCEEDS.............................................................S-__
THE MORTGAGE POOL...........................................................S-__
YIELD ON THE CERTIFICATES...................................................S-__
DESCRIPTION OF THE CERTIFICATES.............................................S-__
POOLING AND SERVICING AGREEMENT.............................................S-__
FEDERAL INCOME TAX CONSEQUENCES.............................................S-__
METHOD OF DISTRIBUTION......................................................S-__
SECONDARY MARKET............................................................S-__
LEGAL OPINIONS..............................................................S-__
RATINGS.....................................................................S-__
LEGAL INVESTMENT............................................................S-__
ERISA CONSIDERATIONS........................................................S-__
S-2
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS A VERY BROAD OVERVIEW OF THE CERTIFICATES
OFFERED HEREBY AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF
THE OFFERED CERTIFICATES, READ CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND
THE ENTIRE ACCOMPANYING PROSPECTUS. Capitalized terms used but not defined
herein have the meanings assigned to them in the prospectus. An Index of
Principal Definitions is included at the end of the prospectus.
Title of Series....................Salomon Brothers Mortgage Securities VII,
Inc., Mortgage Pass-Through Certificates,
Series ____-_.
Cut-off Date.......................__________ __, ____.
Closing Date.......................On or about __________ __, ____.
Depositor..........................Salomon Brothers Mortgage Securities VII,
Inc. (the "Depositor"), an indirect
wholly-owned subsidiary of Salomon Smith
Barney Holdings Inc. and an affiliate of
Salomon Smith Barney Inc. The Depositor will
deposit the mortgage loans into the trust.
See "The Depositor" in the prospectus.
Mortgage Asset Seller..............The mortgage loans were originated or
acquired by ___________ and will be sold to
the Depositor on or prior to the date of
initial issuance of the certificates.
Originator and Master Servicer....._____________________. See "The Mortgage
Pool--Underwriting Standards" and "Pooling
and Servicing Agreement--The Originator and
Master Servicer" herein.
Trustee............................_____________________. See "Pooling and
Servicing Agreement--The Trustee" herein.
Distribution Dates.................Distributions on the Offered Certificates
will be made on the __th day of each month,
or, if such day is not a business day, on the
next succeeding business day, beginning in
___________.
Offered Certificates...............The classes Offered Certificates and their
pass-through rates and certificate principal
balances or notional amounts are set forth in
the table below.
INITIAL CERTIFICATE PASS-THROUGH
CLASS PRINCIPAL BALANCE(1) RATE
- -------------------- -------------------------------- --------------------------
A................... $_________ ____%
==================== ================================ ==========================
- ----------------------
(1)Approximate.
(2)Approximate Initial Notional Amount.
(3)Calculated as described herein.
S-3
<PAGE>
THE TRUST
The Depositor will establish a trust with respect to the Series ____-_
Certificates, pursuant to a pooling and servicing agreement dated as of
__________ __, ____ among the Depositor, the Master Servicer and the Trustee.
There are _____ classes of certificates representing the trust. See "Description
of the Certificates" herein.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust. Distributions of interest and/or principal on the Offered
Certificates will be made only from payments received in connection with the
mortgage loans described below.
THE MORTGAGE LOANS
The trust will contain approximately _____ conventional, [adjustable-rate]
mortgage loans secured by first liens on [multifamily][commercial] properties.
The mortgage loans have an aggregate principal balance of approximately
$__________ as of _________ __ ____.
The mortgage loans have original terms to maturity of not greater than [30]
years and the following characteristics as of __________ __, ____.
Range of mortgage rates _____% to _____%.
(approximate):
Weighted average mortgage ______%.
rate (approximate):
Weighted average remaining ___ years and ___ months.
term to stated maturity
(approximate):
Range of principal balances $__________ to
(approximate): $____________.
Average principal balance: $_____________.
Range of loan-to-value ratios _____% to _____%.
(approximate):
Weighted average loan-to-
value ratio (approximate): ______%.
For additional information regarding the mortgage loans, see "The Mortgage Pool"
herein.
THE CERTIFICATES
OFFERED CERTIFICATES. The Offered Certificates will have the characteristics
shown in the table above in this prospectus supplement. The pass-through rate on
the Offered Certificates is shown in the table above and is calculated as
described herein under "Description of the Certificates--Distributions--
CALCULATIONS OF INTEREST".
The Offered Certificates will be sold by the Depositor to the Underwriter on the
closing date.
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 in minimum denominations of $[10,000] and integral multiples of
$[1.00] in excess thereof.
CLASS B CERTIFICATES, CLASS C CERTIFICATES AND CLASS R CERTIFICATES. Such
Certificates are not offered hereby. The Class B Certificates, the Class C
Certificates and the Class R Certificates have initial certificate principal
balances of approximately $____________, $___________ and $___________,
respectively, evidencing initial undivided interests in the trust of
approximately _____%, ____% and ____%, respectively. [Such Certificates will be
sold by the Depositor to Salomon Smith Barney Inc. on the closing date].
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Offered
Certificates consists of subordination as described below and under "Description
of the Certificates--Subordination" herein.
S-4
<PAGE>
SUBORDINATION. The rights of the holders of the Class B Certificates, the Class
C Certificates and the Class R Certificates (the "Subordinate Certificates") to
receive distributions will be subordinated, to the extent described herein, to
the rights of the holders of the Class A Certificates.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates in respect of interest and principal and to afford
such certificates protection against realized losses on the mortgage loans as
described below.
ADVANCES
The Master Servicer is required to advance delinquent monthly payments of
principal and interest on the mortgage loans, subject to the limitations
described herein. The Trustee will be obligated to make such advance if the
Master Servicer fails in its obligation to do so, to the extent provided in the
pooling and servicing agreement. See "Description of the Certificates--Advances"
herein and "Description of the Securities--Advances in respect of Delinquencies"
in the prospectus.
OPTIONAL TERMINATION
At its option, the Master Servicer may purchase all of the mortgage loans,
together with any properties in respect thereof acquired on behalf of the trust,
and thereby effect termination and early retirement of the Certificates, after
the aggregate principal balance of the mortgage loans (and properties acquired
in respect thereof) remaining in the trust has been reduced to less than [10%]
of the aggregate principal balance of the mortgage loans as of __________ __,
____. See "Pooling and Servicing Agreement-- Termination" herein and
"Description of the Securities-- Termination" in the prospectus.
FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the trust as a real estate mortgage investment
conduit for federal income tax purposes. See "Federal Income Tax
Consequences--Characterization of Investments in REMIC Certificates" in the
prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Federal Income Tax Consequences"
herein and in the prospectus.
RATINGS
It is a condition to the issuance of the certificates that the Offered
Certificates receive a rating of ___ from [______________ ("_____") and
___________ ("_________")]:
A security rating does not address the frequency of prepayments on the mortgage
loans or the corresponding effect on yield to investors. [The "r" symbol in
certain _____________ ratings is attached to highlight certificates that
__________ believes may 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 Offered Certificates [will] [will not] constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") [for so long as they are rated not lower than the second highest
rating category by one or more nationally recognized statistical rating
organizations and, as such, will be legal investments for certain entities to
the extent provided in SMMEA and applicable state laws]. See "Legal Investment"
herein and in the prospectus.
S-5
<PAGE>
ERISA CONSIDERATIONS
The U.S. Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption 91-23, to the Underwriter. Such exemption generally
exempts from the application of certain of the prohibited transaction provisions
of Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the excise taxes imposed on such prohibited transactions
by Section 4975(a) and (b) of the Internal Revenue Code of 1986 (the "Code") and
Section 502(i) of ERISA, transactions relating to the purchase, sale and holding
of pass-through certificates underwritten by the Underwriter. Such exemption
generally applies to certificates such as the Class A Certificates, and the
servicing and operation of asset pools such as the mortgage pool, provided that
certain conditions are satisfied.
See "ERISA Considerations" herein and in the prospectus.
S-6
<PAGE>
RISK FACTORS
[Appropriate Risk Factors as necessary]
[THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES
WILL BE AFFECTED BY PREPAYMENT SPEEDS AND BY THE PRIORITY OF PAYMENT ON SUCH
PAYMENTS.
The rate and timing of distributions allocable to principal on the Class A
Certificates will depend, in general, on the rate and timing of principal
payments (including prepayments, defaults, liquidations and purchases of
Mortgage Loans due to a breach of representation and warranty) on the mortgage
loans and the allocation thereof to pay principal on the Class A 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.
The rate at which principal prepayments occur on the mortgage loans will be
affected by a variety of factors, including the terms of the mortgage loans, the
level of prevailing interest rates, the availability of mortgage credit and
economic, demographic, geographic, tax, legal and other factors. Generally,
however, if prevailing interest rates fall significantly below the mortgage
rates on the mortgage loans, such mortgage loans are likely to be the subject of
higher principal prepayments than if prevailing rates remain at or above the
rates borne by such mortgage loans. [The rate of principal payments on the Class
A Certificates will correspond to the rate of principal payments on the mortgage
loans and is likely to be affected by the lock-out periods and prepayment
premium provisions applicable to the mortgage loans, and by the extent to which
the Master Servicer is able to enforce such provisions. Mortgage loans with a
lock-out period or a prepayment premium provision, to the extent enforceable,
generally would be expected to experience a lower rate of principal prepayments
than otherwise identical mortgage loans without such provisions, with shorter
lock-out periods or with lower prepayment premiums.]
As described herein, prior to reduction of the Class A Balance to zero, all
principal prepayments on and other unscheduled recoveries of principal of the
Mortgage Loans will be allocated to the Class A Certificates. To the extent that
no prepayments or other unscheduled recoveries of principal are distributed on
the Class B Certificates, the Class C Certificates and the Class R Certificates,
the subordination afforded the Class A Certificates by the Class B Certificates,
the Class C Certificates and the Class R Certificates, in the absence of
offsetting losses on the mortgage loans allocated thereto, will be increased.
See "Description of the Certificates--Distributions--Priority" and "Certain
Yield, Prepayment and Maturity Considerations" herein and "Yield Considerations"
in the Prospectus].
[THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON A VARIETY
OF FACTORS
The yield to maturity on the Class A Certificates will depend, in general,
on:
o the applicable purchase price; and
o the rate and timing of principal payments (including prepayments and
collections upon defaults, liquidations and repurchases due to a breach
of representation and warranty) on the mortgage loans and the
allocation thereof to reduce the certificate principal balance of such
certificates, as well as other factors.
The yield to investors on the Class A Certificates will be adversely
affected by any allocation thereto of shortfalls in interest payments on the
mortgage loans as the result of prepayments on the mortgage loans, which are
expected to result from the distribution of interest only to the date of
S-7
<PAGE>
prepayment (rather than a full month's interest) in connection with prepayments
in full, and the lack of any distribution of interest on the amount of any
partial prepayments. Neither the Certificates not the Mortgage Loans are
guaranteed by any governmental entity or private insurer.
In general, if a Class A Certificate is purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a Class A Certificate is
purchased at a discount and principal distributions thereon occur at a rate
slower than that at the time of purchase, the investor's actual yield to
maturity will be lower than that originally assumed.
The proceeds to the Depositor from the sale of the Offered Certificates
were determined based on a number of assumptions, including a prepayment
assumption of 100% of the prepayment vector (as more fully described herein) and
weighted average lives corresponding thereto. No representation is made that the
mortgage loans will prepay at such rate or at any other rate. The yield
assumptions for the Offered Certificates will vary as determined at the time of
sale].
RISKS ASSOCIATED WITH CERTAIN OF THE MORTGAGE LOANS AND MORTGAGED
PROPERTIES
[Description of type of property, lease provisions, nature of tenants and
operating income.]
[RECOURSE IN THE MORTGAGE LOANS WILL BE LIMITED TO THE VALUE OF THE
PROPERTY SECURING THE MORTGAGE LOAN.
Investors in the Class A Certificates should consider all of the mortgage
loans to be nonrecourse loans (i.e., in the event of a default, recourse will be
limited to the mortgaged property securing the defaulted mortgage loan). In
those cases where recourse to a borrower or guarantor is permitted by the loan
documents, the Depositor has not undertaken any evaluation of the financial
condition of such borrower or guarantor. Consequently, payment on each mortgage
loan prior to maturity is dependent on one or more of the following:
o the sufficiency of the net cash flow from the mortgaged property;
o the market value of the mortgaged property at maturity; or
o the ability of the borrower to refinance the mortgaged property.
None of the mortgage loans are insured or guaranteed by any governmental
agency].
[CERTAIN MORTGAGED PROPERTIES MAY CONTAIN ENVIRONMENTAL CONDITIONS OR RISKS
THAT COULD ADVERSELY AFFECT THE VALUE OF SUCH PROPERTY
A third-party environmental consultant conducted an environmental site
assessment (or updated a previously conducted assessment) with respect to each
mortgaged property within the 24-month period preceding __________ __, ____.
Each such environmental site assessment or update generally complied with
industry-wide standards. In the case of certain mortgaged properties, a "Phase
II" environmental assessment was also performed. If any such assessment or
update revealed a material adverse environmental condition or circumstance at
any mortgaged property, then (depending on the nature of the condition or
circumstance) one of the following actions has been or is expected to be taken:
o an environmental indemnity was obtained from an affiliate of the
Borrower;
S-8
<PAGE>
o an operations and maintenance plan (including, in several cases, in
respect of asbestos- containing materials, lead-based paint and/or
radon) or periodic monitoring of nearby properties has been or is
expected to be implemented in the manner and within the time frames
specified in the related mortgage loan documents; or
o an escrow reserve was established to cover the estimated cost of
remediation.
There can be no assurance, however, that the environmental assessments
identified all environmental conditions and risks or that the related borrowers
will implement all recommended operations and maintenance plans. In addition,
the current environmental condition of the mortgaged properties could be
adversely affected by tenants or by the condition of land or operations in the
vicinity of the mortgaged properties (such as underground storage tanks).
For further information on the potential environmental risks associated
with the mortgaged properties, see "Servicing of the Mortgage Loans--Realization
Upon Defaulted Mortgage Loans" herein and "Description of the
Agreements--Realization Upon Defaulted Whole Loans", "Risk
Factors--Environmental Risks" and "Certain Legal Aspects of Mortgage
Loans--Environmental Legislation" in the Prospectus].
[THE MORTGAGE LOANS ARE CONCENTRATED IN THE STATE OF ________, WHICH MAY
PRESENT A GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately _____% of the mortgage loans by aggregate principal balance
as of __________ __, ____, are secured by mortgaged properties located in the
State of _________. The aggregate principal balance of mortgage loans in the
__________ zip code with the largest amount of such mortgage loans, by aggregate
principal balance as of ___________ __, ____, was approximately $_________. If
the _________ residential real estate market should experience an overall
decline in property values after the dates of origination of the mortgage loans,
the rates of delinquencies, foreclosures, bankruptcies and losses on the
mortgage loans may increase over historical levels of comparable type loans, and
may increase substantially].
MORTGAGE LOANS WITH PARTICULARLY HIGH BALANCES RELATIVE TO OTHER MORTGAGE
LOANS IN THE MORTGAGE POOL MAY PRESENT A GREATER RISK OF LOSS
[Description of concentrations, if applicable]
In general, the inclusion in a mortgage pool of one or more loans that have
outstanding principal balances that are substantially larger than the other
mortgage loans in the pool can result in losses that are more severe, relative
to the size of the pool, than would be the case if the aggregate balance of such
pool were distributed more evenly. Several of the individual mortgage loans
mortgage loans have balances, as of __________ __, ____ that are substantially
higher than the average Cut-off Date balance, which is $_________. Concentration
of borrowers and operators also poses increased risks. For instance, if a
borrower that owns several mortgaged properties experiences financial difficulty
at one mortgaged property, or at another income-producing property that it owns,
it could attempt to avert foreclosure by filing a bankruptcy petition that might
have the effect of interrupting monthly payments for an indefinite period on all
of the related mortgage loans. Similarly, if an operator of more than one
mortgaged property were to experience financial difficulties, any adverse
effects of that difficulty, such as a reduction in the level of operating
performance or, if the operator were to become a debtor in a bankruptcy
proceeding, an interruption in payments to the borrower needed for debt service,
could adversely affect the mortgage pool to a greater degree than if the
operator operated fewer mortgaged properties].
S-9
<PAGE>
[INVESTORS SHOULD BE AWARE OF CERTAIN RISKS ASSOCIATED WITH MORTGAGE LOANS
FEATURING BALLOON PAYMENTS.
None of the mortgage loans is fully amortizing over its term to maturity.
Thus, each mortgage loan will have a substantial payment (that is, a balloon
payment) due at its stated maturity unless prepaid prior thereto. In addition,
mortgage loans that permit negative amortization could require balloon payments
substantially larger than expected under certain interest rate scenarios. Loans
with balloon payments involve a greater risk to the lender than self-amortizing
loans because the ability of a borrower to make a balloon payment typically will
depend upon its ability either to refinance the loan or to sell the related
mortgaged property. See "Risk Factors--Balloon Payments" in the Prospectus.
The ability of a borrower under a balloon loan to make the required balloon
payment at maturity depends upon its ability either to refinance the loan or to
sell the related mortgaged property. The ability of a borrower to refinance its
mortgage loan or sell the related mortgaged property will be affected by a
number of factors occurring at the time of attempted refinancing or sale,
including:
o the level of available mortgage rates;
o the fair market value of the related mortgaged property;
o the borrower's equity in the related mortgaged property and the
financial condition of the borrower;
o operating history of the related mortgaged property;
o tax laws;
o prevailing general and regional economic conditions; and
o the availability of credit for multifamily or commercial properties.
In order to maximize recoveries on defaulted mortgage loans, the pooling
and servicing agreement enables the master servicer to extend and modify
mortgage loans that are in material default or as to which a payment default
(including the failure to make a balloon payment) is imminent; subject, however,
to the limitations described under "Servicing of the Mortgage
Loans--Modifications, Waivers and Amendments" herein. There can be no assurance,
however, that any such extension or modification will increase the present value
of recoveries in a given case. Any delay in collection of a balloon payment that
would otherwise be distributable in respect of a class of certificates, whether
such delay is due to borrower default or to modification of the related mortgage
loan by the master servicer, will extend the weighted average life of such class
of certificates. See "Certain Yield, Prepayment and Maturity Considerations"
herein and "Yield Considerations" in the Prospectus].
[MORTGAGE LOANS THAT PROVIDE FOR NEGATIVE AMORTIZATION MAY PRESENT UNIQUE
RISKS TO INVESTORS IN THE CLASS A CERTIFICATES
All of the mortgage loans are adjustable rate mortgage loans. In addition,
____ of the mortgage loans, which represent _____% of the aggregate principal
balance of the mortgage loans as of the Cut-off Date, allow negative
amortization to occur. Increases in the required monthly payments on mortgage
loans in excess of those assumed in the original underwriting of those loans may
result in a default rate higher than that on mortgage loans with fixed mortgage
rates. Moreover, increases in
S-10
<PAGE>
the principal balances of mortgage loans due to the deferral and capitalization
of interest payments may result in a default rate that is higher than that of
adjustable rate mortgage loans that do not provide for negative amortization. In
addition, in the case of the mortgage loans that permit negative amortization,
the amount of a monthly payment may be more or less than the amount necessary to
amortize the mortgage loan principal balance over the then remaining
amortization schedule at the applicable mortgage rate. Accordingly, such
mortgage loans may be subject to (i) slower amortization (if the monthly payment
due on a due date is sufficient to pay interest accrued to such due date at the
applicable mortgage rate but is not sufficient to reduce principal in accordance
with the applicable amortization schedule), (ii) negative amortization (if
interest accrued to a due date at the applicable mortgage rate is greater than
the entire monthly payment due on such due date) or (iii) accelerated
amortization (if the monthly payment due on a due date is greater than the
amount necessary to pay interest accrued to such due date at the applicable
mortgage rate and to reduce principal in accordance with the applicable
amortization schedule)].
[THERE ARE SEVERAL RISKS ASSOCIATED WITH BORROWER DEFAULTS AND INVESTORS
SHOULD BE AWARE THAT DELINQUENCIES AND DEFAULTS BY BORROWERS MAY DELAY PAYMENTS
ON THE CLASS A CERTIFICATES.
The rate and timing of delinquencies and defaults on the mortgage loans
will affect the amount of distributions on the Class A Certificates, the yield
to maturity of the Class A Certificates, the rate of principal payments on the
Class A Certificates and the weighted average life of the Class A Certificates.
Delinquencies on the mortgage loans, unless covered by advances made by the
Master Servicer, may result in shortfalls in distributions of interest and/or
principal on the Class A Certificates for the current month. Although any such
shortfalls may be made up on future distribution dates, no interest would accrue
on such shortfalls. Thus, any such shortfalls would adversely affect the yield
to maturity of the Class A Certificates.
If an investor calculates the anticipated yield to maturity for the Class A
Certificates based on an assumed rate of default and amount of losses on the
mortgage loans that is lower than the default rate and amount of losses actually
experienced and such additional losses result in a reduction of the
distributions on or the aggregate principal balance or notional amount of the
Class a Certificates, the actual yield to maturity will be lower than calculated
and could, under certain scenarios, be negative. The timing of any loss on a
liquidated mortgage loan that results in a reduction of the distributions on or
the aggregate principal balance of the Class A Certificates will also affect the
actual yield to maturity of the Class A Certificates, even if the rate of
defaults and severity of losses are consistent with your expectations. In
general, the earlier a loss occurs, the greater the negative effect on yield to
maturity.
Even if losses on the mortgage loans do not result in a reduction of the
distributions on or the aggregate principal balance or notional amount of the
Class A Certificates, such losses may still affect the timing of distributions
on (and, accordingly, the weighted average life and yield to maturity of) the
Class A Certificates.
[THE MASTER SERVICER HAS CERTAIN RIGHTS TO PAYMENT THAT ARE SENIOR TO
DISTRIBUTIONS ON THE CLASS A CERTIFICATES
As and to the extent described herein, the Master Servicer will be entitled
to receive interest on unreimbursed advances and unreimbursed servicing expenses
that (i) are recovered out of amounts received on the mortgage loan as to which
such advances were made or such servicing expenses were incurred, which amounts
are in the form of liquidation proceeds, insurance proceeds, condemnation
proceeds or amounts paid in connection with the purchase of such mortgage loan
out of the trust fund or (ii) are determined to be nonrecoverable advances. The
Master Servicer's right
S-11
<PAGE>
to receive such payments of interest are prior to the rights of
certificateholders to receive distributions on the Class A Certificates and,
consequently, may result in losses being allocated to the Class A Certificates
that would not otherwise have resulted absent the accrual of such interest.
Even if losses on the mortgage loans are not borne by an investor in the
Class A Certificates, such losses may affect the weighted average life and yield
to maturity of such investor's certificates. Losses on the mortgage loans, to
the extent not allocated to the Class A Certificates, may result in a higher
percentage ownership interest evidenced by such certificates than would
otherwise have resulted absent such loss. The consequent effect on the weighted
average life and yield to maturity of the Class A Certificates will depend upon
the characteristics of the remaining mortgage loans.
Regardless of whether losses ultimately result, delinquencies and defaults
on the mortgage loans may significantly delay the receipt of payments by the
holder of a Class A Certificate, to the extent that advances or the
subordination of another class of certificates does not fully offset the effects
of any such delinquency or default. The scheduled principal distribution amount
and the unscheduled principal distribution amount generally consist of, as more
fully described herein, principal of the mortgage loans actually collected or
advanced. The Master Servicer has the ability to extend and modify mortgage
loans that are in default or as to which a payment default is imminent,
including the ability to extend the date on which a balloon payment is due by up
to ____ months, subject to certain conditions described in the Pooling and
Servicing Agreement. The Master Servicer's obligation to make advances in
respect of a mortgage loan that is delinquent as to its balloon payment is
limited, however, to the extent described under "Description of the
Certificates--Advances".
As described under "Description of the Certificates--Distributions" herein,
if the portion of available distribution amount distributable in respect of
interest on the Class A Certificates on any distribution date is less than the
distributable certificate interest then payable for such class, the shortfall
will be distributable to holders of such class of certificates on subsequent
distribution dates, to the extent of available funds. Any such shortfall will
not bear interest and will therefore negatively affect the yield to maturity of
such class of certificates for so long as it is outstanding].
S-12
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Trust Fund will consist primarily of __ conventional, adjustable
interest rate Mortgage Loans with an aggregate principal balance as of the
Cut-off Date, after deducting payments of principal due on such date, of
$___________. Each Mortgage Loan is evidenced by a promissory note (a "Mortgage
Note") and secured by a mortgage, deed of trust or other similar security
instrument (a "Mortgage") creating a [first] [first or junior] fee lien on a
[multifamily][commercial] property (a "Mortgaged Property"). The Mortgaged
Properties consist of [description commercial or multifamily properties].
[Because no evaluation of any mortgagor's financial condition has been
conducted, investors should consider all of the Mortgage Loans to be
non-recourse loans so that, in the event of mortgagor default, recourse may be
had only against the specific property and such limited other assets as have
been pledged to secure a Mortgage Loan, and not against the mortgagor's other
assets.] ALL PERCENTAGES OF THE MORTGAGE LOANS DESCRIBED HEREIN ARE APPROXIMATE
PERCENTAGES (EXCEPT AS OTHERWISE INDICATED) BY AGGREGATE PRINCIPAL BALANCE AS OF
THE CUT-OFF DATE.
The Mortgage Loans to be included in the Trust Fund will have been
originated or acquired by __________ (the "Mortgage Asset Seller") and will
comply with the underwriting criteria described herein. The Depositor will
purchase the Mortgage Loans to be included in the Mortgage Pool on or before the
_____________ from the Mortgage Asset Seller pursuant to a seller's agreement
(the "Seller's Agreement"), to be dated as of _______________, ____ between the
Mortgage Asset Seller and the Depositor. The Depositor will cause the Mortgage
Loans in the Mortgage Pool to be assigned to ____________, as Trustee, pursuant
to the Pooling and Servicing Agreement. ___________, in its capacity as Master
Servicer, will service the Mortgage Loans pursuant to the Pooling and Servicing
Agreement.
Under the Seller's Agreement, the Mortgage Asset Seller will make
certain representations, warranties and covenants to the Depositor relating to,
among other things, the due execution and enforceability of the Seller's
Agreement and certain characteristics of the Mortgage Loans, and will be
obligated to repurchase or substitute for any Mortgage Loans as to which there
exists deficient documentation or an uncured material breach of any such
representation, warranty or covenant. Under the Pooling and Servicing Agreement
the Depositor will assign all its right, title and interest in such
representations, warranties and covenants (including the Mortgage Asset Seller's
repurchase or substitution obligation) to the Trustee for the Trust Fund. The
Depositor will make no representations or warranties with respect to the
Mortgage Loans and will have no obligation to repurchase or substitute for
Mortgage Loans with deficient documentation or which are otherwise defective.
The Mortgage Asset Seller is selling such Mortgage Loans without recourse and,
accordingly, in such capacity, will have no obligations with respect to the
Certificates other than pursuant to such representations, warranties, covenants
and repurchase obligations. See "Description of the Agreements--Representations
and Warranties; Repurchases" in the Prospectus.
The Mortgage Rate on each Mortgage Loan is subject to adjustment on
each Interest Rate Adjustment Date by adding the related Gross Margin to the
value of the Index (described below) as most recently announced a specified
number of days prior to such Interest Rate Adjustment Date, subject, in the case
of substantially all of the Mortgage Loans, to minimum and maximum lifetime
Mortgage Rates, with ranges specified below. The Mortgage Rates on the Mortgage
Loans generally are adjusted monthly; however, certain of the Mortgage Loans
provide for Interest Rate Adjustment Dates to occur quarterly (____% of the
Mortgage Loans), semi-annually (_____% of the Mortgage Loans) or annually (____%
of the Mortgage Loans). Each of the Mortgage Loans
S-13
<PAGE>
provided for an initial fixed interest rate period; _____ Mortgage Loans,
representing _____% of the Mortgage Loans, have not experienced their first
Interest Rate Adjustment Dates. The latest initial Interest Rate Adjustment Date
for any Mortgage Loan is to occur in _______________.
Subject to the Payment Caps described below, the amount of the Monthly
Payment on each Mortgage Loan adjusts periodically on each Payment Adjustment
Date to an amount that would fully amortize the principal balance of the
Mortgage Loan over its then remaining amortization schedule and pay interest at
the Mortgage Rate in effect during the one month period preceding such Payment
Adjustment Date. Approximately _____% of the Mortgage Loans provide that an
adjustment of the amount of the Monthly Payment on a Payment Adjustment Date may
not result in a Monthly Payment that increases by more than ___% (nor, in some
cases, decreases by more than ___%) of the amount of the Monthly Payment in
effect immediately prior to such Payment Adjustment Date (each such provision, a
"Payment Cap"); however, certain of those Mortgage Loans also provide that the
Payment Cap will not apply on certain Payment Adjustment Dates or if the
application thereof would result in the principal balance of the Mortgage Loan
exceeding (through negative amortization) by a specified percentage the original
principal balance thereof. Generally, the related Mortgage Note provides that
if, as a result of negative amortization, the respective principal balance of
the Mortgage Loan reaches an amount specified therein (which as to most Mortgage
Loans is not greater than ___% of the Mortgage Loan principal balance as of the
origination date thereof), the amount of the Monthly Payments due thereunder
will be increased as necessary to prevent further negative amortization.
[THE INDEX
As of any Payment Adjustment Date, the Index applicable to the
determination of the related Mortgage Rate will be a per annum rate equal to
________________, as most recently available as of the date ___ days prior to
the Payment Adjustment Date (the "Index"). Such average yields reflect the
yields for the week prior to that week in which the information is reported. In
the event that the Index is no longer available, an index reasonably acceptable
to the Trustee that is based on comparable information will be selected by the
Master Servicer.
The Index is currently calculated based on information reported in
_____________. Listed below are the weekly average yields on actively traded
________________ as reported in _________________ on the date that would have
been applicable to mortgage loans having the following adjustment dates for the
indicated years. Such average yields may fluctuate significantly from week to
week as well as over longer periods and may not increase or decrease in a
constant pattern from period to period. The following does not purport to be
representative of future average yields. No assurance can be given as to the
average yields on such _______________ on any Payment Adjustment Date or during
the life of any Mortgage Loan].
<TABLE>
<CAPTION>
[NAME OF INDEX]
MONTH 1994 1995 1996 1997 1998
- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January ...........................................
February ..........................................
March .............................................
April .............................................
May ...............................................
June ..............................................
July ..............................................
August ............................................
S-14
<PAGE>
September .........................................
October ...........................................
November ..........................................
December ..........................................
</TABLE>
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
Approximately _____% of the Mortgage Loans have Due Dates that occur on
the first day of each month; approximately _____% of the Mortgage Loans have Due
Dates that occur on the fifth day of each month; approximately _____% of the
Mortgage Loans have Due Dates that occur on the tenth day of each month; and the
remainder of the Mortgage Loans have Due Dates that occur on
the fifteenth day of each month.
As of the Cut-off Date, the Mortgage Loans had the following
characteristics: (i) Mortgage Rates ranging from _____% per annum to ______% per
annum; (ii) a weighted average Mortgage Rate of _____% per annum; (iii) Gross
Margins ranging from ___ basis points to ___ basis points; (iv) a weighted
average Gross Margin of _____ basis points; (v) principal balances ranging from
$_______ to $_________ and with ____ Mortgage Loans having a principal balance
as of the Cutoff Date that exceeds its original principal balance; (vi) an
average principal balance of $_________; (vii) original terms to maturity
ranging from __ months to ___ months; (viii) a weighted average original term to
maturity of ___ months; (ix) remaining terms to maturity ranging from _ months
to ___ months; (x) a weighted average remaining term to maturity of __ months;
(xi) Loan-to-Value ("LTV") Ratios ranging from ____% to ____%; (xii) a weighted
average LTV Ratio of ____%; (xiii) as to the _____% of the Mortgage Loans to
which such characteristic applies, (A) minimum lifetime Mortgage Rates ranging
from ___% per annum to ____% per annum and (B) a weighted average minimum
lifetime Mortgage Rate of ____% per annum; (xiv) as to the _____% of Mortgage
Loans to which such characteristic applies and for which it may be currently
calculated, (A) maximum lifetime Mortgage Rate ranging from ____% per annum to
_____% per annum and (B) a weighted average maximum lifetime Mortgage Rate of
_____% per annum, (xv) Debt Service Coverage Ratios ranging from ___% to ___%
and (xvi) a weighted average Debt Service Coverage Ratio of ___%.
___% of the Mortgage Loans are secured by first liens; ___% by second
liens; ___% by third liens and ___% by fourth liens. Loans secured by junior
liens involve a greater degree of risk than loans secured by first liens, and
the more junior a lien is, the greater the risk will be. See "Risk
Factors--Junior Mortgage Loans" in the Prospectus.
___% of the Mortgage Loans provide for Balloon Payments on their
respective maturity dates. Loans providing for Balloon Payments involve a
greater degree of risk than self-amortizing loans. See "Risk Factors--Balloon
Payments" herein.
No Mortgage Loan currently prohibits principal prepayments; however,
certain of the Mortgage Loans impose fees or penalties ("Prepayment Premiums")
in connection with full or partial prepayments. Although Prepayment Premiums are
payable to the Master Servicer as additional servicing compensation, the Master
Servicer may waive the payment of any Prepayment Premium only in connection with
a principal prepayment that is proposed to be made during the three month period
prior to the scheduled maturity of the related Mortgage Loan, or under certain
other limited circumstances.
The Mortgage Loans are expected to have the following additional
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
S-15
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES AS OF THE CUT-OFF DATE
Aggregate Principal % By Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Mortgage Rates Loans as of the Cut-off Date as of the Cut-off Date
-------------- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== =============================== =======
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate was % per
annum.
<TABLE>
<CAPTION>
PROPERTY TYPE
Aggregate Principal % By Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Type Loans as of the Cut-off Date as of the Cut-off Date
---- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== =============================== =======
</TABLE>
<TABLE>
<CAPTION>
GROSS MARGINS
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Gross Margins Loans as of the Cut-off Date as of the Cut-off Date
------------- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== =============================== =======
</TABLE>
As of the Cut-off Date, the weighted average Gross Margin was % per
annum.
S-16
<PAGE>
<TABLE>
<CAPTION>
FREQUENCY OF ADJUSTMENTS TO MORTGAGE RATES
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Frequency Loans as of the Cut-off Date as of the Cut-off Date
--------- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== =============================== =======
</TABLE>
As of the Cut-off Date, the weighted average frequency of adjustments
to Mortgage Rates was months. ___% of Mortgage Loans, with an aggregate
principal balance of $ as of the Cut-off Date, have not experienced their first
Interest Rate Adjustment Date.
<TABLE>
<CAPTION>
FREQUENCY OF ADJUSTMENTS TO MONTHLY PAYMENTS
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Frequency Loans as of the Cut-off Date as of the Cut-off Date
--------- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== =============================== =======
</TABLE>
As of the Cut-off Date, the weighted average frequency of Payment
Adjustment Dates was ___ months. ________ of the Mortgage Loans, with an
aggregate principal balance of $____________ as of the Cut-off Date, have not
experienced their first Payment Adjustment Date.
S-17
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM LIFETIME MORTGAGE RATES
Maximum Aggregate Principal % by Aggregate Principal
Lifetime Number of Balance Outstanding Balance Outstanding
Mortgage Rates(%) Loans as of the Cut-off Date as of the Cut-off Date
----------------- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== =============================== =======
</TABLE>
As of the Cut-off Date, the weighted average Maximum Lifetime Mortgage
Rate was _____% per annum.
[(A) Represents Mortgage Loans without a lifetime rate cap.
(B) The lifetime rate caps for these Mortgage Loans are based upon the
Index as determined at a future point in time plus a fixed percentage.
Therefore, the rate is not determinable as of the Cut-off Date.
(C) This calculation does not include the ___ Mortgage Loans without a
lifetime rate cap or the ____ Mortgage Loans with lifetime rate caps
which are currently not determinable.]
<TABLE>
<CAPTION>
MINIMUM LIFETIME MORTGAGE RATES
Minimum Aggregate Principal % by Aggregate Principal
Lifetime Number of Balance Outstanding Balance Outstanding
Mortgage Rates(%) Loans as of the Cut-off Date as of the Cut-off Date
----------------- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== =============================== =======
</TABLE>
As of the Cut-off Date, the weighted average Minimum Lifetime Mortgage
Rate was _____% per annum.
[(A) Represents Mortgage Loans without interest rate floors.
(B) This calculation does not include the _____ Mortgage Loans without
interest rate floors.]
S-18
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES AS OF THE CUT-OFF DATE
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Principal Balances ($) Loans as of the Cut-off Date as of the Cut-off Date
---------------------- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== =============================== =======
</TABLE>
The average principal balance of the Mortgage Loans at origination was
$______________. No Mortgage Loan had a principal balance at origination of
greater than $______________ or less than $______________.
<TABLE>
<CAPTION>
PRINCIPAL BALANCES AT ORIGINATION
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Principal Balances ($) Loans at Origination at Origination
---------------------- ------- ---------------- ---------------
<S> <C> <C> <C>
Total $ 100.00%
=== =============================== =======
</TABLE>
Average Principal
Balance at Origination:
The average principal balance of the Mortgage Loans as of the Cut-off
Date was $______________. No Mortgage Loan had a principal balance as of the
Cut-off Date of greater than $______________ or less than $______________.
<TABLE>
<CAPTION>
ORIGINAL TERM TO MATURITY
Aggregate Principal % by Aggregate Principal
Original Number of Balance Outstanding Balance Outstanding
Term (Months) Loans as of the Cut-off Date as of the Cut-off Date
------------- ----- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============================ =======
</TABLE>
The weighted average original term to maturity was months.
S-19
<PAGE>
<TABLE>
<CAPTION>
REMAINING TERM TO MATURITY AS OF THE CUT-OFF DATE
Aggregate Principal % by Aggregate Principal
Remaining Number of Balance Outstanding Balance Outstanding
Term (Months) Loans as of the Cut-off Date as of the Cut-off Date
------------- ----- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ================== =======
</TABLE>
As of the Cut-off Date, the weighted average term to maturity was
months.
<TABLE>
<CAPTION>
MORTGAGE LOAN YEAR OF ORIGINATION
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Year Loans as of the Cut-off Date as of the Cut-off Date
---- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== =============== =======
</TABLE>
The following table sets forth the respective years in which the
Mortgage Loans are scheduled to mature. The table provides an indication (which
does not account for any scheduled amortization, prepayments or negative
amortization) of the concentration of Balloon Payments that will be due in those
years. See "Risk Factors--Balloon Payments" herein.
<TABLE>
<CAPTION>
MORTGAGE LOAN YEAR OF SCHEDULED MATURITY
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Year Loans as of the Cut-off Date as of the Cut-off Date
---- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============ =======
</TABLE>
The following table[s] set[s] forth the range of Cut-off Date LTV
Ratios of the Mortgage Loans. A "Cut-off Date LTV Ratio" is a fraction,
expressed as a percentage, the numerator of which is the Cut-off Date Balance of
a Mortgage Loan, and the denominator of which is the appraised value of the
related Mortgaged Property as determined by an appraisal thereof obtained in
connection with the origination of such Mortgage Loan. A Cut-off Date LTV Ratio,
since it is most often based on the value of a Mortgaged Property determined as
of loan origination, is not necessarily a reliable measure of the borrower's
current equity in that Mortgaged Property. In a
S-20
<PAGE>
declining real estate market, the fair market value of the Mortgaged Property
could have decreased from the value determined at origination, and the actual
loan-to-value ratio of a Mortgage Loan may be higher than its Cut-off Date LTV
Ratio.
<TABLE>
<CAPTION>
CUT-OFF DATE LTV RATIOS
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
LTV Ratio(%) Loans as of the Cut-off Date as of the Cut-off Date
------------ ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============== =======
</TABLE>
As of the Cut-off Date, the weighted average Cut-off Date LTV Ratio was
_____% per annum.
<TABLE>
<CAPTION>
CUT-OFF DATE LTV RATIOS - [FIRST] [SECOND] [THIRD] [FOURTH] LIEN
MORTGAGE LOANS
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
LTV Ratio(%) Loans As Of The Cut-off Date As Of The Cut-off Date
------------ ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
As of the Cut-off Date, the weighted average Cut-off Date LTV Ratio for
the [first] [second] [third] [fourth] lien Mortgage Loans was _____ % per annum.
S-21
<PAGE>
The following table sets forth the range of Debt Service Coverage
Ratios for the Mortgage Loans. The "Debt Service Coverage Ratio" for any
Mortgage Loan is the ratio of Net Operating Income produced by the related
Mortgaged Property for the period (annualized if the period was less than one
year) covered by the operating statement to the amount of the Monthly Payment in
effect as of the Cut-off Date multiplied by 12. "Net Operating Income" is the
revenue derived from the use and operation of a Mortgaged Property less
operating expenses (such as utilities, administrative expenses, repairs and
maintenance and less fixed expenses (such as insurance, real estate and other
taxes to be paid by mortgagor). Net Operating Income generally does not reflect
capital expenditures. The following table was prepared using operating
statements obtained from the respective mortgagors. The information contained
therein was unaudited, and the Depositor has made no attempt to verify its
accuracy. [In the case of _________ Mortgage Loans, operating statements could
not be obtained. Accordingly, Debt Service Coverage Ratios for those Mortgage
Loans were not calculated. As a result, no conclusions should be drawn as to
those ____ Mortgage Loans on the basis of the information set forth below.] The
last day of the period (which may not correspond to the end of the calendar year
most recent to the Cut-off Date) covered by each operating statement or cost
report from which a Debt Service Coverage Ratio was calculated is set forth in
Annex A with respect to the related Mortgage Loan. Certain of the Mortgaged
Properties have relatively short operating histories, and such performance may
be less indicative of future performance than in the case of a property with a
stable operating history over an extended period of time. However, even with
respect to Mortgaged Properties with longer operating histories, operating
income produced by Mortgaged Properties in the past should not be construed as
indicative of the future performance of any Mortgaged Property.
<TABLE>
<CAPTION>
DEBT SERVICE COVERAGE RATIOS
AS OF THE CUT-OFF DATE
Aggregate Principal % by Aggregate Principal
Debt Service Number of Balance Outstanding Balance Outstanding
Coverage Ratio Loans as of the Cut-off Date as of the Cut-off Date
-------------- ----- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============== =======
</TABLE>
As of the Cut-off Date, the weighted average Debt Service Coverage
Ratio was ______x.
[(A) The debt service coverage ratios for these loans were not calculated
due to a lack of operating statements with respect to years after 198_.
(B) This calculation does not include the ___ Mortgage Loans where debt
service coverage ratios were not calculated.]
S-22
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
State Loans as of the Cut-off Date as of the Cut-off Date
----- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============= =======
</TABLE>
[regional breakdown to be provided as appropriate]
___% of the Mortgage Loans prohibit the prepayment thereof until a date
specified in the related Mortgage Note (such period, the "Lock-out Period" and
the date of expiration thereof, the "Lock-out Date"). The following table sets
forth the Lock-out Dates for such Mortgage Loans.
<TABLE>
<CAPTION>
MORTGAGE LOAN LOCK-OUT DATES
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Lock-out Date Loans as of the Cut-off Date as of the Cut-off Date
------------- ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============ =======
</TABLE>
___% of the Mortgage Loans provide that upon any principal prepayment
of a Mortgage Loan, whether made voluntarily or involuntarily, the related
Mortgagor will be required to pay a prepayment premium or yield maintenance
penalty (a "Prepayment Premium") in the amount set forth in the following table.
<TABLE>
<CAPTION>
MORTGAGE LOAN PREPAYMENT PREMIUMS
Aggregate Principal % by Aggregate Principal
Number of Balance Outstanding Balance Outstanding
Prepayment Premium Loans as of the Cut-off Date as of the Cut-off Date
------------------ ------- ---------------------- ----------------------
<S> <C> <C> <C>
Total $ 100.00%
=== ============ =======
</TABLE>
[Set forth in Annex A to this Prospectus Supplement are certain
individual characteristics of the Mortgage Loans.]
S-23
<PAGE>
UNDERWRITING STANDARDS
All of the Mortgage Loans were originated or acquired by ________,
generally in accordance with the underwriting criteria described herein.
[Description of underwriting standards.]
The Mortgage Loans selected for inclusion in the Mortgage Pool from
loans in the [Mortgage Asset Seller's] portfolio were not so selected on any
basis which would have a material adverse effect on the Certificateholders.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the close of business on the Cut-off Date, as adjusted for the
scheduled principal payments due on or before such date. Prior to the issuance
of the Class A Certificates, a Mortgage Loan may be removed from the Mortgage
Pool as a result of incomplete documentation or otherwise, if the Depositor
deems such removal necessary or appropriate and may be prepaid at any time. A
limited number of other mortgage loans may be included in the Mortgage Pool
prior to the issuance of the Class A Certificates unless including such mortgage
loans would materially alter the characteristics of the Mortgage Pool as
described herein. The Depositor believes that the information set forth herein
will be representative of the characteristics of the Mortgage Pool as it will be
constituted at the time the Class A Certificates are issued, although the range
of Mortgage Rates and maturities and certain other characteristics of the
Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Class A Certificates and will be filed, together with the
Pooling and Servicing Agreement, with the Securities and Exchange Commission
within fifteen days after the initial issuance of the Class A Certificates. In
the event Mortgage Loans are removed from or added to the Mortgage Pool as set
forth in the preceding paragraph, such removal or addition will be noted in the
Form 8-K.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will consist of four classes to be designated as the Class A
Certificates, the Class B Certificates, the Class C Certificates and the Class R
Certificates. The Class B, Class C and Class R Certificates (the "Subordinate
Certificates") will be subordinate to the Class A Certificates, as described
herein. The Certificates represent in the aggregate the entire beneficial
ownership interest in a Trust Fund consisting of: (i) the Mortgage Loans and all
payments under and proceeds of the Mortgage Loans received after the Cut-off
Date (exclusive of payments of principal and interest due on or before the
Cut-off Date); (ii) any Mortgaged Property acquired on behalf of the Trust Fund
through foreclosure or deed in lieu of foreclosure (upon acquisition, an "REO
Property"); (iii) such funds or assets as from time to time are deposited in the
Certificate Account and any account established in connection with REO
Properties (the "REO Account"); and (iv) the rights of the mortgagee under all
insurance policies with respect to the Mortgage Loans. Only the Class A
Certificates are offered hereby.
The Class A Certificates will have an initial Certificate Balance of
$__________, representing __% of the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date.
S-24
<PAGE>
The Class B Certificates will have an initial Certificate Balance of
$__________, representing __% of the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date. The Class C Certificates will have an initial
Certificate Balance of $_______, representing ___% of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date. The initial Certificate
Balance of the Class R Certificates will be [zero]. The Certificate Balance of
any class of Certificates outstanding at any time represents the maximum amount
which the holders thereof are entitled to receive as distributions allocable to
principal from the cash flow on the Mortgage Loans and the other assets in the
Trust Fund. The respective Certificate Balances of the Class A, Class B and
Class C Certificates (respectively, the "Class A Balance", "Class B Balance" and
"Class C Balance") will in each case be (i) reduced by amounts actually
distributed on such class of Certificates that are allocable to principal and
(ii) increased by amounts allocated to such class of Certificates in respect of
negative amortization on the Mortgage Loans. The Certificate Balance of the
Class R Certificates (the "Class R Balance") will at any time equal the
aggregate Stated Principal Balance of the Mortgage Loans minus the sum of the
Class A Balance, Class B Balance and Class C Balance. The Stated Principal
Balance of any Mortgage Loan at any date of determination will equal (a) the
Cut-off Date Balance of such Mortgage Loan, plus (b) any negative amortization
added to the principal balance of such Mortgage Loan on any Due Date after the
Cut-off Date to and including the Due Date in the Due Period for the most
recently preceding Distribution Date, minus (c) the sum of (i) the principal
portion of each Monthly Payment due on such Mortgage Loan after the Cut-off
Date, to the extent received from the mortgagor or advanced by the Master
Servicer and distributed to holders of the Certificates before such date of
determination, (ii) all principal prepayments and other unscheduled collections
of principal received with respect to such Mortgage Loan, to the extent
distributed to holders of the Certificates before such date of determination,
and (iii) any reduction in the outstanding principal balance of such Mortgage
Loan resulting out of a bankruptcy proceeding for the related mortgagor.
None of the Subordinate Certificates are offered hereby.
DISTRIBUTIONS
METHOD, TIMING AND AMOUNT. Distributions on the Certificates will be
made on the 25th day of each month or, if such 25th day is not a business day,
then on the next succeeding business day, commencing in __________ _____ (each,
a "Distribution Date"). All distributions (other than the final distribution on
any Certificate) will be made by the Master Servicer to the persons in whose
names the Certificates are registered at the close of business on each Record
Date, which will be the last business day of the month preceding the month in
which the related Distribution Date occurs. Such distributions will be made by
wire transfer in immediately available funds to the account specified by the
Certificateholder at a bank or other entity having appropriate facilities
therefor, if such Certificateholder will have provided the Master Servicer with
wiring instructions no less than five business days prior to the related Record
Date and is the registered owner of Certificates the aggregate initial principal
amount of which is at least $_________, or otherwise by check mailed to such
Certificateholder. The final distribution on any Certificate will be made in
like manner, but only upon presentment or surrender of such Certificate at the
location specified in the notice to the holder thereof of such final
distribution. All distributions made with respect to a class of Certificates on
each Distribution Date will be allocated pro rata among the outstanding
Certificates of such class based on their respective Percentage Interests. The
Percentage Interest evidenced by any Class A Certificate is equal to the initial
denomination thereof as of the _____________, divided by the initial Certificate
Balance for such class. The aggregate distribution to be made on the
Certificates on any Distribution Date shall equal the Available Distribution
Amount.
The "Available Distribution Amount" for any Distribution Date is an
amount equal to (a) the sum of (i) the amount on deposit in the Certificate
Account as of the close of business on the related
S-25
<PAGE>
Determination Date, (ii) the aggregate amount of any Advances made by the Master
Servicer in respect of such Distribution Date and (iii) the aggregate amount
deposited by the Master Servicer in the Certificate Account in respect of such
Distribution Date in connection with Prepayment Interest Shortfalls incurred
during the related Due Period, net of (b) the portion of the amount described in
clause (a)(i) hereof that represents (i) Monthly Payments due on a Due Date
subsequent to the end of the related Due Period, (ii) any voluntary principal
prepayments and other unscheduled recoveries on the Mortgage Loans received
after the end of the related Due Period or (iii) any amounts payable or
reimbursable therefrom to any person.
PRIORITY. On each Distribution Date, the Master Servicer shall apply
amounts on deposit in the Certificate Account, to the extent of the Available
Distribution Amount, first, to distributions of interest to holders of the Class
A Certificates, in the amount equal to all Distributable Certificate Interest in
respect of the Class A Certificates for such Distribution Date and, to the
extent not previously distributed, for all preceding Distribution Dates and
second, to distributions of principal to holders of the Class A Certificates, in
an amount, not to exceed the sum of the Class A Balance outstanding immediately
prior to such Distribution Date and any Class Negative Amortization in respect
of the Class A Certificates for such Distribution Date, equal to the sum of (A)
the then Class A Scheduled Principal Distribution Percentage of the Scheduled
Principal Distribution Amount for such Distribution Date and (B) the Unscheduled
Principal Distribution Amount for such Distribution Date.
On or after the reduction of the Class A Balance to zero, the Available
Distribution Amount will be paid solely to the holders of the Subordinate
Certificates.
CALCULATIONS OF INTEREST. The "Distributable Certificate Interest" in
respect of the Class A Certificates for any Distribution Date represents that
portion of the Accrued Certificate Interest in respect of such class of
Certificates for such Distribution Date that is net of such class's allocable
share of (i) the aggregate portion of any Prepayment Interest Shortfalls
resulting from voluntary principal prepayments on the Mortgage Loans during the
related Due Period that are not covered by the application of servicing
compensation of the Master Servicer for the related Due Period (such uncovered
aggregate portion, as to such Distribution Date, the "Net Aggregate Prepayment
Interest Shortfall"); and (ii) the aggregate of any negative amortization in
respect of the Mortgage Loans for their respective Due Dates during the related
Due Period (the aggregate of such negative amortization, as to such Distribution
Date, the "Aggregate Mortgage Loan Negative Amortization").
The "Accrued Certificate Interest" in respect of the Class A
Certificates for any Distribution Date is equal to thirty days' interest accrued
during the related Interest Accrual Period at the Pass- Through Rate applicable
to such class of Certificates for such Distribution Date accrued on the related
Certificate Balance outstanding immediately prior to such Distribution Date. The
Pass- Through Rate applicable to the Class A Certificates for any Distribution
Date is equal to the weighted average of the Class A Remittance Rates in effect
for the Mortgage Loans as of the commencement of the related Due Period (as to
such Distribution Date, the "Weighted Average Class A Remittance Rate"). The
"Class A Remittance Rate" in effect for any Mortgage Loan as of any date of
determination (a) prior to its first Interest Rate Adjustment Date, is equal to
the related Mortgage Rate then in effect minus ___ basis points and (b) from and
after its first Interest Rate Adjustment Date, is equal to the related Mortgage
Rate then in effect minus the excess of the related Gross Margin over ___ basis
points. The "Interest Accrual Period" for the Certificates is the calendar month
preceding the month in which the Distribution Date occurs.
The portion of Net Aggregate Prepayment Interest Shortfall and the
Aggregate Mortgage Loan Negative Amortization for any Distribution Date that
will be allocated to the Class A Certificates on such Distribution Date will be
equal to the then applicable Class A Interest Allocation
S-26
<PAGE>
Percentage. The "Class A Interest Allocation Percentage" for any Distribution
Date will equal a fraction, expressed as a percentage, the numerator of which is
equal to the product of (a) the Class A Balance (net of any Uncovered Portion
thereof) outstanding immediately prior to such Distribution Date, multiplied by
(b) the Weighted Average Class A Remittance Rate for such Distribution Date, and
the denominator of which is the product of (x) the aggregate Stated Principal
Balance of the Mortgage Loans outstanding immediately prior to such Distribution
Date, multiplied by (y) the Weighted Average Net Mortgage Rate for such
Distribution Date. The "Net Mortgage Rate" in effect for any Mortgage Loan as of
any date of determination is equal to the related Mortgage Rate then in effect
minus ___ basis points. The "Uncovered Portion" of the Class A Balance, as of
any date of determination, is the portion thereof representing the excess, if
any, of (a) the Class A Balance then outstanding, over (b) the aggregate Stated
Principal Balance of the Mortgage Loans then outstanding.
CALCULATIONS OF PRINCIPAL. The "Scheduled Principal Distribution
Amount" for any Distribution Date is equal to the aggregate of the principal
portions of all Monthly Payments, including Balloon Payments, due during or, if
and to the extent not previously received or advanced and distributed to
Certificateholders on a preceding Distribution Date, prior to the related Due
Period, in each case to the extent paid by the related mortgagor or advanced by
the Master Servicer and included in the Available Distribution Amount for such
Distribution Date. The principal portion of any Advances in respect of a
Mortgage Loan delinquent as to its Balloon Payment will constitute advances in
respect of the principal portion of such Balloon Payment.
The Class A Scheduled Principal Distribution Percentage for any
Distribution Date represents the portion of the Scheduled Principal Distribution
Amount for such Distribution Date payable (subject to the payment priorities
described herein) on the Class A Certificates. The "Class A Scheduled Principal
Distribution Percentage" for any Distribution Date will equal the lesser of (a)
100% and (b) a fraction, expressed as a percentage, the numerator of which is
the Class A Balance outstanding immediately prior to such Distribution Date, and
the denominator of which is the lesser of (i) the sum of the Class A Balance,
the Class B Balance and the Class C Balance and (ii) the aggregate Stated
Principal Balance of the Mortgage Loans, in either case outstanding immediately
prior to such Distribution Date.
The "Unscheduled Principal Distribution Amount" for any Distribution
Date is equal to the sum of: (a) all voluntary principal prepayments received on
the Mortgage Loans during the related Due Period; and (b) the excess, if any, of
(i) all unscheduled recoveries received on the Mortgage Loans during the related
Due Period, whether in the form of liquidation proceeds, condemnation proceeds,
insurance proceeds or amounts paid in connection with the purchase of a Mortgage
Loan out of the Trust Fund, exclusive in each case of any portion thereof
payable or reimbursable to the Master Servicer in connection with the related
Mortgage Loan, over (ii) the respective portions of the net amounts described in
the immediately preceding clause (i) needed to cover interest (at the applicable
Net Mortgage Rate in effect from time to time) on the related Mortgage Loan from
the date to which interest was previously paid or advanced through the Due Date
for such Mortgage Loan in the related Due Period (exclusive of any portion of
such interest added to the principal balance of such Mortgage Loan as negative
amortization).
The "Class Negative Amortization" in respect of any class of
Certificates for any Distribution Date is equal to such class' allocable share
of the Aggregate Mortgage Loan Negative Amortization for such Distribution Date.
S-27
<PAGE>
SUBORDINATION
In order to maximize the likelihood of distribution in full of the
Class A Interest Distribution Amount and the Class A Scheduled Principal
Distribution Amount, on each Distribution date, holders of the Class A
Certificates have a right to distributions of the Available Distribution Amount
that is prior to the rights of the holders of the Subordinate Certificates, to
the extent necessary to satisfy the Class Interest Distribution Amount and the
Class A Scheduled Principal Distribution Amount.
The entitlement to the Class A Certificates of the entire Unscheduled
Principal Distribution Amount will accelerate the amortization of the Class A
Certificates relative to the actual amortization of the Mortgage Loans.
To the extent that the Class A Certificates are amortized faster than
the Mortgage Loans, without taking into account losses on the Mortgage Loans,
the percentage interest evidenced by the Class A Certificates in the Trust Fund
will be decreased (with a corresponding increase in the interest in the Trust
Fund evidenced by the Subordinate Certificates), thereby increasing, relative to
their respective Certificate Balances, the Subordinate afforded the Class A
Certificates by the Subordinate Certificates.
ADVANCES
On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated to make advances (each, an "Advance") out of
its own funds, or funds held in the Certificate Account that are not required to
be part of the Available Distribution Amount for such Distribution Date, in an
amount equal to the aggregate of (i) all Monthly Payments (net of the Servicing
Fee), other than Balloon Payments, which were due on the Mortgage Loans during
the related Due Period and delinquent as of the related Determination Date and
(ii) in the case of each Mortgage Loan delinquent in respect of its Balloon
Payment as of the related Determination Date, an amount sufficient to amortize
fully the principal portion of such Balloon Payment over the remaining
amortization term of such Mortgage Loan and to pay interest at the Net Mortgage
Rate in effect for such Mortgage Loan for the one month period preceding its Due
Date in the related Due Period (but only to the extent that the related
mortgagor has not made a payment sufficient to cover such amount under any
forbearance arrangement that has been included in the Available Distribution
Amount for such Distribution Date). The Master Servicer's obligations to make
Advances in respect of any Mortgage Loan will continue through liquidation of
such Mortgage Loan and out of its own funds from any amounts collected in
respect of the Mortgage Loan as to which such Advance was made, whether in the
form of late payments, insurance proceeds, liquidation proceeds, condemnation
proceeds or amounts paid in connection with the purchase of such Mortgage Loan.
Notwithstanding the foregoing, the Master Servicer will be obligated to make any
Advance only to the extent that it determines in its reasonable good faith
judgment that, if made, would be recoverable out of general funds on deposit in
the Certificate Account. Any failure by the Master Servicer to make an Advance
as required under the Pooling and Servicing Agreement will constitute an event
of default thereunder, in which case the trustee will be obligated to make any
such Advance, in accordance with the terms of the Pooling and Servicing
Agreement.
S-28
<PAGE>
CERTAIN YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity on the Class A Certificates will be affected by
the rate of principal payments on the Mortgage Loans including, for this
purpose, prepayments, which may include amounts received by virtue of
repurchase, condemnation, insurance or foreclosure. The yield to maturity on the
Class A Certificates will also be affected by the level of the Index. The rate
of principal payments on the Class A Certificates will correspond to the rate of
principal payments (including prepayments) on the related Mortgage Loans.
[Description of factors affecting yield, prepayment and maturity of the
Mortgage Loans and Class A Certificates depending upon characteristics of the
Mortgage Loans.]
WEIGHTED AVERAGE LIFE OF THE CLASS A CERTIFICATES
Weighted average life refers to the average amount of time from the
date of issuance of a security until each dollar of principal of such security
will be repaid to the investor. The weighted average life of the Class A
Certificates will be influenced by the rate at which principal payments
(including scheduled payments, principal prepayments and payments made pursuant
to any applicable policies of insurance) on the Mortgage Loans are made.
Principal payments on the Mortgage Loans may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
prepayments and liquidations due to a default or other dispositions of the
Mortgage Loans).
The table of Percent of Initial Certificate Balance Outstanding for the
Class A Certificates at the respective percentages of [CPR][SPA] set forth below
indicates the weighted average life of such Certificates and sets forth the
percentage of the initial principal amount of such Certificates that would be
outstanding after each of the dates shown at the indicated percentages of
[CPR][SPA]. The table has been prepared on the basis of the following
assumptions regarding the characteristics of the Mortgage Loans: (i) an
outstanding principal balance of $____________, a remaining amortization term of
___ months and a term to balloon of ___ months; (ii) an interest rate equal to
___% per annum until the _______ Due Date and thereafter an interest rate equal
to ___% per annum (at an assumed Index of ___%) and Monthly Payments that would
fully amortize the remaining balance of the Mortgage Loan over its remaining
amortization term; (iii) the Mortgage Loans prepay at the indicated percentage
of [CPR][SPA]; (iv) the maturity date of each of the Balloon Mortgage Loans is
not extended; (v) distributions on the Class A Certificates are received, in
cash, on the 25th day of each month, commencing in __________; (vi) no defaults
or delinquencies in, or modifications, waivers or amendments respecting, the
payment by the mortgagors of principal and interest on the Mortgage Loans occur;
(vii) the initial Certificate Balance of the Class A Certificates is
$______________; (viii) prepayments represent payment in full of individual
Mortgage Loans and are received on the respective Due Dates and include 30 days'
interest thereon; (ix) there are no repurchases of Mortgage Loans due to
breaches of any representation and warranty or otherwise; (x) the Class A
Certificates are purchased on ___________; (xi) the Servicing Fee is ____% per
annum; and (xii) the Index on each Interest Rate Adjustment Date is _____% per
annum.
Based on the foregoing assumptions, the table indicates the weighted
average life of the Class A Certificates and sets forth the percentages of the
initial Certificate Balance of the Class A Certificates that would be
outstanding after the Distribution Date in ____________ of each of the years
indicated, at various percentages of [CPR][SPA]. Neither [CPR][SPA] nor any
other prepayment model or assumption purports to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Mortgage Loans included in the
Mortgage Pool. Variations in the actual prepayment experience and
S-29
<PAGE>
the balance of the Mortgage Loans that prepay may increase or decrease the
percentage of initial Certificate Balance (and weighted average life) shown in
the following table. Such variations may occur even if the average prepayment
experience of all such Mortgage Loans is the same as any of the specified
assumptions.
<TABLE>
<CAPTION>
PERCENT OF INITIAL CLASS A CERTIFICATE BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF [CPR][SPA]
Distribution Date
- -----------------
Initial Percent.................... ____% ____% ____% ____% ____% ____%
<S> <C> <C> <C> <C> <C> <C>
_________ 25, 1999.................
_________ 25, 2000.................
_________ 25, 2001.................
_________ 25, 2002.................
_________ 25, 2003.................
_________ 25, 2004.................
_________ 25, 2005.................
_________ 25, 2006.................
_________ 25, 2007.................
_________ 25, 2008.................
_________ 25, 2009.................
Weighted Average Life
(Years) (+)......................
</TABLE>
- -----------------
+ The weighted average life of the Class A Certificates is determined by (i)
multiplying the amount of each distribution of principal by the number of
years from the date of issuance to the related Distribution Date, (ii)
adding the results and (iii) dividing the sum by the total principal
distributions on such class of Certificates.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of ____________ 1, ____ (the "Pooling and Servicing
Agreement"), by and among the Depositor, the Master Servicer and the Trustee.
Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Class A Certificates. The Depositor will
provide to a prospective or actual Class A Certificateholder without charge,
upon written request, a copy (without exhibits) of the Pooling and Servicing
Agreement. Requests should be addressed to Salomon Brothers Mortgage Securities
VII, Inc., Seven World Trade Center, New York, New York 10048.
S-30
<PAGE>
[The Master Servicer will be required to service and administer the
Mortgage Loans, either directly or through sub-servicers, on behalf of the
Trustee and in the best interests of and for the benefit of the
Certificateholders (as determined by the Master Servicer in its good faith and
reasonable judgment) in accordance with applicable law, the terms of the Pooling
and Servicing Agreement, the terms of the respective Mortgage Loans and, to the
extent consistent with the foregoing, in the same manner as would prudent
institutional mortgage lenders and loan servicers servicing mortgage loans
comparable to the Mortgage Loans in the jurisdictions where the Mortgaged
Properties are located, and with a view to the maximization of timely recovery
of principal and interest, but without regard to: (i) any relationship that the
Master Servicer or any affiliate of the Master Servicer or any affiliate of the
Master Servicer may have with the related mortgagor; (ii) the ownership of any
Certificate by the Master Servicer or any affiliate of the Master Servicer;
(iii) the Master Servicer's obligation to make Advances and advances to cover
certain servicing expenses; and (iv) the Master Servicer's right to receive
compensation for services under the Pooling and Servicing Agreement or with
respect to any particular transaction.]
ASSIGNMENT OF THE MORTGAGE LOANS
On or prior to the _____________, the Depositor will assign or cause to
be assigned the Mortgage Loans, without recourse, to the Trustee for the benefit
of the Certificateholders. Prior to the _____________, the Depositor will, as to
each Mortgage Loan, deliver to the Trustee (or the custodian hereinafter
referred to), among other things, the following documents (collectively, as to
such Mortgage Loan, the "Mortgage File"): (i) the original or, if accompanied by
a "lost note" affidavit, a copy of the Mortgage Note, endorsed by
_______________________________ which transferred such Mortgage Loan, without
recourse, in blank or to the order of Trustee; (ii) the original Mortgage or a
certified copy thereof, and any intervening assignments thereof, or certified
copies of such intervening assignments, in each case with evidence of recording
thereon; (iii) originals or certified copies of any related assignment of
leases, rents and profits and any related security agreement (if, in either
case, such item is a document separate from the Mortgage) and any intervening
assignments of each such document or instrument; (iv) an assignment of the
Mortgage, executed by the __________________________________ which transferred
such Mortgage Loan, in blank or to the order of the Trustee, in recordable form;
(v) assignments of any related assignment of leases, rents and profits and any
related security agreement (if, in either case, such item is a document separate
from the Mortgage), executed by ______________________________________ which
transferred such Mortgage Loan, in blank or to the order of the Trustee; (vi)
originals or certified copies of all assumption, modification and substitution
agreements in those instances where the terms or provisions of the Mortgage or
Mortgage Note have been modified or the Mortgage or Mortgage Note has been
assumed; and (vii) the originals or certificates of a lender's title insurance
policy issued on the date of the origination of such Mortgage Loan or, with
respect to each Mortgage Loan not covered by a lender's title insurance policy,
an attorney's opinion of title given by an attorney licensed to practice law in
the jurisdiction where the Mortgaged Property is located. The Pooling and
Servicing Agreement will require the Depositor promptly (and in any event within
___ days of the _____________) to cause each assignment of the Mortgage
described in clauses (iv) and (v) above to be submitted for recording in the
real property records of the jurisdiction in which the related Mortgaged
Property is located. Any such assignment delivered in blank will be completed to
the order of the Trustee prior to recording. The Pooling and Servicing Agreement
will also require the Depositor to cause the endorsements on the Mortgage Notes
delivered in blank to be completed to the order of the Trustee.
THE MASTER SERVICER
GENERAL. ______________________, a ______________ corporation, will act
as Master Servicer (in such capacity, the "Master Servicer") for the
Certificates pursuant to the Pooling and
S-31
<PAGE>
Servicing Agreement. The Master Servicer[, a wholly-owned subsidiary of
______________,] [is engaged in the mortgage banking business and, as such,
originates, purchases, sells and services mortgage loans. _____________
primarily originates mortgage loans through a branch system consisting of
_________ offices in ________ states, and through mortgage loan brokers.]
The executive offices of the Master Servicer are located at
________________, telephone number (___) ____________.
The information set forth herein concerning the Master Servicer has
been provided by the Master Servicer, and neither the Depositor nor the
Underwriter makes any representation or warranty as to the accuracy or
completeness of such information.
DELINQUENCY AND FORECLOSURE EXPERIENCE. The following tables set forth
certain information concerning the delinquency experience (including pending
foreclosures) on [multifamily][commercial] mortgage loans included in the Master
Servicer's servicing portfolio (which includes mortgage loans that are
subserviced by others). The indicated periods of delinquency are based on the
number of days past due on a contractual basis. No mortgage loan is considered
delinquent for these purposes until 31 days past due on a contractual basis.
S-32
<PAGE>
<TABLE>
<CAPTION>
=========================================================================================================================
As of December 31, Xxxx As of December 31, As of ,
----------------------- ----------------------- -----------------------
- -------------------------------------------------------------------------------------------------------------------------
By By By
Dollar Dollar Dollar
Amount Amount Amount
By No. of of By No. of of By No. of of
Loans Loans Loans Loans Loans Loans
----- ----- ----- ----- ----- -----
- -------------------------------------------------------------------------------------------------------------------------
(Dollar Amount in Thousands)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio __________ $______ _________ $______ ______ $______
- -------------------------------------------------------------------------------------------------------------------------
Period of
Delinquency
- -------------------------------------------------------------------------------------------------------------------------
31 to 59 days
- -------------------------------------------------------------------------------------------------------------------------
60 to 89 days
- -------------------------------------------------------------------------------------------------------------------------
90 days or more __________ ______ _________ ______ ______ _______
- -------------------------------------------------------------------------------------------------------------------------
Total Delinquent __________ $______ _________ $______ ______ $______
Loans
- -------------------------------------------------------------------------------------------------------------------------
Percent of % % % % % %
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Foreclosures
pending (1)
- -------------------------------------------------------------------------------------------------------------------------
Percent of % % % % % %
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Foreclosures
- -------------------------------------------------------------------------------------------------------------------------
Percent of
Portfolio % % % % % %
=========================================================================================================================
</TABLE>
- ------------------
(1) Includes bankruptcies which preclude foreclosure.
There can be no assurance that the delinquency and foreclosure
experience of the Mortgage Loans comprising the Mortgage Pool will correspond to
the delinquency and foreclosure experience of the Master Servicer's mortgage
portfolio set forth in the foregoing tables. The aggregate delinquency and
foreclosure experience on the Mortgage Loans comprising the Mortgage Pool will
depend on the results obtained over the life of the Mortgage Pool.
[A discussion regarding trends, changes and anomalies and matters
expected to have a material impact on future conditions].
S-33
<PAGE>
[SPECIAL SERVICERS
The Master Servicer is permitted, at its own expense, to utilize agents
or attorneys in performing any of its obligations under the Pooling and
Servicing Agreement, but will not thereby be relieved of any such obligation,
and will be responsible for the acts and omissions of any such agents or
attorneys.
The Master Servicer currently intends to engage [____________]
("______"), a ______ corporation, as its agent to perform certain servicing
functions primarily related to property inspections, foreclosure and the
operation and sale of REO Property. See "Description of the
Agreements-Realization Upon Defaulted Whole Loans" in the Prospectus.
____________ is [describe organization] of [multifamily] [commercial] properties
and has extensive experience in the [describe relevant experience] of
[multifamily] [commercial] properties.]
CERTIFICATE ACCOUNT
The Master Servicer is required to deposit on a daily basis all amounts
received with respect of the Mortgage Loans, net of its servicing compensation,
into a separate Certificate Account maintained with _____________. Interest or
other income earned on funds in the Certificate Account will be paid to the
Master Servicer as additional servicing compensation. See "Description of the
Trust Funds--General" and "--Certificate Accounts" in the Prospectus.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect
of its master servicing activities will be the Servicing Fee. The Servicing Fee
will be payable monthly only from amounts received in respect of interest on
each Mortgage Loan, will accrue at the Servicing Fee Rate and will be computed
on the basis of the same principal amount and for the same period respecting
which any related interest payment on such Mortgage Loan is computed. The
Servicing Fee Rate with respect to each Mortgage Loan equals ____% per annum.
[The principal compensation to be paid to the Special Servicer in respect of its
special servicing activities will be the Special Servicing Fee. The Special
Servicing Fee will be payable monthly only from amounts received in respect of
interest on each Mortgage Loan serviced by the Special Servicer (each such
Mortgage Loan, a Specially Serviced Mortgage Loan"), will accrue at the Special
Servicing Fee Rate and will be computed on the basis of the same principal
amount for the same period respecting which any related interest payment on such
Mortgage Loan is computed. The Special Servicing Fee Rate with respect to each
Specially Serviced Mortgage Loan equals __% per annum. As further compensation
for its servicing activities, the Special Servicer shall also be entitled to
receive (i) the Liquidation Fee for the procurement (directly or through an
agent thereof) of a purchaser in connection with the liquidation of a Mortgaged
Property securing any defaulted Mortgage Loan, out of related liquidation
proceeds, provided that the payment of such Liquidation Fee would not be a
violation of, and would not subject the Trustee or the Trust Fund to liability
under, any state or local statute, regulation or other requirement (including
without limitation, those governing the licensing of real estate brokers or
salesmen), and (ii) the Management Fee in connection with the operation and
management of any REO Property, out of related revenues. Any "Liquidation Fee"
payable to the Special Servicer will be equal to ___% (if the relevant sale
occurs at a foreclosure sale, trustee's sale or other similar proceeding) or
___% (if the relevant sale occurs subsequent to such Mortgaged Property's having
become an REO Property), as applicable, of the gross liquidation proceeds. The
"Management Fee" in respect of any REO Property is payable to the Special
Servicer monthly and is equal to ___% of the gross revenues derived from such
REO Property.]
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<PAGE>
As additional servicing compensation, the Master Servicer is entitled
to retain all assumption fees, prepayment penalties and late payment charges, to
the extent collected from mortgagors, together with any interest or other income
earned on funds held in the Certificate Account and any escrow accounts.
Although the Master Servicer is required to service and administer the Mortgage
Pool in accordance with the general servicing standard described above and,
accordingly, without regard to its right to receive compensation under the
Pooling and Servicing Agreement, additional servicing compensation in the nature
of assumption fees, prepayment penalties and late payment charges may under
certain circumstances provide the Master Servicer with an economic disincentive
to comply with such standard. The Master Servicer is obligated to pay certain
ongoing expenses associated with the Mortgage Pool and incurred by the Master
Servicer in connection with its responsibilities under the Agreement. See
"Description of the Agreements-Retained Interest; Servicing Compensation and
Payment of Expenses" in the Prospectus for information regarding other possible
compensation payable to the Master Servicer and for information regarding
expenses payable by the Master Servicer [and "Federal Income Tax Consequences"
herein regarding certain taxes payable by the Master Servicer].
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date the Master Servicer shall furnish to each
Certificateholder, to the Depositor, to the Trustee and to the Rating Agency a
statement setting forth certain information with respect to the Mortgage Loans
and the Certificates required pursuant to the Pooling and Servicing Agreement.
In addition, within a reasonable period of time after each calendar year, the
Master Servicer shall furnish to each person who at any time during such
calendar year was the holder of a Certificate a statement containing certain
information with respect to the Certificates required pursuant to the Pooling
and Servicing Agreement, aggregated for such calendar year or portion thereof
during which such person was a Certificateholder. See "Description of the
Certificates-Reports to Certificateholders" in the Prospectus.
VOTING RIGHTS
At all times during the term of this Agreement, the Voting Rights shall
be allocated among the Classes of Certificateholders in proportion to the
respective Certificate Balances of their Certifi cates (net, in the case of the
Class A, Class B and Class C Certificates, of any Uncovered Portion of the
related Certificate Balance). Voting Rights allocated to a class of
Certificateholders shall be allocated among such Certificateholders in
proportion to the Percentage Interests evidenced by their respective
Certificates.
TERMINATION
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment or other liquidation
of the last Mortgage Loan or REO Property subject thereto, and (ii) the purchase
of all of the assets of the Trust Fund by the Master Servicer. Written notice of
termination of the Pooling and Servicing Agreement will be given to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at the office of the Certificate Registrar
specified in such notice of termination. In no event, however, will the trust
created by the Pooling and Servicing Agreement continue beyond the expiration of
21 years from the death of the survivor of certain persons named in such Pooling
and Servicing Agreement.
Any such purchase by the Master Servicer of all the Mortgage Loans and
other assets in the Trust Fund is required to be made at a price equal to the
greater of (1) the aggregate fair market value of all the Mortgage Loans and REO
Properties then included in the Trust Fund, as mutually
S-35
<PAGE>
determined by the Master Servicer and the Trustee, and (2) the excess of (a) the
sum of (i) the aggregate Purchase Price of all the Mortgage Loans then included
in the Trust Fund and (ii) the fair market value of all REO Properties then
included in the Trust Fund, as determined by an appraiser mutually agreed upon
by the Master Servicer and the Trustee, over (b) the aggregate of amounts
payable or reimbursable to the Master Servicer under the Pooling and Servicing
Agreement. Such purchase will effect early retirement of the then outstanding
Class A Certificates, but the right of the Master Servicer to effect such
termination is subject to the requirement that the aggregate Stated Principal
Balance of the Mortgage Loans then in the Trust Fund is less than ___% of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date.
USE OF PROCEEDS
The net proceeds from the sale of Class A Certificates will be used by
the Depositor to pay the purchase price of the Mortgage Loans.
FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class A Certificates, _______________________,
counsel to the Depositor, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Pooling and Servicing Agreement,
for federal income tax purposes, the Trust Fund will qualify
as a REMIC under the Code.
For federal income tax purposes, the Class R Certificates will be the
sole class of "residual interests" in the REMIC and the Class A, Class B and
Class C Certificates will be the "regular interests" in the REMIC and will be
treated as debt instruments of the REMIC.
See "Federal Income Tax Consequences--REMICs" in the Prospectus.
[The Class A Certificates [may][will not] be treated as having been
issued with original issue discount for federal income tax reporting purposes.
The prepayment assumption that will be used in determining the rate of accrual
of original issue discount, market discount and premium, if any, for federal
income tax purposes will be based on the assumption that subsequent to the date
of any determination the Mortgage Loans will prepay at a rate equal to ___%
[CPR][SPA]. No representation is made that the Mortgage Loans will prepay at
that rate or at any other rate. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates" and
"--Original Issue Discount" in the Prospectus.]
The Class A Certificates may be treated for federal income tax purposes
as having been issued at a premium. Whether any holder of such a class of
Certificates will be treated as holding a certificate with amortizable bond
premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of such class of Certificates
should consult their own tax advisors regarding the possibility of making an
election to amortize such premium. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates" and
"--Premium" in the Prospectus.
The Class A Certificates will be treated as "qualifying real property
loans" within the meaning of Section 593(d) of the Code[, assets described in
Section 7701(a)(19)(C) of the Code] and "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code generally in the same proportion that the
assets of the REMIC underlying such Certificates would be so treated. [In
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<PAGE>
addition, interest (including original issue discount) on the Class A
Certificates will be interests described in Section 856(c)(3)(B) of the Code to
the extent that such Class A Certificates are treated as "real estate assets"
under Section 856(c)(5)(A) of the Code.] [Moreover, the Class A Certificates
will be "obligation[s] . . . which . . . [are] principally secured by an
interest in real property" within the meaning of Section 860G(a)(3)(C) of the
Code.] [The Class A Certificates will not be considered to represent an interest
in "loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code.] See "Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Certificates" in
the Prospectus.
For further information regarding the federal income tax consequences
of investing in the Class A Certificates, see "Federal Income Tax
Consequences--REMICs" in the Prospectus.
ERISA CONSIDERATIONS
[A fiduciary of any employee benefit plan or other retirement plans and
arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested, that is subject to the Employee
Retirement arrangements are invested, that is subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code
should carefully review with its legal advisors whether the purchase or holding
of Class A Certificates could give rise to a transaction that is prohibited or
is not otherwise permitted either under ERISA or Section 4975 of the Code.
[The U.S. Department of Labor issued an individual exemption,
Prohibited Transaction Exemption 91-23 (the "Exemption"), on April 18, 1991 to
Salomon Smith Barney Inc. (formerly known as Smith Barney Inc.), which generally
exempts from the application of the prohibited transaction provisions of Section
406 of ERISA, and the excise taxes imposed on such prohibited transactions
pursuant to Sections 4975(a) and (b) of the Code and Section 501(i) of ERISA,
certain transactions, among others, relating to the servicing and operation of
mortgage pools and the purchase, sale and holding of mortgage pass-through
certificates underwritten by an Underwriter (as hereinafter defined), provided
that certain conditions set forth in the Exemption are satisfied. For purposes
of this Section "ERISA Considerations", the term "Underwriter" shall include (a)
Salomon Smith Barney Inc., (b) any person directly or indirectly, through one or
more intermediaries, controlling, controlled by or under common control with
Salomon Smith Barney Inc. and (c) any member of the underwriting syndicate or
selling group of which a person described in (a) or (b) is a manager or
co-manager with respect to the Class A Certificates.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Class A
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the Class A Certificates by certain employee benefit plans
subject to Section 4975 of the Code (each, a "Plan"), must be on terms that are
at least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party. Second, the rights and interests evidenced
by the Class A Certificates must not be subordinated to the rights and interests
evidenced by the other certificates of the same trust. Third, the Class A
Certificates at the time of acquisition by the Plan must be rated in one of the
three highest generic rating categories by Standard & Poor's Corporation,
Moody's Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch
Investors Service, Inc. Fourth, the Trustee cannot be an affiliate of any member
of the "Restricted Group", which consists of any Underwriter, the Depositor, the
Master Servicer, each sub-servicer and any mortgagor with respect to Mortgage
Loans constituting more than 5% of the aggregate unamortized principal balance
of the Mortgage Loans as of the date of initial issuance of
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the Class A Certificates. Fifth, the sum of all payments made to and retained by
the Underwriter must represent not more than reasonable compensation for
underwriting the Class A Certificates; the sum of all payments made to and
retained by the Underwriter must represent not more than reasonable compensation
for underwriting the Class A Certificates; the sum of all payments made to and
retained by the Depositor pursuant to the assignment of the Mortgage Loans to
the Trust Fund must represent not more than the fair market value of such
obligations; and the sum of all payments made to and retained by the Master
Servicer and any sub-servicer must represent not more than reasonable
compensation for such person's services under the Agreement and reimbursement of
such person's reasonable expenses in connection therewith. Sixth, the investing
Plan must be an accredited investor as defined in Rule 501(a)(1) of Regulation D
of the Securities and Exchange Commission under the Securities Act of 1933, as
amended.
Because the Class A Certificates are not subordinated to any other
class of Certificates, the second general condition set forth above is satisfied
with respect to such Certificates. It is a condition of the issuance of the
Class A Certificates that they be rated [not lower than] "___________" by
_______________. A fiduciary of a Plan contemplating purchasing a Class A
Certificate in the secondary market must make its own determination that at the
time of such acquisition, the Class A Certificates continue to satisfy the third
general condition set forth above. The Depositor expects that the fourth general
condition set forth above will be satisfied with respect to the Class A
Certificates. A fiduciary of a Plan contemplating purchasing a Class A
Certificate must make its own determination that the first, third, fifth and
sixth general conditions set forth above will be satisfied with respect to such
Class A Certificate.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm (a) that such Certificates constitute "certificates" for purposes
of the Exemption and (b) that the specific and general conditions of the
Exemption and the other requirements set forth in the Exemption would be
satisfied. In addition to making its own determination as to the availability of
the exemptive relief provided in the Exemption, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions, in
particular, Prohibited Transaction Class Exemption 83-1.] See "ERISA
Considerations" in the Prospectus.
Any Plan fiduciary considering whether to purchase a Class A
Certificate on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment.
LEGAL INVESTMENT
The Class A Certificates will [not] constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") [so long as they are rated in at least the second highest rating
category by the Rating Agency, and, as such, are legal investments
for certain entities to the extent provided in SMMEA].
The Depositor makes no representations as to the proper
characterization of the Class Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase the Class A
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of the Class A Certificates. Accordingly, all
institutions whose investment activities are subject to legal investment laws
and regulations, regulatory capital requirements or review by regulatory
authorities should consult with their own legal advisors in determining whether
and to what extent the Class A Certificates constitute a legal investment under
SMMEA or is subject to investment, capital or other restrictions.
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<PAGE>
See "Legal Investment" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated _________ __, ____ (the "Underwriting Agreement"), the
Depositor has agreed to sell, and Salomon Smith Barney Inc. (the "Underwriter")
has agreed to purchase the Class A Certificates. The Underwriter is obligated to
purchase all Class A Certificates offered hereby if it purchases any. The
Underwriter is an affiliate of the Depositor.
Distribution of the Class A 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 Class A
Certificates, before deducting expenses payable by the Depositor, will be
approximately _________% of the aggregate initial Certificate Principal Balance
of the Class A Certificates, plus accrued interest on the Class A Certificates.
In connection with the purchase and sale of the Class A Certificates, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts.
The Class A Certificates are offered subject to receipt and acceptance
by the Underwriter, to prior sale and to the Underwriter's right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. [It is expected that delivery of the Book-Entry Certificates will be
made through the facilities of DTC, and that delivery of each other class of
Offered Certificates and the Residual Certificates will be made at the offices
of the Underwriter, Seven World Trade Center, New York, New York 10048, in each
case, on or about the Closing Date[.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain civil liabilities, including liabilities under
the Securities Act of 1933, as amended, or will contribute to payments the
Underwriter may be required to make in respect thereof.
SECONDARY MARKET
There can be no assurance that a secondary market for the Class A
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Class A
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates-Reports to Certificateholders", which will
include information as to the outstanding principal balance of the Class A
Certificates and the status of the applicable forms of credit enhancement. There
can be no assurance that any additional information regarding the Class A
Certificates will be available through any other source. In addition, the
Depositor is not aware of any source through which price information about the
Class A Certificates will be generally available on an ongoing basis. The
limited nature of such information regarding the Class A Certificates may
adversely affect the liquidity of the Class A Certificates, even if a secondary
market for the Class A Certificates becomes available.
LEGAL MATTERS
Certain legal matters relating to the Class A Certificates will be
passed upon for the Depositor and the Underwriter by Thacher Proffitt & Wood,
New York, New York.
S-39
<PAGE>
RATINGS
It is a condition to issuance that the Class A Certificates be rated
[not lower than] "___" by __________________. However, no person is obligated to
maintain the rating on the Class A Certificates, and ____________________ is not
obligated to monitor its rating following the ________________.
_______________'s ratings on mortgage pass-through certificates address
the likelihood of the receipt by holders thereof of payments to which they are
entitled. _______________'s ratings take into consideration the credit quality
of the mortgage pool, structural and legal aspects associated with the
certificates, and the extent to which the payment stream in the mortgage pool is
adequate to make payments required under the certificates. _______________'s
rating on the Class A Certificates does not, however, constitute a statement
regarding frequency of prepayments on the Mortgage Loans. See "Risk Factors"
herein.
There can be no assurance as to whether any rating agency not requested
to rate the Class A Certificates will nonetheless issue a rating and, if so,
what such rating would be. A rating assigned to the Class A Certificates by a
rating agency that has not been requested by the Depositor to do so may be lower
than the rating assigned by _______________'s pursuant to the Depositor's
request.
The rating of the Class A Certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating agency.
S-40
<PAGE>
[ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
Attach Mortgage Loan Schedule that details relevant and available
information regarding the Mortgage Loans, such as the information included under
the following headings:
1. Loan ID number 19. First rate change
2. Original balance
3. Current balance
4. Current rate
5. Current payment
6. Note date
7. Original term
8. Remaining term
9. Maturity date
10. Amortization
11. Origination appraisal
12. Borrowing entity
13. Property name
14. Street
15. City
16. State
17. Zip code
18. Rate index
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20. Next rate change
21. First payment change
22. Next payment change
23. Rate adjustment frequency
24. Payment adjustment frequency
25. Period payment cap
26. Life rate cap
27. Life rate floor
28. Negative amortization cap percent
29. Negative amortization cap amount
30. Annualized recent net operating
income
31. Most recent net operating income year
32. Most recent debt service coverage
ratio
33. LTV and current balances based upon
the Appraised Value]
S-42
<PAGE>
$____________ (APPROXIMATE)
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES ____-__
PROSPECTUS SUPPLEMENT
DATED _________ ___, ____
MASTER SERVICER
SALOMON SMITH BARNEY
UNDERWRITER
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE CERTIFICATES OFFERED HEREBY IN ANY STATE WHERE THE OFFER
IS NOT PERMITTED.
WE DO NOT CLAIM THE ACCURACY OF THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS AS OF ANY DATE OTHER THAN THE DATES STATED ON
THEIR COVER PAGES.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
Offered Certificates, whether or not participating in this offering, may be
required to deliver a prospectus supplement and prospectus until _______ ___,
____.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Subject to Completion, Dated September 7, 1999
[Version 4]
Prospectus Supplement
(To Prospectus dated , ____)
$_______________ (APPROXIMATE)
ASSET BACKED FLOATING RATE NOTES, SERIES ____-__
[SALOMON] TRUST SERIES ____-__
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
MASTER SERVICER
- --------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ IN THIS
PROSPECTUS SUPPLEMENT AND PAGE __ IN THE PROSPECTUS.
The notes will represent interests only in a trust consisting primarily of
mortgage loans and will not represent ownership interests in or obligations of
any other entity.
This prospectus supplement may be used to offer and sell the notes offered
hereby only if accompanied by the prospectus.
- --------------------------------------------------------------------------------
THE TRUST --
o will consist primarily of a mortgage pool of one- to four-family
fixed-rate and adjustable-rate residential mortgage loans; and
o will be represented by ______ classes of notes, ______ of which are
offered hereby.
THE OFFERED NOTES --
o will represent senior and subordinate interests in the trust and will
receive distributions from the assets of the trust; and
o will receive monthly distributions commencing on ________, __ ____
CREDIT ENHANCEMENT --
o the senior notes will have credit enhancement in the form of
subordination; and
o the subordinate notes will have credit enhancement in the form of
subordination provided by certain classes of offered subordinate notes with
lower payment priorities;
Salomon Smith Barney Inc. (the "Underwriter") will offer the Class A Notes, the
Class M-1 Notes, the Class M-2 Notes and the Class M-3 Notes (collectively, the
"Offered Notes") from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. The proceeds
to the Depositor from the sale of such notes, before deducting expenses, will be
approximately _____% of the initial note balance, plus accrued interest on such
notes. The Underwriter's commission will be any positive difference between the
price it pays to the Depositor for such notes and the amount it receives from
the sale of such notes to the public. See "Method of Distribution" herein.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED NOTES OR DETERMINED THAT
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF
THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
S-1
<PAGE>
SALOMON SMITH BARNEY
Underwriter
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD NOT
ASSUME THAT THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS DOCUMENT.
We provide information to you about the Offered Notes in two separate documents
that progressively provide more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to this series of notes; and
o this prospectus supplement, which describes the specific terms of this
series of notes.
Salomon Brothers Mortgage Securities VII, Inc.'s principal offices are located
at Seven World Trade Center, New York, New York 10048 and its phone number is
(212) 783-5635.
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
SUMMARY OF PROSPECTUS SUPPLEMENT............................................S-__
RISK FACTORS................................................................S-__
USE OF PROCEEDS.............................................................S-__
THE MORTGAGE POOL...........................................................S-__
YIELD ON THE NOTES..........................................................S-__
DESCRIPTION OF THE NOTES....................................................S-__
THE ISSUER..................................................................S-__
THE SELLER..................................................................S-__
THE _______ SPE.............................................................S-__
THE OWNER TRUSTEE...........................................................S-__
THE INDENTURE TRUSTEE.......................................................S-__
THE SERVICING AGREEMENT.....................................................S-__
THE INDENTURE AND OWNER TRUST AGREEMENT.....................................S-__
FEDERAL INCOME TAX CONSEQUENCES.............................................S-__
METHOD OF DISTRIBUTION......................................................S-__
SECONDARY MARKET............................................................S-__
LEGAL OPINIONS..............................................................S-__
RATINGS.....................................................................S-__
LEGAL INVESTMENT............................................................S-__
ERISA CONSIDERATIONS........................................................S-__
S-2
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS A VERY BROAD OVERVIEW OF THE NOTES OFFERED
HEREBY AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER IN
MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THE OFFERED
NOTES, READ CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND THE ENTIRE
ACCOMPANYING PROSPECTUS. Capitalized terms used but not defined herein have the
meanings assigned to them in the prospectus. An Index of Principal Definitions
is included at the end of the prospectus.
Title of Series....................Salomon Brothers Mortgage Securities VII,
Inc., Asset- Backed Floating Rate Notes,
Series ____-_.
Cut-off Date.......................__________ __, ____.
Closing Date.......................On or about __________ __, ____.
Issuer.............................[Salomon] Trust Series ____-__ (the
"Issuer").
Depositor..........................Salomon Brothers Mortgage Securities VII,
Inc. (the "Depositor"), an indirect
wholly-owned subsidiary of Salomon Smith
Barney Holdings Inc. and an affiliate of
Salomon Smith Barney Inc. The Depositor will
deposit the mortgage loans into the trust.
See "The Depositor" in the prospectus.
Master Servicer....................__________________. See "The Servicing
Agreements--Master Servicer" herein.
Originators and Servicers..........______________, ______________ and
____________. See "The Mortgage
Pool--Underwriting Standards;
Representations" and "The Servicing
Agreements--The Originators and Servicers"
herein.
Seller............................._______________. See "The Seller" herein.
________ SPE......................._______________. See "The ___________ SPE"
herein.
Owner Trustee......................________________. See "The Owner Trustee"
herein.
Indenture Trustee..................__________________. See "The Indenture
Trustee" herein.
Distribution Dates.................Distributions on the Offered Notes will be
made on the __th day of each month, or, if
such day is not a business day, on the next
succeeding business day, beginning in ______.
Offered Notes......................The classes Offered Notes and their interest
rates, note balances and final maturity date
are set forth in the table below.
S-3
<PAGE>
NOTE INTEREST FINAL MATURITY DATE
CLASS INITIAL NOTE RATE
BALANCE(1)
- ----------- ------------------- --------------------- --------------------------
A.......... $_________ Variable(2) ________ ____
M-1........ $_________ Variable(2) ________ ____
M-2........ $_________ Variable(2) ________ ____
M-3........ $_________ Variable(2) ________ ____
=========== =================== ===================== ==========================
- ----------------------
(1)Approximate.
(2)Calculated as described herein.
THE ISSUER
The Notes will be issued by the Issuer, a Delaware business trust established
pursuant to a trust agreement between the Depositor and the Owner Trustee (the
"Owner Trust Agreement"). The Issuer will issue _____ classes of notes
representing non-recourse debt obligations of the Issuer secured by the trust
estate. See "Description of the Notes" herein.
Distributions of interest and/or principal on the Offered Notes will be made
only from payments received in connection with the mortgage loans described
below.
EQUITY CERTIFICATES
Trust Certificates, Series ____-__, will be issued pursuant to the Owner Trust
Agreement and will represent the beneficial ownership interest in the Issuer.
The equity certificates are not offered hereby.
THE MORTGAGE LOANS
The trust will contain approximately _____ conventional, one- to four-family,
fixed-rate and adjustable-rate mortgage loans secured by first liens on
residential real properties. The mortgage loans have an aggregate principal
balance of approximately $__________ as of _________ __ ____.
The mortgage loans have original terms to maturity of not greater than [30]
years and the following characteristics as of __________ __, ____.
Range of mortgage rates _____% to _____%.
(approximate):
Weighted average mortgage ______%.
rate (approximate):
Weighted average remaining ___ years and ___
term to stated maturity months.
(approximate):
Range of principal balances $__________ to
(approximate): $____________.
Average principal balance: $_____________.
Range of loan-to-value ratios _____% to _____%.
(approximate):
Weighted average loan-to-
value ratio (approximate): ______%.
For additional information regarding the mortgage loans, see "The Mortgage Pool"
herein.
THE NOTES
OFFERED NOTES. The Offered Notes will have the characteristics shown in the
table above in this prospectus supplement. The interest rates on each class of
Offered Notes are variable and are calculated for each distribution date as
described herein under "Description of the Notes--Note Interest Rates" herein.
The Offered Notes will be sold by the Depositor to the Underwriter on the
closing date.
The Offered Notes will initially be represented by one or more global notes
registered in the name of CEDE & Co., as nominee of the
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Depository Trust Company in minimum denominations of $[10,000] and integral
multiples of $[1.00] in excess thereof. See "Description of the Notes
- --Registration" herein.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Offered
Notes consists of subordination as described below and under "Description of the
Notes--Allocation of Losses; Subordination" herein.
SUBORDINATION. The rights of the holders of the Class M-1 Notes, the Class M-2
Notes, the Class M-3 Notes (the "Subordinate Notes") to receive distributions
will be subordinated, to the extent described herein, to the rights of the
holders of the Class A Notes.
In addition, the rights of the holders of Subordinate Notes with higher
numerical class designations will be subordinated to the rights of holders of
Subordinate Notes with lower numerical class designations, to the extent
described herein.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior notes in respect of interest and principal and to afford such
notes protection against realized losses on the mortgage loans as described
below.
ALLOCATION OF LOSSES. Except as described below, if Subordinate Notes remain
outstanding, losses on the mortgage loans will be allocated first to the class
of Subordinate Notes with the lowest payment priority, and the other classes of
notes will not bear any portion of such losses. If none of the Subordinate Notes
remain outstanding, losses on mortgage loans will generally be allocated to the
Class A Notes.
P&I ADVANCES
Each Servicer is required to advance delinquent payments of principal and
interest on the mortgage loans, subject to the limitations described herein.
Each Servicer is entitled to be reimbursed for such advances, and therefore such
advances are not a form of credit enhancement. See "Description of the
Notes--P&I Advances" herein and "Description of the Securities--Advances in
respect of Delinquencies" in the prospectus.
OPTIONAL REDEMPTION
At its option, the majority holder of the equity certificates may redeem the
notes and thereby effect termination and early retirement of the Notes, after
the aggregate Note balance has been reduced to less than [20%] of the aggregate
initial Note balance. See "The Indenture and Owner Trust Agreement-- Optional
Redemption" herein and "Description of the Securities-- Termination" in the
prospectus.
FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Notes, Thacher Proffitt & Wood, counsel to the
Depositor, will deliver its opinion generally to the effect that the Notes will
be characterized as indebtedness and the Issuer will not be classified as an
association taxable as a corporation or a publicly traded partnersip.
For further information regarding the federal income tax consequences of
investing in the Offered Notes, see "Federal Income Tax Consequences" herein and
in the prospectus.
RATINGS
It is a condition to the issuance of the notes that the Offered Notes receive
the following ratings from [______________ ("_____") and ___________
("_________")]:
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OFFERED [RA] [RA]
- ------- ---- ----
NOTES
- -----
Class A AAA AAA
Class M-1 AA AA
Class M-2 A A
Class M-3 BBB BBB
- ---------------------
[(1) Not rated.]
A security rating does not address the frequency of prepayments on the mortgage
loans, the corresponding effect on yield to investors. [The "r" symbol in
certain _____________ ratings is attached to highlight notes that __________
believes may 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 note will exhibit no volatility or variability in total
return.]
See "Yield on the Notes" and "Ratings" herein and "Yield Considerations" in the
prospectus.
LEGAL INVESTMENT
The Offered Notes (other than the Class ___ and Class ___ Notes) will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as they are rated not lower than
the second highest rating category by one or more nationally recognized
statistical rating organizations and, as such, will be legal investments for
certain entities to the extent provided in SMMEA and applicable state laws. The
Class ___ Notes and the Class ___ Notes will not constitute "mortgage related
securities" for purposes of SMMEA. See "Legal Investment" herein and in the
prospectus.
ERISA CONSIDERATIONS
The U.S. Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption 91-23, to the Underwriter. Such exemption generally
exempts from the application of certain of the prohibited transaction provisions
of Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the excise taxes imposed on such prohibited transactions
by Section 4975(a) and (b) of the Internal Revenue Code of 1986 (the "Code") and
Section 502(i) of ERISA, transactions relating to the purchase, sale and holding
of pass-through certificates underwritten by the Underwriter. Such exemption
generally applies to notes such as the Class A Notes, and the servicing and
operation of asset pools such as the mortgage pool, provided that certain
conditions are satisfied.
Such exemption will only apply to the Class A Notes. ACCORDINGLY, THE OTHER
CLASSES OF NOTES MAY NOT BE ACQUIRED BY OR ON BEHALF OF A PLAN EXCEPT AS
DESCRIBED HEREIN. See "ERISA Considerations" herein and in the prospectus.
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RISK FACTORS
In addition to the matters described elsewhere in this Prospectus
Supplement and the Prospectus, prospective investors should carefully consider
the following factors before deciding to invest in the Notes.
[Appropriate Risk Factors as necessary]
[THE UNDERWRITING STANDARDS OF THE MORTGAGE LOANS ARE NOT AS STRINGENT AS THOSE
UNDERWRITTEN IN A MORE TRADITIONAL MANNER, OR UNDERWRITTEN TO THE STANDARDS OF
FANNIE MAE AND FREDDIE MAC, WHICH MAY RESULT IN LOSSES ALLOCATED TO THE OFFERED
NOTES
The Originators' underwriting standards are primarily intended to assess
the value of the mortgaged property and to evaluate the adequacy of such
property as collateral for the mortgage loan. The Originators provide loans
primarily to borrowers who do not qualify for loans conforming to Fannie Mae and
Freddie Mac guidelines. While the Originators' primary consideration in
underwriting a mortgage loan is the value of the mortgaged property, each
Originator also considers, among other things, a mortgagor's credit history,
repayment ability and debt service-to- income ratio, as well as the type and use
of the mortgaged property. None of the Originators' underwriting standards
prohibit a mortgagor from obtaining secondary financing at the time of
origination of the related Originator's first lien. Any such secondary financing
would reduce the equity the mortgagor would otherwise have in the related
mortgaged property as indicated in the related Originator's loan-to-value ratio
determination.
As a result of the Originators' underwriting standards, the mortgage loans
are likely to experience rates of delinquency, foreclosure and bankruptcy that
are higher, and that may be substantially higher, than those experienced by
mortgage loans underwritten in a more traditional manner.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the mortgage loans than on mortgage loans originated in a more traditional
manner. No assurance can be given that the values of the mortgaged properties
have remained or will remain at the levels in effect on the dates of origination
of the related mortgage loans. See "The Mortgage Pool--Underwriting Standards;
Representations" herein].
[CERTAIN MORTGAGE LOANS ARE DELINQUENT AS OF THE CUT-OFF DATE, WHICH MAY PRESENT
A GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately ____% of the mortgage loans were thirty days or more but less
than sixty days delinquent in their monthly payments and approximately ____% of
the mortgage loans were sixty days or more but less than ninety days delinquent
in their monthly payments as of _________ __, ____, in each case by aggregate
principal balance as of ________ __, ____. However, approximately _____% of the
mortgage loans, by aggregate principal balance as of ________ __,____, have a
first payment date occurring on or after _______ __, ____ and, therefore, such
mortgage loans could not have been delinquent as of ________ __, ____].
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[CERTAIN MORTGAGE LOANS HAVE HIGH LOAN-TO-VALUE RATIOS WHICH MAY PRESENT A
GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately ____% of the mortgage loans, by aggregate principal balance
as of ________ __, ____, had a loan-to-value ratio at origination in excess of
80%. No mortgage loan with a loan-to-value ratio at origination in excess of 80%
will be covered by a primary mortgage insurance policy. Mortgage loans with
higher loan-to-value ratios may present a greater risk of loss. There can be no
assurance that the loan-to-value ratio of any mortgage loan determined at any
time after origination is less than or equal to its original loan-to-value
ratio. See "The Mortgage Pool--General" herein. In addition, an overall decline
in the residential real estate market, a rise in interest rates over a period of
time and the general condition of a mortgaged property, as well as other
factors, may have the effect of reducing the value of such mortgaged property
from the appraised value at the time the mortgage loan was originated. If there
is a reduction in value of the mortgaged property, the loan-to-value ratio may
increase over what it was at the time the mortgage loan was originated. Such an
increase may reduce the likelihood of liquidation or other proceeds being
sufficient to satisfy the mortgage loan. There can be no assurance that the
loan-to-value ratio of any mortgage loan determined at any time after
origination is less than or equal to its original loan-to-value ratio].
[THE MORTGAGE LOANS ARE CONCENTRATED IN THE STATE OF __________, WHICH MAY
PRESENT A GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately _____% of the mortgage loans are secured by mortgaged
properties located in the State of ___________, by aggregate principal balance
as of _________ __, ____. As of ________ __, ____, the aggregate principal
balance of mortgage loans in the ________ zip code with the largest amount of
such mortgage loans, by aggregate principal balance as of _________ __, ____,
was approximately $_________. If the __________ residential real estate market
should experience an overall decline in property values after the dates of
origination of the mortgage loans, the rates of delinquencies, foreclosures,
bankruptcies and losses on the mortgage loans may increase over historical
levels of comparable type loans, and may increase substantially].
[THE CLASS M-1, CLASS M-2 AND CLASS M-3 NOTES WILL BE PARTICULARLY SENSITIVE TO
LOSSES ON THE MORTGAGE LOANS
The weighted average lives of, and the yields to maturity on, the Class
M-1, Class M-2 and Class M-3 Notes will be progressively more sensitive, in
increasing order of their numerical class designations, to the rate and timing
of mortgagor defaults and the severity of ensuing losses on the mortgage loans.
If the actual rate and severity of losses on the mortgage loans is higher than
those assumed by an investor in one of the Class M-1, Class M-2 or Class M-3
Notes, the actual yield to maturity of such Note may be lower than the yield
anticipated by such holder based on such assumption. The timing of losses on the
mortgage loans will also affect an investor's actual yield to maturity, even if
the rate of defaults and severity of losses over the life of the mortgage pool
are consistent with an investor's expectations. In general, the earlier a loss
occurs, the greater the effect on an investor's yield to maturity. Losses on the
mortgage loans in any due period, to the extent they exceed the
overcollateralized amount following payments of principal on the related payment
date, will reduce the Note balance of the class of Notes then outstanding with
the highest numerical class designation. As a result of such reductions, less
interest will accrue on such class of subordinate Notes than would otherwise be
the case].
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<PAGE>
[THE CLASS M-1, CLASS M-2 AND CLASS M-3 NOTES WILL GENERALLY NOT BE ENTITLED TO
RECEIVE PRINCIPAL PAYMENTS UNTIL ALL PRINCIPAL PAYMENTS HAVE BEEN MADE ON THE
CLASS A NOTES WHICH MAY LEAD TO A GREATER RISK OF LOSS WITH RESPECT TO SUCH
NOTES
Unless the Note balance of the Class A Notes has been reduced to zero, the
Class M-1, Class M-2 and Class M-3 Notes will not be entitled to any principal
payments until _________ ____ or a later period as described herein. As a
result, the weighted average lives of such notes will be longer than would
otherwise be the case if payments of principal were allocated among all of the
notes at the same time. As a result of the longer weighted average lives of such
Notes, the holders of such Notes have a greater risk of suffering a loss on
their investments. Further, because such notes might not receive any principal
if certain delinquency levels occur, it is possible for the such Notes to
receive no principal payments even if no losses have occurred on the mortgage
pool].
[THE NOTES ARE OBLIGATIONS OF THE TRUST ONLY
The Notes will not represent an interest in or obligation of the
Originators, the Depositor, the Master Servicer, the Seller, the _________ SPE,
the Owner Trustee, the Indenture Trustee or any of their respective affiliates.
The only obligations of the foregoing entities with respect to the Notes or any
Mortgage Loan will be the obligations of the Seller pursuant to certain limited
representations and warranties made with respect to the mortgage loans and of
the Servicers with respect to their servicing obligations under the related
Servicing Agreement (including the limited obligation to make certain advances,
as described herein). Neither the Notes nor the underlying mortgage loans will
be guaranteed or insured by any governmental agency or instrumentality, or by
the Issuer, the Originators, the Depositor, the Master Servicer, the Seller, the
________ SPE, the Owner Trustee, the Indenture Trustee or any of their
respective affiliates. Proceeds of the assets included in the trust (including
the mortgage loans) will be the sole source of payments on the Notes, and there
will be no recourse to the Issuer, the Originators, the Depositor, the Master
Servicer, the Seller, the _______ SPE, the Owner Trustee, the Indenture Trustee
or any of their respective affiliates or any other entity in the event that such
proceeds are insufficient or otherwise unavailable to make all payments provided
for under the Notes].
[THE DIFFERENCE BETWEEN THE INTEREST RATES ON THE NOTES AND THE MORTGAGE LOANS
MAY RESULT IN INTEREST SHORTFALLS ALLOCATED TO THE NOTES
The Note interest rate for each class of the notes adjusts monthly based on
a particular index, subject to certain limitations as described herein. However,
the mortgage rates on the fixed rate mortgage loans are fixed and will not vary
with any index, and the mortgage rates on the adjustable rate mortgage loans
adjust semi-annually (after an initial fixed rate period in the case of certain
adjustable rate mortgage loans) based on the index (which may not move in tandem
with the index), subject to periodic and lifetime limitations as described
herein. As a result of the foregoing as well as other factors such as the
prepayment behavior of the mortgage pool, relative increases in the index or
relative decreases in the weighted average of the mortgage rates on the mortgage
loans (i) could cause the amount of interest generated by the mortgage pool to
be less than the aggregate of the amount of interest that would otherwise be
payable on the Notes, leading one or more classes of Notes to accept payments of
interest at a later date, as described herein or (ii) could cause the maximum
Note interest rate to apply to one or more classes of Notes, as described
herein.
Because the mortgage rate for each adjustable rate mortgage loan will be
adjusted, subject to periodic and lifetime limitations, to equal the sum of the
index and the related gross margin, such rates could be higher than prevailing
market interest rates, possibly resulting in an increase in the rate of
prepayments on the adjustable rate mortgage loans after their adjustments. In
particular, investors should note that approximately _____% of the adjustable
rate mortgage loans have their
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interest rates fixed for two years following origination and approximately
_____% of the adjustable rate mortgage loans have their interest rates fixed for
three years following origination, in each case by aggregate principal balance
as of _________ __, ___. The weighted average next adjustment date for the
adjustable rate mortgage loans whose interest rates are fixed for two years is
_______ ____, and the weighted average next adjustment date for the adjustable
rate mortgage loans whose interest rates are fixed for three years is _______
____].
[THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON THE OFFERED NOTES WILL BE
AFFECTED BY PREPAYMENT SPEEDS
The rate and timing of distributions allocable to principal on the offered
notes will depend, in general, on the rate and timing of principal payments
(including prepayments and collections upon defaults, liquidations and
repurchases) on the mortgage loans and the allocation thereof to pay principal
on the offered notes as provided herein. As is the case with mortgage securities
generally, the offered notes are subject to substantial inherent cash-flow
uncertainties because the mortgage loans may be prepaid at any time. However,
with respect to approximately ____% of the mortgage loans, by aggregate
principal balance as of _______ __, ____, a prepayment may subject the related
mortgagor to a prepayment charge, which may act as a deterrent to prepayment of
such mortgage loan. See "The Mortgage Pool" herein.
Generally, when prevailing interest rates are increasing, prepayment rates
on mortgage loans tend to decrease; a decrease in the prepayment rates on the
mortgage loans will result in a reduced rate of return of principal to investors
in the offered notes at a time when reinvestment at such higher prevailing rates
would be desirable. Conversely, when prevailing interest rates are declining,
prepayment rates on mortgage loans tend to increase; an increase in the
prepayment rates on the mortgage loans will result in a greater rate of return
of principal to investors in the offered notes at a time when reinvestment at
comparable yields may not be possible.
Distributions of principal will be made to the subordinate notes according
to the priorities described herein. The timing of commencement of principal
distributions and the weighted average life of each such class of notes will be
affected by the rates of prepayment on the mortgage loans experienced both
before and after the commencement of principal distributions on such class. For
further information regarding the effect of principal prepayments on the
weighted average lives of the offered notes, see "Yield on the Notes" herein and
the table entitled "Percent of Initial Note Balance Outstanding at the Following
Percentages of the Prepayment Assumption" therein].
[THE YIELD TO MATURITY ON THE OFFERED NOTES WILL DEPEND ON A VARIETY OF FACTORS
The yield to maturity on the offered notes will depend, in general, on:
o the applicable Note interest rate and Note accrual rate thereon from
time to time;
o the applicable purchase price; and
o the rate and timing of principal payments (including prepayments and
collections upon defaults, liquidations and repurchases) on the
mortgage loans and the allocation thereof to reduce the Note balance of
such Notes, as well as other factors.
The yield to investors on any class of offered notes will be adversely
affected by any allocation thereto of interest shortfalls on the mortgage loans.
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In general, if the offered notes are purchased at a premium and principal
distributions thereon occur at a rate faster than anticipated at the time of
purchase, the investor's actual yield to maturity will be lower than that
assumed at the time of purchase. Conversely, if the offered notes are purchased
at a discount and principal distributions thereon occur at a rate slower than
that anticipated at the time of purchase, the investor's actual yield to
maturity will be lower than that originally assumed.
The proceeds to the depositor from the sale of the offered notes were
determined based on a number of assumptions, including a prepayment assumption
of __% of the [Constant Prepayment Rate Model] and weighted average lives
corresponding thereto. No representation is made that the mortgage loans will
prepay at such rate or at any other rate. The yield assumptions for the offered
notes will vary as determined at the time of sale].
[VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE
MORTGAGE LOANS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosure, and require licensing of the Originators. In
addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the mortgage loans.
The mortgage loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers
regarding the terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age,
race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under
the Consumer Credit Protection Act, in the extension of credit;
and
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws, policies
and principles may limit the ability of the trust to collect all or part of the
principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the
Originators to damages and administrative enforcement.
The Seller will represent that as of ___________ __, ____, each mortgage
loan is in compliance with applicable federal and state laws and regulations. In
the event of a breach of such representation, the Seller will be obligated to
cure such breach or repurchase or replace the affected mortgage loan in the
manner described in herein].
[THE SERVICING RIGHTS TO CERTAIN MORTGAGE LOANS WILL BE TRANSFERRED TO THE
MASTER SERVICER WHICH MAY LEAD TO AN INCREASE IN DELINQUENCIES WITH RESPECT TO
SUCH MORTGAGE LOANS
The Master Servicer and _____________ have advised the Depositor that with
respect to a portion of the mortgage loans initially to be serviced by
___________, the servicing thereof is expected to be transferred to the Master
Servicer by _________ __, ____, whereupon the Master Servicer will act in the
capacity as "servicer" under the applicable servicing agreement to the extent
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of such mortgage loans. Such portion of the mortgage loans that are expected to
be subject to such servicing transfer represents approximately _____% of the
mortgage loans, by aggregate principal balance as of _________ __, ____.
Investors should note that when servicing of mortgage loans is transferred,
there may be a rise in delinquencies associated with such transfer].
[YEAR 2000 SYSTEMS RISK COULD AFFECT THE ABILITY OF THE SERVICERS TO PERFORM
THEIR DUTIES
As is the case with most companies using computers in their operations,
each Servicer is faced with the task of completing its compliance goals in
connection with the year 2000 issue. The year 2000 issue is the result of prior
computer programs being written using two digits, rather than four digits, to
define the applicable year. Any of the Servicers' computer programs that have
time- sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. Any such occurrence could result in major computer system
failure or miscalculations. Each Servicer is presently engaged in various
procedures to ensure that its computer systems and software will be year 2000
compliant. However, in the event that the related Servicer or any of its
suppliers, customers, brokers or agents do not successfully and timely achieve
year 2000 compliance, the performance of obligations of such Servicer under the
pooling and servicing agreement could be materially adversely affected].
THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of approximately _____ conventional, one- to
four-family, fixed-rate Mortgage Loans (the "Fixed Rate Mortgage Loans") and
approximately _____ conventional, one-to four-family, adjustable-rate Mortgage
Loans (the "Adjustable Rate Mortgage Loans" and, together with the Fixed Rate
Mortgage Loans, the "Mortgage Loans"), in each case secured by first liens on
residential real properties (the "Mortgaged Properties") and having an aggregate
principal balance as of ________ __, ____ (the "Cut-off Date") of approximately
$___________ after application of scheduled payments due on or before the
Cut-off Date whether or not received, subject to a permitted variance of plus or
minus [5]%. The Mortgage Loans have original terms to maturity of not greater
than [30] years. References to percentages of the Mortgage Loans, unless
otherwise noted, are calculated based on the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date. The Mortgage Loans are secured by first
mortgages or deeds of trust or other similar security instruments creating first
liens on residential properties consisting of attached, detached or
semi-detached, one- to four-family dwelling units, townhouses, individual
condominium units, individual units in planned unit developments and
manufactured housing.
The Mortgage Loans to be included in the Mortgage Pool will be acquired by
the Depositor on the Closing Date from ________________ (the "_________ SPE"),
who will have acquired the Mortgage Loans on the Closing Date from the Seller.
See "--Underwriting Standards; Representations" below and "The ________ SPE" and
"The Seller" herein. The Seller in turn will have acquired the Mortgage Loans on
the Closing Date from [Salomon Brothers Realty Corp.], an affiliate of the
Depositor and the Underwriter. [Salomon Brothers Realty Corp.] will have
acquired the Mortgage Loans directly or indirectly from the Originators.
Investors should note that, in the case of the Adjustable Rate __________
Mortgage Loans, [Salomon Brothers Realty Corp.] will have acquired such Mortgage
Loans on the Closing Date in connection with the termination on the Closing Date
of the trust funds underlying two series of mortgage pass-through certificates
previously issued by the Depositor, which trust funds hold the Adjustable Rate
__________
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Mortgage Loans as of the date of this Prospectus Supplement. Such previously
issued mortgage pass-through certificates were entitled (i) _____________ and
(ii) _____________. Adjustable Rate __________ Mortgage Loans acquired upon the
termination of the Series ____-___ trust fund (the "_____-___ Mortgage Loans")
represent approximately _____% of the Mortgage Loans, and Adjustable Rate
___________ Mortgage Loans acquired upon the termination of the Series ____- ___
trust fund represent approximately _____% of the Mortgage Loans (the "____-___
Mortgage Loans"), in each case by aggregate principal balance as of the Cut-off
Date. [Salomon Brothers Realty Corp.] will have acquired the remainder of the
Mortgage Loans in whole loan purchases directly from ______________ in the case
of ____% of the Mortgage Loans (the "Fixed Rate ______________ Mortgage Loans"),
_______________ in the case of _____% of the Mortgage Loans (the "__________
Mortgage Loans") and ____________ in the case of _____% of the Mortgage Loans
(the "___________ Mortgage Loans"), in each case by aggregate principal balance
as of the Cut-off Date.
Each Adjustable Rate Mortgage Loan provides for semi-annual adjustment to
the Mortgage Rate thereon and for corresponding adjustments to the monthly
payment amount due thereon, in each case on each adjustment date applicable
thereto (each such date, an "Adjustment Date"); provided, however, that in the
case of approximately _____% and approximately _____% of the Adjustable Rate
Mortgage Loans by aggregate principal balance as of the Cut-off Date, the first
Adjustment Date will occur after an initial period of approximately ____ years
and approximately ______ years, respectively, from the date of origination
thereof (each, a "Delayed First Adjustment Mortgage Loan"). The weighted average
month of origination of the _____ year Delayed First Adjustment Mortgage Loans
is _________ _____, and the weighted average month of origination of the ______
year Delayed First Adjustment Mortgage Loans is _________ _____. On each
Adjustment Date, the Mortgage Rate on each Adjustable Rate Mortgage Loan will be
adjusted to equal the sum, rounded as provided in the related Mortgage Note, of
the Index (as described below) and a fixed percentage amount (the "Gross
Margin"); provided, however, that the Mortgage Rate on each Adjustable Rate
Mortgage Loan, including each Delayed First Adjustment Mortgage Loan, will
generally not increase or decrease by more than a specified periodic adjustment
limitation (the "Periodic Rate Cap") on any related Adjustment Date and will not
exceed a specified maximum Mortgage Rate over the life of such Adjustable Rate
Mortgage Loan (the "Maximum Mortgage Rate") or be less than a specified minimum
Mortgage Rate over the life of such Adjustable Rate Mortgage Loan (the "Minimum
Mortgage Rate"). For Adjustment Dates other than the first Adjustment Date after
origination, the Periodic Rate Cap for the majority of the Adjustable Rate
Mortgage Loans is 1.00% per annum, and with respect to substantially all of the
Adjustable Rate Mortgage Loans, for Adjustment Dates other than the first
Adjustment Date after origination, the Periodic Rate Cap will not exceed ____%
per annum. Effective with the first monthly payment due on each Adjustable Rate
Mortgage Loan after each related Adjustment Date, the monthly payment amount
will be adjusted to an amount that will amortize fully the outstanding principal
balance of the related Adjustable Rate Mortgage Loan over its remaining term and
pay interest at the Mortgage Rate as so adjusted. Due to the application of the
Periodic Rate Caps and the Maximum Mortgage Rates, the Mortgage Rate on each
Mortgage Loan, as adjusted on any related Adjustment Date, may be less than the
sum of the Index and Gross Margin, calculated as described herein. See "--The
Index" herein. None of the Adjustable Rate Mortgage Loans permits the related
mortgagor to convert the adjustable Mortgage Rate thereon to a fixed Mortgage
Rate.
The Mortgage Loans generally have scheduled monthly payments due (with
respect to each Mortgage Loan, a "Due Date") on the first day of the month .
Each Mortgage Loan will contain a customary "due-on-sale" clause or will be
assumable by a creditworthy purchaser of the related Mortgaged Property.
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Approximately ______% of the Mortgage Loans provide for payment by the
mortgagor of a Prepayment Charge in limited circumstances on certain voluntary
prepayments in full made within one to five years from the date of origination
of such Mortgage Loans. The amount of the Prepayment Charge is as provided in
the related Mortgage Note. Prepayment Charge obligations generally expire by
their terms after a limited period specified in the related Mortgage Note. The
weighted average month of origination of the Mortgage Loans with Prepayment
Charges is _________ ____. The holders of the Equity Certificates will be
entitled to all Prepayment Charges received on the Mortgage Loans, and such
amount will [not] be available for distribution on the Notes. Under certain
instances, as described in the related Servicing Agreement, the related Servicer
may waive the payment of any otherwise applicable Prepayment Charge, and
accordingly, there can be no assurance that the Prepayment Charges will have any
effect on the prepayment performance of the Mortgage Loans.
None of the Mortgage Loans are Buydown Mortgage Loans.
Approximately ____% of the Mortgage Loans are balloon loans (the "Balloon
Loans"). Each Balloon Loan is a Fixed Rate Mortgage Loan that amortizes over ___
months, but the final payment (the "Balloon Payment") on each Balloon Loan is
due and payable on the ___th month. The amount of the Balloon Payment on each
Balloon Loan is substantially in excess of the amount of the scheduled monthly
payment on such Balloon Loan for the period prior to the Due Date of such
Balloon Payment.
The average principal balance of the Mortgage Loans at origination was
approximately $_______. No Mortgage Loan had a principal balance at origination
greater than approximately $________ or less than approximately $______. The
average principal balance of the Mortgage Loans as of the Cut-off Date was
approximately $_______.
The Mortgage Loans had Mortgage Rates as of the Cut-off Date ranging from
approximately ____% per annum to approximately _____% per annum, and the
weighted average Mortgage Rate was approximately ______% per annum. The weighted
average loan-to-value ratio of the Mortgage Loans at origination was
approximately _____%. At origination, no Mortgage Loan will have a loan-to-value
ratio greater than approximately _____% or less than approximately ____%.
The weighted average remaining term to maturity of the Mortgage Loans will
be approximately __ years and __ months as of the Cut-off Date. None of the
Mortgage Loans will have a first Due Date prior to _______ ____ or after
___________ ____, or will have a remaining term to maturity of less than __
years or greater than __ years as of the Cut-off Date. The latest maturity date
of any Mortgage Loan is __________ ____.
As of the Cut-off Date, the Adjustable Rate Mortgage Loans had Gross
Margins ranging from approximately ____% to approximately ____%, Minimum
Mortgage Rates ranging from approximately ____% per annum to approximately
_____% per annum and Maximum Mortgage Rates ranging from approximately _____%
per annum to approximately _____% per annum. As of the Cut-off Date, the
weighted average Gross Margin was approximately ______%, the weighted average
Minimum Mortgage Rate was approximately _____% per annum and the weighted
average Maximum Mortgage Rate was approximately _______% per annum. The latest
first Adjustment Date following the Cut-off Date on any Adjustable Rate Mortgage
Loan occurs in _______ ____ and the weighted average next Adjustment Date for
all of the Mortgage Loans following the Cut-off Date is _______ ____.
The Mortgage Loans are expected to have the following characteristics as of
the Cut-off Date (the sum in any column may not equal the total indicated due to
rounding):
S-14
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF
ORIGINAL AGGREGATE
NUMBER PRINCIPAL ORIGINAL
RANGE ($) OF LOANS BALANCE PRINCIPAL BALANCE
- --------- -------- -------- ------------------
<S> <C> <C> <C>
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . .
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE ($) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------- -------- ------------------ -----------------
<S> <C> <C> <C>
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . .
</TABLE>
S-15
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
MAXIMUM MORTGAGE RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MAXIMUM NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
MINIMUM MORTGAGE RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MINIMUM NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
GROSS MARGINS OF THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
S-16
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN-TO-VALUE RATIO (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY OCCUPANCY STATUS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
Total..............................................
</TABLE>
S-17
<PAGE>
The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
<TABLE>
<CAPTION>
LOAN PURPOSE OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------ -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
LOAN PROGRAMS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PROGRAM OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------ -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
S-18
<PAGE>
<TABLE>
<CAPTION>
RISK CATEGORIES OF THE FIXED RATE ______________ MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
RISK CATEGORIES OF THE ADJUSTABLE RATE ____________ MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
RISK CATEGORIES OF THE ____________ MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
RISK CATEGORIES OF THE ____________ MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
S-19
<PAGE>
<TABLE>
<CAPTION>
NEXT ADJUSTMENT DATES FOR THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MONTH OF NEXT ADJUSTMENT DATE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
Total...................................................
</TABLE>
THE INDEX
As of any Adjustment Date, the Index applicable to the determination of the
Mortgage Rate on each Mortgage Loan will be the average of the interbank offered
rates for six-month United States dollar deposits in the London market as
published in THE WALL STREET JOURNAL and as of a date as specified in the
related Mortgage Note. In the event that the Index becomes unavailable or
otherwise unpublished, each Servicer will select a comparable alternative index
over which it has no direct control and which is readily verifiable.
The table below sets forth historical average rates of six-month LIBOR for
the months indicated as made available from FNMA, which rates may differ from
the rates of the Index, which is six-month LIBOR as published in THE WALL STREET
JOURNAL as described above. The table does not purport to be representative of
the subsequent rates of the Index which will be used to determine the Mortgage
Rate on each Mortgage Loan.
Year
----
Month
- ----- ---- ---- ---- ---- ---- ---- ----
UNDERWRITING STANDARDS; REPRESENTATIONS
The Mortgage Loans will be acquired by the Depositor on the Closing Date
from the __________ SPE, who will have acquired the Mortgage Loans on the
Closing Date from the Seller.
S-20
<PAGE>
The Seller in turn will have acquired the Mortgage Loans on the Closing Date
from [Salomon Brothers Realty Corp.] [Salomon Brothers Realty Corp.], an
affiliate of the Depositor and the Underwriter, will have acquired the Mortgage
Loans directly or indirectly from the Originators. Investors should note that,
in the case of the Adjustable Rate ___________ Mortgage Loans, [Salomon Brothers
Realty Corp.] will have acquired such Mortgage Loans on the Closing Date in
connection with the termination on the Closing Date of the trust funds
underlying two series of mortgage pass-through certificates previously issued by
the Depositor, which trust funds hold the Adjustable Rate ___________ Mortgage
Loans as of the date of this Prospectus Supplement. Such previously issued
mortgage pass-through certificates were entitled (i) ____________ and (ii)
___________. [Salomon Brothers Realty Corp.] will have acquired the remainder of
the Mortgage Loans in whole loan purchases directly from __________, __________
and __________.
The information set forth below with regard to each Originator's
underwriting standards has been provided to the Depositor or compiled from
information provided to the Depositor by such Originator. With respect to the
information regarding each Originator's underwriting standards, none of the
Issuer, the other Originators, the Depositor, the Master Servicer, the Seller,
the ___________ SPE, the Owner Trustee, the Indenture Trustee or any of their
respective affiliates has made or will make any representation as to the
accuracy or completeness of such information.
[Discussion of each Originator's Underwriting Standards used to originate the
Mortgage Loans follows].
REPRESENTATIONS
The Seller will make representations and warranties as of the Closing Date
with respect to the Mortgage Loans, and will be obligated to repurchase any such
Mortgage Loan in respect of which a material breach of the representations and
warranties it has made has occurred (other than those breaches which have been
cured). For a discussion of the representations and warranties made and the
repurchase obligation, see "Mortgage Loan Program--Representations by or on
behalf of the Seller; Repurchases" in the Prospectus.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted as of the
close of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Notes,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise if the Depositor deems such removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the Mortgage Pool prior to the issuance of the Notes
unless including such mortgage loans would materially alter the characteristics
of the Mortgage Pool as described herein. The Depositor believes that the
information set forth herein will be representative of the characteristics of
the Mortgage Pool as it will be constituted at the time the Notes are issued,
although the range of Mortgage Rates and maturities and certain other
characteristics of the Mortgage Loans may vary.
S-21
<PAGE>
YIELD ON THE NOTES
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Notes, the aggregate amount of
payments on the Notes and the yield to maturity of the Notes will be related to
the rate and timing of payments of principal on the Mortgage Loans. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of such Mortgage Loans and by the rate of principal
prepayments thereon (including for this purpose, payments resulting from
refinancings, liquidations of the Mortgage Loans due to defaults, casualties,
condemnations and repurchases, whether optional or required, by the Depositor,
the Seller or the majority holder of the Equity Certificates, as the case may
be). The Mortgage Loans generally may be prepaid by the mortgagors at any time;
however, as described under "The Mortgage Pool" herein, with respect to
approximately _____% of the Mortgage Loans, by aggregate principal balance as of
the Cut-off Date, a prepayment may subject the related mortgagor to a Prepayment
Charge. Prepayment Charge obligations generally expire by their terms after a
limited period specified in the related Mortgage Note. The weighted average
month of origination of the Mortgage Loans with Prepayment Charges is ________
____.
Prepayments, liquidations and repurchases of the Mortgage Loans will result
in payments in respect of principal to the holders of the class or classes of
Notes then entitled to receive such payments that otherwise would be distributed
over the remaining terms of the Mortgage Loans. See "Maturity and Prepayment
Considerations" in the Prospectus. Since the rates of payment of principal on
the Mortgage Loans will depend on future events and a variety of factors (as
described more fully herein and in the Prospectus under "Yield Considerations"
and "Maturity and Prepayment Considerations"), no assurance can be given as to
such rate or the rate of principal prepayments. The extent to which the yield to
maturity of any class of Notes may vary from the anticipated yield will depend
upon the degree to which such Notes are purchased at a discount or premium and
the degree to which the timing of payments thereon is sensitive to prepayments
on the Mortgage Loans. Further, an investor should consider, in the case of any
such Note purchased at a discount, the risk that a slower than anticipated rate
of principal payments on the Mortgage Loans could result in an actual yield to
such investor that is lower than the anticipated yield and, in the case of any
such Note purchased at a premium, the risk that a faster than anticipated rate
of principal payments could result in an actual yield to such investor that is
lower than the anticipated yield. In general, the earlier a prepayment of
principal is made on the Mortgage Loans, the greater the effect on the yield to
maturity of the Notes. As a result, the effect on an investor's yield of
principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of such Notes would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments.
It is highly unlikely that the Mortgage Loans will prepay at any constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate. Moreover, the timing of prepayments on the Mortgage Loans may
significantly affect the actual yield to maturity on the Notes, even if the
average rate of principal payments experienced over time is consistent with an
investor's expectation.
The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment (and refinancing) would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment on the
S-22
<PAGE>
Mortgage Loans would be expected to decrease. Other factors affecting prepayment
of mortgage loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. In addition, in the case of the Adjustable Rate Mortgage Loans in the
Mortgage Pool, the existence of the applicable Periodic Rate Cap, Maximum
Mortgage Rate and Minimum Mortgage Rate may affect the likelihood of prepayments
resulting from refinancings. There can be no certainty as to the rate of
prepayments on the Mortgage Loans during any period or over the life of the
Notes. See "Yield Considerations" and "Maturity and Prepayment Considerations"
in the Prospectus.
Because principal payments are paid to certain classes of Notes before
other such classes, holders of classes of Notes having a later priority of
payment bear a greater risk of losses (because such Notes will represent an
increasing percentage of the Trust Estate during the period prior to the
commencement of payments of principal thereon) than holders of classes having
earlier priorities for payment of principal. As described under "Description of
the Notes--Principal Payments on the Notes" herein, prior to the Stepdown Date
(as defined herein), all principal payments on the Mortgage Loans will be
allocated to the Class A Notes. Thereafter, as further described herein, subject
to certain delinquency triggers described herein, all principal payments on the
Mortgage Loans will be allocated among all classes of the Notes then outstanding
as described under "Description of the Notes--Principal Payments on the Notes"
herein.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years. In addition, default rates may be higher for
mortgage loans used to refinance an existing mortgage loan. In the event of a
mortgagor's default on a Mortgage Loan, there can be no assurance that recourse
will be available beyond the specific Mortgaged Property pledged as security for
repayment. See "The Mortgage Pool--Underwriting Standards; Representations"
herein.
SPECIAL YIELD CONSIDERATIONS
The Note Interest Rate for each class of the Notes adjusts monthly based on
One-Month LIBOR as described under "Description of the Notes--Calculation of
One-Month LIBOR" herein, subject to the Maximum Note Interest Rate and the
Available Interest Rate. However, the Mortgage Rates on the Fixed Rate Mortgage
Loans are fixed and will not vary with any index, and the Mortgage Rates on the
Adjustable Rate Mortgage Loans adjust semi-annually (after an initial fixed rate
period in the case of Delayed First Adjustment Mortgage Loans) based on the
Index (which may not move in tandem with One-Month LIBOR), subject to periodic
and lifetime limitations as described herein. Investors should note that
approximately _____% of the Mortgage Loans are ____ year Delayed First
Adjustment Mortgage Loans, approximately ____% of the Mortgage Loans are _____
year Delayed First Adjustment Loans and approximately _____% of the Mortgage
Loans are Fixed Rate Mortgage Loans, in each case by aggregate principal balance
as of the Cut-off Date. The weighted average month of origination of the two
year Delayed First Adjustment Mortgage Loans is _____ ____, and the weighted
average month of origination of the ______ year Delayed First Adjustment
Mortgage Loans is ______ ____. Because of the application of the Maximum Note
Interest Rate and the Available Interest Rate, increases in the Note Interest
Rate on the Notes may be limited for extended periods or indefinitely in a
rising interest rate environment. The interest due on the Mortgage Loans during
any Due Period may not equal the amount of interest that would accrue at
One-Month LIBOR plus the applicable spread on the Notes during the related
Interest Accrual Period. In addition, the Index and One-Month LIBOR may respond
differently to economic and market factors. Thus, it is possible, for example,
that if both One-Month LIBOR and the Index rise during the same period,
One-Month LIBOR may rise more rapidly than the Index or may rise higher than the
Index, potentially resulting in Interest Carry Forward Amounts with respect to
one or more
S-23
<PAGE>
classes of Notes. As a result of the foregoing as well as other factors such as
the prepayment behavior of the Mortgage Pool, relative increases in One-Month
LIBOR or relative decreases in the weighted average of the Mortgage Rates on the
Mortgage Loans (i) could cause the Current Interest Payment Amount generated by
the Mortgage Pool to be less than the aggregate of the Interest Payment Amounts
that would otherwise be payable on the Notes, leading one or more classes of
Notes to incur Interest Carry Forward Amounts, or (ii) could cause the Maximum
Note Interest Rate to apply to one or more classes of Notes.
Because the Mortgage Rate for each Adjustable Rate Mortgage Loan will be
adjusted, subject to periodic and lifetime limitations, to equal the sum of the
Index and the related Gross Margin, such rates could be higher than prevailing
market interest rates, possibly resulting in an increase in the rate of
prepayments on the Adjustable Rate Mortgage Loans after their adjustments.
As described under "Description of the Notes--Allocation of Losses;
Subordination", amounts otherwise distributable to holders of the Subordinate
Notes may be made available to protect the holders of the Class A Notes against
interruptions in payments due to certain mortgagor delinquencies, to the extent
not covered by P&I Advances. Such delinquencies may affect the yield to
investors on such classes of Subordinate Notes and, even if subsequently cured,
will affect the timing of the receipt of payments by the holders of such classes
of Subordinate Notes. In addition, a larger than expected rate of delinquencies
or losses will affect the rate of principal payments on each class of
Subordinate Notes. See "Description of the Notes--Principal Payments on the
Notes" herein.
WEIGHTED AVERAGE LIVES
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of each class
of Notes will be influenced by the rate at which principal on the Mortgage Loans
is paid, which may be in the form of scheduled payments or prepayments
(including repurchases and prepayments of principal by the borrower as well as
amounts received by virtue of condemnation, insurance or foreclosure with
respect to the Mortgage Loans), and the timing thereof.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") assumes a prepayment rate for the Mortgage Loans of __%
CPR. The Constant Prepayment Rate model ("CPR") assumes that the outstanding
principal balance of a pool of mortgage loans prepays at a specified constant
annual rate or CPR. In generating monthly cash flows, this rate is converted to
an equivalent constant monthly rate. To assume __% CPR or any other CPR
percentage is to assume that the stated percentage of the outstanding principal
balance of the pool is prepaid over the course of a year. No representation is
made that the Mortgage Loans will prepay at __% CPR or any other rate.
The tables following the next paragraph indicate the percentage of the
initial Note Balance of the Notes that would be outstanding after each of the
dates shown at various percentages of the Prepayment Assumption and the
corresponding weighted average lives of such Notes. The tables are based on the
following assumptions (the "Modeling Assumptions"): (i) the Mortgage Pool
consists of __ Mortgage Loans with the characteristics set forth below, (ii)
payments on such Notes are received, in cash, on the 25th day of each month,
commencing in _______ ____, (iii) the Mortgage Loans prepay at the percentages
of the Prepayment Assumption indicated, (iv) no defaults or delinquencies occur
in the payment by mortgagors of principal and interest on the Mortgage Loans,
(v) none of the majority holder of the Equity Certificates, the Seller, the
Master
S-24
<PAGE>
Servicer, the Servicers or any other person purchases from the Trust Estate any
Mortgage Loan or redeems the Notes pursuant to any obligation or option under
the Indenture, the Servicing Agreements or any other agreement except as
indicated in footnote two in the tables below, and no partial early redemption
of the Notes occurs with respect to the ___________ Mortgage Loans, (vi)
scheduled monthly payments on the Mortgage Loans are received on the first day
of each month commencing in _______ ____, 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 ________ ____, and include 30 days'
interest thereon, (viii) the scheduled monthly payment for each Mortgage Loan is
calculated based on its principal balance, Mortgage Rate, original term to
stated maturity and remaining term to stated maturity such that the Mortgage
Loan will amortize in amounts sufficient to repay the remaining principal
balance of such Mortgage Loan by its remaining term to stated maturity, (ix) the
Notes are purchased on ________ __, ____, (x) the Index remains constant at
_____% per annum and the Mortgage Rate on each Adjustable Rate Mortgage Loan is
adjusted on the next Adjustment Date (and on subsequent Adjustment Dates, if
necessary) to equal the Index plus the applicable Gross Margin, subject to the
applicable Periodic Rate Cap, (xi) One-Month LIBOR remains constant at _____%
per annum, (xii) the monthly payment on each Adjustable Rate Mortgage Loan is
adjusted on the Due Date immediately following the next Adjustment Date (and on
subsequent Adjustment Dates, if necessary) to equal a fully amortizing monthly
payment as described in clause (viii) above and (xiii) the Master Servicing Fee
Rate is as set forth in the Assumed Mortgage Loan Characteristics table below
and the Master Servicing Fee is payable monthly, the Servicing Fee Rate for each
Servicer is equal to ____% per annum and the Servicing Fees are payable monthly,
and the Indenture Trustee Fee Rate is equal to ______% per annum and the
Indenture Trustee Fee is paid monthly.
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
PRINCIPAL ORIGINAL REMAINING MASTER
BALANCE TERM TO TERM NEXT MAXIMUM MINIMUM PERIODIC SERVICING PREPAY
AS OF THE MORTGAGE MATURITY TO MATURITY ADJUSTMENT GROSS MORTGAGE MORTGAGE RATE FEE RATE PENALTY
CUT-OFF DATE RATE(%) (MONTHS) (MONTHS) DATE MARGIN(%) RATE(%) RATE(%) CAP(%) (%) (YES/NO)
------------ ------- -------- -------- ---- --------- ------- ------- ------ --- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the tables. Any such
discrepancy may have an effect upon the percentages of the initial Note Balance
outstanding (and the weighted average lives) of the Notes set forth in the
tables. In addition, since the actual Mortgage Loans included in the Mortgage
Pool will have characteristics that differ from those assumed in preparing the
tables set forth below and since it is not likely the level of the Index or
One-Month LIBOR will remain constant as assumed, the Notes may mature earlier or
later than indicated by the tables. In addition, as described under "Description
of the Notes--Principal Payments on the Notes" herein, the
S-25
<PAGE>
occurrence of the Stepdown Date or a Trigger Event (each as defined herein) will
have the effect of accelerating or decelerating the amortization of the Notes,
affecting the weighted average lives of the Notes. Based on the foregoing
assumptions, the tables indicate the weighted average lives of the Notes and set
forth the percentages of the initial Note Balance of such Notes that would be
outstanding after each of the Payment Dates shown, at various percentages of the
Prepayment Assumption. Neither the prepayment model used herein nor any other
prepayment model or assumption purports to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Mortgage Loans included in the
Mortgage Pool. Variations in the prepayment experience and the balance of the
Mortgage Loans that prepay may increase or decrease the percentages of initial
Note Balances (and weighted average lives) shown in the following tables. Such
variations may occur even if the average prepayment experience of all the
Mortgage Loans equals any of the specified percentages of the Prepayment
Assumption.
S-26
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL NOTE BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A NOTES CLASS M-1 NOTES
------------- ---------------
PAYMENT DATE 0% 15% 28% 35% 45% 0% 15% 28% 35% 45%
- ------------ ----- --- --- --- --- ----- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date..........
......................
......................
......................
......................
Weighted Average
Life
in Years(1).........
Weighted Average
Life
in Years(2).........
CLASS M-2 NOTES CLASS M-3 NOTES
--------------- ---------------
PAYMENT DATE 0% 15% 28% 35% 45% 0% 15% 28% 35% 45%
- ------------ ----- --- --- --- --- ----- --- --- --- ---
Closing Date..........
......................
......................
......................
......................
Weighted Average
Life
in Years(1).........
Weighted Average
Life
in Years(2).........
</TABLE>
- -----------------
(1) The weighted average life of a Note is determined by (a) multiplying
the amount of each payment of principal by the number of years from the
date of issuance of the Note to the related Payment Date, (b) adding
the results and (c) dividing the sum by the initial Note Balance of the
Notes.
(2) Calculated pursuant to footnote one but assumes the majority holder of
the Equity Certificates exercises its option to redeem the Notes when
the aggregate Note Balance has been reduced to less than 20% of the
initial aggregate Note Balance. See "The Indenture and Owner Trust
Agreement--Redemption" herein.
S-27
<PAGE>
There is no assurance that prepayments of the Mortgage Loans will conform
to any of the levels of the Prepayment Assumption indicated in the tables above,
or to any other level, or that the actual weighted average lives of the Notes
will conform to any of the weighted average lives set forth in the tables above.
Furthermore, the information contained in the tables with respect to the
weighted average lives of the Notes is not necessarily indicative of the
weighted average lives that might be calculated or projected under different or
varying prepayment or Index level assumptions.
The characteristics of the Mortgage Loans will differ from those assumed in
preparing the tables above. In addition, it is unlikely that any Mortgage Loan
will prepay at any constant percentage until maturity, that all of the Mortgage
Loans will prepay at the same rate or that the level of the Index will remain
constant or at any level for any period of time. The timing of changes in the
rate of prepayments may significantly affect the actual yield to maturity to
investors, even if the average rate of principal prepayments and the level of
the Index is consistent with the expectations of investors.
YIELD SENSITIVITY OF THE SUBORDINATE NOTES
If on any Payment Date, the Overcollateralized Amount and the Note Balances
of the Class M-3 Notes and the Class M-2 Notes have been reduced to zero, the
yield to maturity on the Class M-1 Notes will become extremely sensitive to
losses on the Mortgage Loans (and the timing thereof) that are covered by
subordination, because the entire amount of any Realized Losses (to the extent
not covered by Net Monthly Excess Cashflow) will be allocated to the Class M-1
Notes. If on any Payment Date, the Overcollateralized Amount and the Note
Balance of the Class M-3 Notes have been reduced to zero, the yield to maturity
on the Class M-2 Notes will become extremely sensitive to losses on the Mortgage
Loans (and the timing thereof) that are covered by subordination, because the
entire amount of any Realized Losses (to the extent not covered by Net Monthly
Excess Cashflow) will be allocated to the Class M-2 Notes. If on any Payment
Date, the Overcollateralized Amount has been reduced to zero, the yield to
maturity on the Class M-3 Notes will become extremely sensitive to losses on the
Mortgage Loans (and the timing thereof) that are covered by subordination,
because the entire amount of any Realized Losses (to the extent not covered by
Net Monthly Excess Cashflow) will be allocated to the Class M-3 Notes. Once
Realized Losses have been allocated to the Subordinate Notes, such Realized
Losses will not be reinstated thereafter. However, Allocated Realized Loss
Amounts may be paid to the holders of such classes of Notes, after certain
distributions to the holders of the Class A Notes and Subordinate Notes with
lower numerical class designations, but before the Equity Certificates are
entitled to any distributions. See "Description of the
Notes--Overcollateralization Provisions" herein.
Investors in the Subordinate Notes should fully consider the risk that
Realized Losses on the Mortgage Loans could result in the failure of such
investors to fully recover their investments. For additional considerations
relating to the yield on the Subordinate Notes, see "Yield Considerations" and
"Maturity and Prepayment Considerations" in the Prospectus.
DESCRIPTION OF THE NOTES
GENERAL
_[Salomon] Trust Series ____-__, Asset-Backed Floating Rate Notes, Series
____-__ (the "Notes") will consist of ____ classes of notes, designated as (i)
the Class A Notes and (ii) the Class
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<PAGE>
M-1 Notes, the Class M-2 Notes and the Class M-3 Notes (collectively, the
"Subordinate Notes"). The Notes will be issued by [Salomon] Trust Series ____-__
(the "Issuer") pursuant to an indenture, dated as of ________ __, ____ (the
"Indenture"), between the Issuer and the Indenture Trustee. Only the Notes are
offered hereby. Trust Certificates, Series ____-__ (the "Equity Certificates")
will be issued pursuant to a trust agreement, dated as of ________ __, ____ (the
"Owner Trust Agreement"), between the Depositor and the Owner Trustee, and will
represent the beneficial ownership interest in the Issuer. The Equity
Certificates are not being offered hereby and will be delivered on the Closing
Date to the ____________, as partial consideration for the conveyance of the
Mortgage Loans by ____________ to the Depositor.
Distributions on the Offered Notes will be made on the 25th day of each
month, or, if such day is not a business day, on the next succeeding business
day, beginning in _______ ____ (each, a "Distribution Date").
The Notes represent non-recourse debt obligations of the Issuer secured by
a trust estate (the "Trust Estate"), which consists primarily of a segregated
pool (the "Mortgage Pool") of conventional, one- to four-family, adjustable-rate
and fixed-rate first lien mortgage loans (the "Mortgage Loans") having an
aggregate principal balance as of _________ __, ____ (the "Cut-off Date") of
approximately $___________, subject to a permitted variance as described herein
under "The Mortgage Pool". Proceeds of the Trust Estate will be the sole source
of payments on the Notes. The Issuer is not expected to have any significant
assets other than the Trust Estate pledged as collateral to secure the Notes.
The Class A Notes, the Class M-1 Notes, the Class M-2 Notes and the Class
M-3 Notes will have an aggregate initial Note Balance of approximately
$___________, approximately $_________, approximately $__________ and
approximately $__________, respectively, in each case subject to a permitted
variance of plus or minus [5]%. The Note Interest Rates on the Notes are
adjustable, subject to the Maximum Note Interest Rate and the Available Interest
Rate, and will be calculated for each Payment Date as described under "--Note
Interest Rate" herein. The "Final Maturity Date" of the Notes is the Payment
Date occurring in _______ ____.
The Notes will be issued, maintained and transferred on the book-entry
records of DTC and its Participants in minimum denominations of $[10,000] and
integral multiples of $[1.00] in excess thereof.
The Notes will initially be represented by one or more global notes
registered in the name of the nominee of DTC (together with any successor
clearing agency selected by the Depositor, the "Clearing Agency"), except as
provided below. The Depositor has been informed by DTC that DTC's nominee will
be CEDE & Co. ("CEDE"). No person acquiring an interest in any class of the
Notes (a "Note Owner") will be entitled to receive a note representing such
person's interest, except as set forth below under "--Definitive Notes". Unless
and until Definitive Notes are issued under the limited circumstances described
herein, all references to actions by Noteholders with respect to the Notes shall
refer to actions taken by DTC upon instructions from its Participants (as
defined below), and all references herein to payments, notices, reports and
statements to Noteholders with respect to the Notes shall refer to payments,
notices, reports and statements to DTC or CEDE, as the registered holder of the
Notes, for payment to Note Owners in accordance with DTC procedures.
See "--Registration" and "--Definitive Notes" herein.
Any Definitive Notes will be transferable and exchangeable at the offices
of the Indenture Trustee. No service charge will be imposed for any registration
of transfer or exchange, but the Indenture Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
S-29
<PAGE>
All payments to holders of the Notes, other than the final payment on any
class of Notes, will be made by or on behalf of the Indenture Trustee to the
persons in whose names such Notes are registered at the close of business on
each Record Date. The "Record Date" for each Payment Date (i) with respect to
the Notes (other than any Definitive Notes) will be the close of business on the
business day immediately preceding such Payment Date or (ii) with respect to the
Definitive Notes will be the close of business on the last business day of the
month preceding the month in which such Payment Date occurs. Such payments will
be made either (a) by check mailed to the address of each such Noteholder as it
appears in the Note Register or (b) upon written request to the Indenture
Trustee at least five business days prior to the relevant Record Date by any
holder of Notes having an aggregate initial Note Balance that is in excess of
the lesser of (i) $5,000,000 or (ii) two-thirds of the initial aggregate Note
Balance of such class of Notes, by wire transfer in immediately available funds
to the account of such Noteholder specified in the request. The final payment on
any class of Notes will be made in like manner, but only upon presentment and
surrender of such Notes at the corporate trust office of the Indenture Trustee
or such other location specified in the notice to Noteholders of such final
payment.
REGISTRATION
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and to facilitate the
clearance and settlement of securities transactions between Participants through
electronic book entries, thereby eliminating the need for physical movement of
notes. Participants include securities brokers and dealers (including Salomon
Smith Barney Inc.), banks, trust companies and clearing corporations. Indirect
access to the DTC system is also available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Note Owners that are not Participants or Indirect Participants but desire
to purchase, sell or otherwise transfer ownership of, or other interests in, the
Notes may do so only through Participants and Indirect Participants. In
addition, Note Owners will receive all payments of principal of and interest on
the Notes from the Indenture Trustee through DTC and DTC Participants. The
Indenture Trustee will forward payments to DTC in same day funds and DTC will
forward such payments to Participants in next day funds settled through the New
York Clearing House. Each Participant will be responsible for disbursing such
payments to Indirect Participants or to Note Owners. Unless and until Definitive
Notes are issued, it is anticipated that the only holder of the Notes will be
CEDE, as nominee of DTC. Note Owners will not be recognized by the Indenture
Trustee as Noteholders, as such term is used in the Indenture, and Note Owners
will be permitted to exercise the rights of Noteholders only indirectly through
DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Notes among Participants and to receive and transmit payments of principal of,
and interest on, the Notes. Participants and Indirect Participants with which
Note Owners have accounts with respect to the Notes similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Note Owners. Accordingly, although Note Owners will not possess
Definitive Notes, the Rules provide a mechanism by which Note Owners through
their Participants and Indirect Participants will receive payments and will be
able to transfer their interest.
S-30
<PAGE>
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and on behalf of certain banks, the ability of a
Note Owner to pledge Notes to persons or entities that do not participate in the
DTC system, or to otherwise act with respect to such Notes, may be limited due
to the absence of physical notes for the Notes. In addition, under a book-entry
format, Note Owners may experience delays in their receipt of payments since
payment will be made by the Indenture Trustee to CEDE, as nominee for DTC.
Under the Rules, DTC will take action permitted to be taken by a Noteholder
under the Indenture only at the direction of one or more Participants to whose
DTC account the Notes are credited. Cedel or the Euroclear Operator (as defined
herein), as the case may be, will take any other action permitted to be taken by
a Noteholder under the Indenture on behalf of a Cedel Participant (as defined
herein) or Euroclear Participant (as defined herein) only in accordance with its
relevant rules and procedures and subject to the ability of the Relevant
Depositary (as defined herein) to effect such actions on its behalf through DTC.
Additionally, under the Rules, DTC will take such actions with respect to
specified Voting Rights only at the direction of and on behalf of Participants
whose holdings of Notes evidence such specified Voting Rights. DTC may take
conflicting actions with respect to Voting Rights to the extent that
Participants whose holdings of Notes evidence such Voting Rights, authorize
divergent action.
DTC management is aware that some computer applications, systems and
similar items for processing data ("Systems") that are dependent upon calendar
dates, including dates before, on and after January 1, 2000, may encounter "Year
2000 problems". DTC has informed its Participants and other members of the
financial community (collectively, the "Industry") that it has developed and is
implementing a program so that its Systems, as the same relate to the timely
payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries and settlement of trades within DTC ("DTC
Services"), continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to, issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on which DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being Year 2000 compliant and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty or contract modification of any kind.
The Issuer, the Originators, the Depositor, the Master Servicer, the
Seller, the ________ SPE, the Owner Trustee, the Indenture Trustee and their
respective affiliates will have no liability for any actions taken by DTC or its
nominee or Cedel or Euroclear, including, without limitation, actions for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Notes held by CEDE, as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
S-31
<PAGE>
DEFINITIVE NOTES
Definitive Notes will be issued to Note Owners or their nominees, rather
than to DTC or its nominee, only if (i) the Depositor advises the Indenture
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as Clearing Agency with respect to the Notes and the
Depositor is unable to locate a qualified successor, (ii) the Depositor, at its
option, advises the Indenture Trustee in writing that it elects to terminate the
book-entry system through DTC, or (iii) after the occurrence of an Event of
Default (as defined herein), Note Owners representing in the aggregate not less
than 51% of the Voting Rights of the Notes advise the Indenture Trustee and DTC
through Participants, in writing, that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the Note Owners' best
interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Indenture Trustee is required to notify all Note Owners through
Participants of the availability of Definitive Notes. Upon surrender by DTC of
the definitive notes representing the Notes and receipt of instructions for
re-registration, the Indenture Trustee will reissue the Notes as Definitive
Notes issued in the respective principal amounts owned by individual Note
Owners, and thereafter the Indenture Trustee will recognize the holders of such
Definitive Notes as Noteholders under the Indenture. Such Definitive Notes will
be issued in minimum denominations of $10,000, except that any beneficial
ownership represented by a Note in an amount less than $10,000 immediately prior
to the issuance of a Definitive Note shall be issued in a minimum denomination
equal to the amount represented by such Note.
BOOK-ENTRY FACILITIES
Note Owners may elect to hold their interests in the Notes through DTC in
the United States or through Cedel or Euroclear in Europe, if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. The Notes of each class will be issued in one or
more notes which equal the aggregate Note Balance of such class and will
initially be registered in the name of Cede, the nominee of DTC. Cedel and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in Cedel's and Euroclear's names on the books of
their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank will act as depositary for Cedel and Chase will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries").
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear
Participants or Cedel Participants on such business day. Cash received in Cedel
or Euroclear as a result of sales of securities by or through a Cedel
Participant or Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant Cedel or
Euroclear cash account only as of the business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other,
S-32
<PAGE>
will be effected in DTC in accordance with DTC rules on behalf of the relevant
European international clearing system by the Relevant Depositary; however, such
cross market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of notes. Transactions may be settled in Cedel in any of 28 currencies,
including United States dollars. Cedel provides to its Cedel Participants, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing. Cedel
interfaces with domestic markets in several countries. As a professional
depository, Cedel is subject to regulation by the Luxembourg Monetary Institute.
Cedel participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Indirect access to Cedel
is also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Cedel
Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
notes and any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 32 currencies, including United States
dollars. Euroclear includes various other services, including securities lending
and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms
S-33
<PAGE>
and Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments with
respect to securities in Euroclear. All securities in Euroclear are held on a
fungible basis without attribution of specific notes to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants, and has no record of or relationship
with persons holding through Euroclear Participants.
Payments with respect to Notes held through Cedel or Euroclear will be
credited to the cash accounts of Cedel Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such payments will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Notes among participants of DTC, Cedel and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time. See Annex I
hereto.
NOTE INTEREST RATES
The Note Interest Rate on the Class A Notes will be a rate per annum equal
to the lesser of (i) One-Month LIBOR plus ____%, in the case of each Payment
Date through and including the Payment Date on which the aggregate Note Balance
is reduced to less than __% of the aggregate initial Note Balance, or One-Month
LIBOR plus ____%, in the case of any Payment Date thereafter, (ii) the Available
Interest Rate for such Payment Date and (iii) _____% per annum (the "Maximum
Note Interest Rate").
The Note Interest Rate on the Class M-1 Notes will be a rate per annum
equal to the lesser of (i) One-Month LIBOR plus ____%, in the case of each
Payment Date through and including the Payment Date on which the aggregate Note
Balance is reduced to less than __% of the aggregate initial Note Balance, or
One-Month LIBOR plus ____%, in the case of any Payment Date thereafter, (ii) the
Available Interest Rate for such Payment Date and (iii) the Maximum Note
Interest Rate.
The Note Interest Rate on the Class M-2 Notes will be a rate per annum
equal to the lesser of (i) One-Month LIBOR plus ____%, in the case of each
Payment Date through and including the Payment Date on which the aggregate Note
Balance is reduced to less than __% of the aggregate initial Note Balance, or
One-Month LIBOR plus ____%, in the case of any Payment Date thereafter, (ii) the
Available Interest Rate for such Payment Date and (iii) the Maximum Note
Interest Rate.
The Note Interest Rate on the Class M-3 Notes will be a rate per annum
equal to the lesser of (i) One-Month LIBOR plus ____%, in the case of each
Payment Date through and including the Payment Date on which the aggregate Note
Balance is reduced to less than __% of the aggregate initial Note Balance, or
One-Month LIBOR plus _____%, in the case of any Payment Date thereafter, (ii)
the Available Interest Rate for such Payment Date and (iii) the Maximum Note
Interest Rate.
See "--Calculation of One-Month LIBOR" herein.
With respect to any class of Notes and any Payment Date, the lesser of the
rate described for such class in clause (i) above and the Maximum Note Interest
Rate is referred to herein as the "Note Accrual Rate" or such class and such
Payment Date. The "Available Interest Rate" for any Payment
S-34
<PAGE>
Date is a rate per annum equal to the fraction, expressed as a percentage, the
numerator of which is (i) the Current Interest Payment Amount for such Payment
Date, and the denominator of which is (ii) the aggregate Note Balance of the
Notes immediately prior to such Payment Date multiplied by the actual number of
days elapsed in the related Interest Accrual Period and divided by 360.
The Note Interest Rate and the Note Accrual Rate for the Notes for the
current related Interest Accrual Period, to the extent it has been determined,
and for the immediately preceding Interest Accrual Period may be obtained by
telephoning the Indenture Trustee at __________.
INTEREST PAYMENTS ON THE NOTES
To the extent of the Current Interest Payment Amount, in the priorities set
forth below, the holders of each class of Notes will be entitled to receive on
each Payment Date interest payments in an amount equal to the Interest Payment
Amount for such class. On each Payment Date, the Current Interest Payment Amount
will be distributed in the following order of priority:
FIRST, to the holders of the Class A Notes, the Interest Payment Amount for
such Notes;
SECOND, to the extent of the Current Interest Payment Amount remaining
after payment of the Interest Payment Amount for the Class A Notes, to the
holders of the Class M-1 Notes, the Interest Payment Amount for such Notes;
THIRD, to the extent of the Current Interest Payment Amount remaining after
payment of the Interest Payment Amounts for the Class A Notes and the Class
M-1 Notes, to the holders of the Class M-2 Notes, the Interest Payment
Amount for such Notes; and
FOURTH, to the extent of the Current Interest Payment Amount remaining
after payment of the Interest Payment Amounts for the Class A Notes, the
Class M-1 Notes and the Class M-2 Notes, to the holders of the Class M-3
Notes, the Interest Payment Amount for such Notes.
The "Current Interest Payment Amount" for any Payment Date is an amount
equal to interest collections or advances on the Mortgage Loans during the
related Due Period (net of the Master Servicing Fee, the Servicing Fees and the
Indenture Trustee Fee).
The "Interest Payment Amount" for the Notes of any class on any Payment
Date is equal to interest accrued during the related Interest Accrual Period on
the Note Balance of such Notes immediately prior to such Payment Date at the
then-applicable Note Interest Rate for such class.
With respect to any Payment Date, to the extent that the aggregate of the
Interest Payment Amounts for the Notes is limited by the Current Interest
Payment Amount for the related Due Period, the holders of certain classes of
Notes may receive an Interest Payment Amount calculated at the Available
Interest Rate rather than at the applicable Note Accrual Rate for such classes
and such Payment Date. With respect to any class of Notes and any Payment Date,
any shortfall in payment of interest represented by the excess, if any, of the
Interest Payment Amount that would be payable on such class at the applicable
Note Accrual Rate over the Interest Payment Amount actually paid on such class
at the Available Interest Rate, together with any such shortfall in payment of
interest remaining unpaid from previous Payment Dates plus interest accrued
thereon at the related Note Accrual Rate, is referred to as an "Interest Carry
Forward Amount". The Interest Carry Forward Amount, if any, for any class of the
Notes for any Payment Date is payable to the extent of available funds remaining
after certain other payments on the Notes on such Payment Date, but before any
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payments on the Equity Certificates on such Payment Date. See
"--Overcollateralization Provisions" herein.
The "Interest Accrual Period" for any Payment Date is the period commencing
on the Payment Date of the month immediately preceding the month in which such
Payment Date occurs (or, in the case of the first period, commencing on the
Closing Date) and ending on the day preceding such Payment Date. All payments of
interest on the Notes will be based on a 360-day year and the actual number of
days in the applicable Interest Accrual Period.
The Note Balance of a Note outstanding at any time represents the then
maximum amount that the holder thereof is entitled to receive as payments
allocable to principal from the cash flow on the Mortgage Loans and the other
assets in the Trust Estate. The "Note Balance" of any class of Notes as of any
date of determination is equal to the initial Note Balance thereof reduced by
the aggregate of (a) all amounts allocable to principal previously distributed
with respect to such Note and (b) any reductions in the Note Balance thereof
deemed to have occurred in connection with allocations of Realized Losses in the
manner described herein.
CALCULATION OF ONE-MONTH LIBOR
With respect to each Interest Accrual Period, on the second business
day preceding such Interest Accrual Period, (each such date, an "Interest
Determination Date"), the Indenture Trustee will determine One-Month LIBOR for
the next Interest Accrual Period. "One Month LIBOR" means, as of any Interest
Determination Date, the London interbank offered rate for one-month U.S. dollar
deposits which appears on Telerate Page 3750 (as defined herein) as of 11:00
a.m. (London time) on such date. If such rate does not appear on Telerate Page
3750, the rate for that day will be determined on the basis of the offered rates
of the Reference Banks (as defined herein) for one-month U.S. dollar deposits,
as of 11:00 a.m. (London time) on such Interest Determination Date. The
Indenture Trustee will request the principal London office of each of the
Reference Banks to provide a quotation of its rate. If on such Interest
Determination Date two or more Reference Banks provide such offered quotations,
One-Month LIBOR for the related Interest Accrual Period shall be the arithmetic
mean of such offered quotations (rounded upwards if necessary to the nearest
whole multiple of 0.0625%). If on such Interest Determination Date fewer than
two Reference Banks provide such offered quotations, One-Month LIBOR for the
related Interest Accrual Period shall be the higher of (x) One-Month LIBOR as
determined on the previous Interest Determination Date and (y) the Reserve
Interest Rate (as defined herein).
As used in this section, "business day" means a day on which banks are open
for dealing in foreign currency and exchange in London and New York City;
"Telerate Page 3750" means the display page currently so designated on the Dow
Jones Telerate Capital Markets Report (or such other page as may replace that
page on that service for the purpose of displaying comparable rates or prices);
"Reference Banks" means leading banks selected by the Indenture Trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market (i) with an established place of business in London, (ii) which have been
designated as such by the Indenture Trustee and (iii) not controlling,
controlled by, or under common control with, the Depositor or the Issuer; and
"Reserve Interest Rate" shall be the rate per annum that the Indenture Trustee
determines to be either (i) the arithmetic mean (rounded upwards if necessary to
the nearest whole multiple of 0.0625%) of the one-month U.S. dollar lending
rates which New York City banks selected by the Indenture Trustee are quoting on
the relevant Interest Determination Date to the principal London offices of
leading banks in the London interbank market or, (ii) in the event that the
Indenture Trustee can determine no such arithmetic mean, the lowest one-month
U.S. dollar lending rate
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which New York City banks selected by the Indenture Trustee are quoting on such
Interest Determination Date to leading European banks.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Indenture Trustee and the Indenture Trustee's calculation of the rate of
interest applicable to the Notes for the related Interest Accrual Period shall
(in the absence of manifest error) be final and binding.
PRINCIPAL PAYMENTS ON THE NOTES
On each Payment Date, the Principal Payment Amount will be distributed to
the holders of the Notes then entitled to payments of principal. The "Principal
Payment Amount" for any Payment Date, other than the Final Maturity Date and the
Payment Date immediately following the acceleration of the Notes due to an Event
of Default, will be the lesser of:
(a) the excess of the Available Payment Amount over the aggregate of
the Interest Payment Amounts for the Notes; and
(b) THE SUM OF:
(i) the principal portion of all scheduled monthly payments on
the Mortgage Loans due during the related Due Period, whether or
not received on or prior to the related Determination Date;
(ii) the principal portion of all proceeds received during the
related Prepayment Period in respect of the repurchase of a
Mortgage Loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) as contemplated in the
Servicing Agreements;
(iii) the principal portion of all other unscheduled
collections, including insurance proceeds, liquidation proceeds
and all full and partial principal prepayments, received during
the related Prepayment Period, to the extent applied as recoveries
of principal on the Mortgage Loans;
(iv) the principal portion of any Realized Losses incurred or
deemed to have been incurred on any Mortgage Loans in the calendar
month preceding such Payment Date to the extent covered by Net
Monthly Excess Cashflow (as defined herein) for such Payment Date;
and
(v) the amount of any Overcollateralization Increase Amount
(as defined herein) for such Payment Date;
MINUS
(vi) the amount of any Overcollateralization Reduction Amount
(as defined herein) for such Payment Date.
The "Principal Payment Amount" for the Final Maturity Date or the Payment Date
immediately following the acceleration of the Notes due to an Event of Default
will equal the amount necessary to reduce the Note Balance of any Notes
outstanding to zero. In no event will the Principal Payment Amount with respect
to any Payment Date be (x) less than zero or (y) greater than the
then-outstanding aggregate Note Balance of the Notes. The Principal Payment
Amount for the first
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Payment Date will include approximately $_________ collected by the Servicers in
respect of prepayments on the Mortgage Loans during the _________ ____
Prepayment Period.
On each Payment Date (a) prior to the Stepdown Date or (b) on which a
Trigger Event is in effect, the Principal Payment Amount shall be distributed:
first, to the Class A Notes, until the Note Balance thereof has been reduced to
zero; second, to the Class M-1 Notes, until the Note Balance thereof has been
reduced to zero; third, to the Class M-2 Notes, until the Note Balance thereof
has been reduced to zero; and fourth, to the Class M-3 Notes, until the Note
Balance thereof has been reduced to zero.
On each Payment Date (a) on or after the Stepdown Date and (b) on which a
Trigger Event is not in effect, the holders of the Class A Notes and the
Subordinate Notes shall be entitled to receive payments in respect of principal
to the extent of the Principal Payment Amount in the following amounts and order
of priority:
FIRST, the lesser of (x) the Principal Payment Amount and (y) the Class A
Principal Payment Amount, shall be distributed to the holders of the Class
A Notes, until the Note Balance thereof has been reduced to zero;
SECOND, the lesser of (x) the excess of (i) the Principal Payment Amount
over (ii) the amount distributed to the holders of the Class A Notes
pursuant to clause FIRST above and (y) the Class M-1 Principal Payment
Amount, shall be distributed to the holders of the Class M-1 Notes, until
the Note Balance thereof has been reduced to zero;
THIRD, the lesser of (x) the excess of (i) the Principal Payment Amount
over (ii) the sum of the amounts distributed to the holders of the Class A
Notes pursuant to clause FIRST above and to the holders of the Class M-1
Notes pursuant to clause SECOND above and (y) the Class M-2 Principal
Payment Amount, shall be distributed to the holders of the Class M-2 Notes,
until the Note Balance thereof has been reduced to zero; and
FOURTH, the lesser of (x) the excess of (i) the Principal Payment Amount
over (ii) the sum of the amounts distributed to the holders of the Class A
Notes pursuant to clause FIRST above, to the holders of the Class M-1 Notes
pursuant to clause SECOND above and to the holders of the Class M-2 Notes
pursuant to clause THIRD above and (y) the Class M-3 Principal Payment
Amount, shall be distributed to the holders of the Class M-3 Notes, until
the Note Balance thereof has been reduced to zero.
On the Final Maturity Date or the Payment Date immediately following the
acceleration of the Notes due to any Event of Default principal will be payable
on each class of Notes in an amount equal to the Note Balance thereof on such
Payment Date. On the Final Maturity Date or the Payment Date immediately
following the acceleration of the Notes due to any Event of Default, amounts in
respect of accrued interest, Interest Carry Forward Amounts and Allocated
Realized Loss Amounts will also be payable on each class of Notes in the
priorities set forth in the Indenture. There can be no assurance, however, that
sufficient funds will be available on any such date to retire the Note Balances
and pay such other amounts.
The allocation of payments in respect of principal to the Class A Notes on
each Payment Date (a) prior to the Stepdown Date or (b) on which a Trigger Event
has occurred, will have the effect of accelerating the amortization of the Class
A Notes while, in the absence of Realized Losses, increasing the respective
percentage interest in the principal balance of the Mortgage Loans evidenced by
the Subordinate Notes and the Overcollateralized Amount. Increasing the
respective percentage interest in the Trust Estate of the Subordinate Notes and
the Overcollateralized Amount
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relative to that of the Class A Notes is intended to preserve the availability
of the subordination provided by the Subordinate Notes and the
Overcollateralized Amount.
The "Available Payment Amount" for any Payment Date is equal to the sum,
net of amounts reimbursable therefrom to the Master Servicer, the Servicers, the
Indenture Trustee or the Owner Trustee, of (i) the aggregate amount of scheduled
monthly payments on the Mortgage Loans due on the related Due Date and received
on or prior to the related Determination Date, after deduction of the Master
Servicing Fee, the Servicing Fees and the Indenture Trustee Fee, (ii) certain
unscheduled payments in respect of the Mortgage Loans, including prepayments,
insurance proceeds, liquidation proceeds and proceeds from repurchases of and
substitutions for the Mortgage Loans occurring during the preceding calendar
month and (iii) all P&I Advances with respect to the Mortgage Loans received for
such Payment Date. The holders of the Equity Certificates will be entitled to
all Prepayment Charges received on the Mortgage Loans and such amounts will not
be available for distribution on the Notes.
The "Class A Principal Payment Amount" for any Payment Date on or after the
Stepdown Date and on which a Trigger Event is not in effect, is an amount equal
to the excess of (x) the Note Balance of the Class A Notes immediately prior to
such Payment Date over (y) the lesser of (A) the product of (i) _____% and (ii)
the aggregate principal balance of the Mortgage Loans as of the last day of the
related Due Period and (B) the aggregate principal balance of the Mortgage Loans
as of the last day of the related Due Period minus $_________.
The "Class M-1 Principal Payment Amount" for any Payment Date on or after
the Stepdown Date and on which a Trigger Event is not in effect, is an amount
equal to the excess of (x) the sum of (i) the Note Balance of the Class A Notes
(after taking into account the payment of the Class A Principal Payment Amount
on such Payment Date) and (ii) the Note Balance of the Class M-1 Notes
immediately prior to such Payment Date over (y) the lesser of (A) the product of
(i) _____% and (ii) the aggregate principal balance of the Mortgage Loans as of
the last day of the related Due Period and (B) the aggregate principal balance
of the Mortgage Loans as of the last day of the related Due Period minus
$_________.
The "Class M-2 Principal Payment Amount" for any Payment Date on or after
the Stepdown Date and on which a Trigger Event is not in effect, is an amount
equal to the excess of (x) the sum of (i) the Note Balance of the Class A Notes
(after taking into account the payment of the Class A Principal Payment Amount
on such Payment Date), (ii) the Note Balance of the Class M-1 Notes (after
taking into account the payment of the Class M-1 Principal Payment Amount on
such Payment Date) and (iii) the Note Balance of the Class M-2 Notes immediately
prior to such Payment Date over (y) the lesser of (A) the product of (i) _____%
and (ii) the aggregate principal balance of the Mortgage Loans as of the last
day of the related Due Period and (B) the aggregate principal balance of the
Mortgage Loans as of the last day of the related Due Period minus $__________.
The "Class M-3 Principal Payment Amount" for any Payment Date on or after
the Stepdown Date and on which a Trigger Event is not in effect, is an amount
equal to the excess of (x) the sum of (i) the Note Balance of the Class A Notes
(after taking into account the payment of the Class A Principal Payment Amount
on such Payment Date), (ii) the Note Balance of the Class M-1 Notes (after
taking into account the payment of the Class M-1 Principal Payment Amount on
such Payment Date), (iii) the Note Balance of the Class M-2 Notes (after taking
into account the payment of the Class M-2 Principal Payment Amount on such date)
and (iv) the Note Balance of the Class M-3 Notes immediately prior to such
Payment Date over (y) the lesser of (A) the product of (i) _____% and (ii) the
aggregate principal balance of the Mortgage Loans as of the last day of the
related Due Period and (B) the aggregate principal balance of the Mortgage Loans
as of the last day of the related Due Period minus $__________.
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The "Stepdown Date" for any Payment Date is the later to occur of (x) the
Payment Date occurring in _______ ____ and (y) the first Payment Date on which
the Credit Enhancement Percentage (calculated for this purpose only after taking
into account payments of principal on the Mortgage Loans, but prior to any
payment of the Principal Payment Amount to the Notes then entitled to payments
of principal on such Payment Date) is greater than or equal to _____%.
With respect to any Payment Date, a "Trigger Event" is in effect if the
percentage obtained by dividing (x) the principal amount of Mortgage Loans
delinquent 60 days or more by (y) the aggregate principal balance of the
Mortgage Loans, in each case, as of the last day of the previous calendar month,
exceeds the lesser of (i) _____% of the Credit Enhancement Percentage and (ii)
______%.
The "Credit Enhancement Percentage" for any Payment Date is the percentage
obtained by dividing (x) the sum of the Overcollateralized Amount and the
aggregate Note Balance of the Subordinate Notes by (y) the aggregate principal
balance of the Mortgage Loans, calculated after taking into account payments of
principal on the Mortgage Loans and payment of the Principal Payment Amount to
the Notes on such Payment Date.
CREDIT ENHANCEMENT
The Credit Enhancement provided for the benefit of the holders of the Notes
consists of subordination, as described below, and overcollateralization, as
described under "--Overcollateralization Provisions" herein.
The rights of the holders of the Subordinate Notes and the Equity
Certificates to receive payments will be subordinated, to the extent described
herein, to the rights of the holders of the Class A Notes. This subordination is
intended to enhance the likelihood of regular receipt by the holders of the
Class A Notes of the full amount of interest and principal to which they are
entitled and to afford such holders protection against Realized Losses.
The protection afforded to the holders of the Class A Notes by means of the
subordination of the Subordinate Notes and the Equity Certificates will be
accomplished by (i) the preferential right of the holders of the Class A Notes
to receive on any Payment Date, prior to payment on the Subordinate Notes and
the Equity Certificates, payments in respect of interest and principal, subject
to available funds, and (ii) if necessary, the right of the holders of the Class
A Notes to receive future payments of amounts that would otherwise be payable to
the holders of the Subordinate Notes and the Equity Certificates.
In addition, the rights of the holders of Subordinate Notes with lower
numerical class designations will be senior to the rights of holders of
Subordinate Notes with higher numerical class designations, and the rights of
the holders of all of the Subordinate Notes to receive payments in respect of
the Mortgage Loans will be senior to the rights of the holders of the Equity
Certificates, in each case to the extent described herein. This subordination is
intended to enhance the likelihood of regular receipt by the holders of
Subordinate Notes with lower numerical class designations relative to the
holders of Subordinate Notes with higher numerical class designations (and by
the holders of all of the Subordinate Notes relative to the holders of the
Equity Certificates) of the full amount of interest and principal to which they
are entitled and to afford such holders protection against Realized Losses, as
described under "--Allocation of Realized Losses" herein.
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OVERCOLLATERALIZATION PROVISIONS
The weighted average Mortgage Rate for the Mortgage Loans (adjusted to
reflect the Master Servicing Fee, the Servicing Fees and the Indenture Trustee
Fee payable from interest received or advanced on the Mortgage Loans) is
generally expected to be higher than the weighted average of the Note Interest
Rates on the Notes, thus generating excess interest collections which, in the
absence of Realized Losses, will not be necessary to fund interest payments on
the Notes. The Indenture requires that, on each Payment Date, the Net Monthly
Excess Cashflow, if any, be applied on such Payment Date as an accelerated
payment of principal on class or classes of Notes then entitled to receive
payments in respect of principal, but only to the limited extent hereafter
described. The "Net Monthly Excess Cashflow" for any Payment Date is equal to
the sum of (a) any Overcollateralization Reduction Amount and (b) the excess of
(x) the Available Payment Amount for such Payment Date over (y) the sum for such
Payment Date of the aggregate of the Interest Payment Amounts payable to the
holders of the Notes and the sum of the amounts described in clauses (b)(i)
through (iii) of the definition of Principal Payment Amount.
With respect to any Payment Date, any Net Monthly Excess Cashflow (or, in
the case of clause FIRST below, the Net Monthly Excess Cashflow exclusive of any
Overcollateralization Reduction Amount) shall be paid as follows:
FIRST, to the holders of the class or classes of Notes then entitled to
receive payments in respect of principal, in an amount equal to the
principal portion of any Realized Losses incurred or deemed to have been
incurred on the Mortgage Loans;
SECOND, to the holders of the class or classes of Notes then entitled to
receive payments in respect of principal, in an amount equal to the
Overcollateralization Increase Amount;
THIRD, to the holders of the Class A Notes, in an amount equal to the
Interest Carry Forward Amount for such Notes;
FOURTH, to the holders of the Class M-1 Notes, in an amount equal to the
Interest Carry Forward Amount for such Notes;
FIFTH, to the holders of the Class M-1 Notes, in an amount equal to the
Allocated Realized Loss Amount for such Notes;
SIXTH, to the holders of the Class M-2 Notes, in an amount equal to the
Interest Carry Forward Amount for such Notes;
SEVENTH, to the holders of the Class M-2 Notes, in an amount equal to the
Allocated Realized Loss Amount for such Notes;
EIGHTH, to the holders of the Class M-3 Notes, in an amount equal to the
Interest Carry Forward Amount for such Notes;
NINTH, to the holders of the Class M-3 Notes, in an amount equal to the
Allocated Realized Loss Amount for such Notes; and
TENTH, to the holders of the Equity Certificates as provided in the
Indenture.
With respect to any Payment Date, the excess, if any, of (a) the aggregate
principal balance of the Mortgage Loans immediately following such Payment Date
over (b) the Note Balance of the
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Notes, after taking into account the payment of the amounts described in clauses
(b)(i) through (iv) of the definition of Principal Payment Amount on such
Payment Date, is the "Overcollateralized Amount" for the Notes as of such
Payment Date. As of the Closing Date, the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date will exceed the aggregate Note Balance of
the Notes by an amount equal to approximately $_________. Such amount represents
approximately ____% of the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date, which is the initial amount of overcollateralization
required to be provided by the Mortgage Pool under the Indenture. Under the
Indenture, the Overcollateralized Amount is required to be maintained at the
"Required Overcollateralized Amount". In the event that Realized Losses are
incurred on the Mortgage Loans, such Realized Losses may result in an
overcollateralization deficiency since such Realized Losses will reduce the
principal balance of the Mortgage Loans without a corresponding reduction to the
aggregate Note Balance of the Notes. In such event, the Indenture requires the
payment from Net Monthly Excess Cashflow, subject to available funds, of an
amount equal to any such overcollateralization deficiency, which shall
constitute a principal payment on the Notes in reduction of the Note Balances
thereof. This has the effect of accelerating the amortization of the Notes
relative to the amortization of the Mortgage Loans, and of increasing the
Overcollateralized Amount. With respect to the Notes and any Payment Date, any
amount of Net Monthly Excess Cashflow actually applied as an accelerated payment
of principal to the extent the Required Overcollateralized Amount exceeds the
Overcollateralized Amount as of such Payment Date is the "Overcollateralization
Increase Amount".
On and after the Stepdown Date and provided that a Trigger Event is not in
effect, the Required Overcollateralized Amount may be permitted to decrease
("step down") below the initial $___________ level to a level equal to
approximately ____% of the then current aggregate outstanding principal balance
of the Mortgage Loans (after giving effect to principal payments to be
distributed on such Payment Date), subject to a floor of $_________. In the
event that the Required Overcollateralized Amount is permitted to step down on
any Payment Date, the Indenture provides that a portion of the principal which
would otherwise be distributed to the holders of the Notes on such Payment Date
shall be distributed to the holders of the Equity Certificates, subject to the
priorities set forth above. With respect to each such Payment Date, the
Principal Payment Amount will be reduced by the amount by which the
Overcollateralized Amount exceeds the Required Overcollateralized Amount (the
"Overcollateralization Reduction Amount") after taking into account all other
payments to be made on such Payment Date, which amount shall be distributed as
Net Monthly Excess Cashflow pursuant to the priorities set forth above. This has
the effect of decelerating the amortization of the Notes relative to the
amortization of the Mortgage Loans, and of reducing the Overcollateralized
Amount. However, if on any Payment Date a Trigger Event is in effect, the
Required Overcollateralized Amount will not be permitted to step down on such
Payment Date.
ALLOCATION OF LOSSES; SUBORDINATION
With respect to any defaulted Mortgage Loan that is finally liquidated
through foreclosure sale, disposition of the related Mortgaged Property (if
acquired by deed in lieu of foreclosure) or otherwise, the amount of loss
realized, if any, will equal the portion of the unpaid principal balance
remaining, if any, plus interest thereon through the last day of the month in
which such Mortgage Loan was finally liquidated, after application of all
amounts recovered (net of amounts reimbursable to the Servicers for P&I
Advances, servicing advances and Servicing Fees) towards interest and principal
owing on the Mortgage Loan. Such amount of loss realized and any Bankruptcy
Losses are referred to herein as "Realized Losses".
Any Realized Loss on the Mortgage Loans will be allocated on any Payment
Date, first, to Net Monthly Excess Cashflow, second, to the Overcollateralized
Amount, third, to the Class M-3 Notes,
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fourth, to the Class M-2 Notes, and fifth, to the Class M-1 Notes. With respect
to any class of Subordinate Notes and any Payment Date, the sum of (i) any such
Realized Loss allocated to such class of Subordinate Notes on such Payment Date
and (ii) any Allocated Realized Loss Amount for such class remaining unpaid from
previous Payment Dates plus accrued interest thereon at the Note Accrual Rate
for such class is referred to as an "Allocated Realized Loss Amount". The
Indenture does not permit the allocation of Realized Losses to the Class A
Notes. Investors in the Class A Notes should note that although Realized Losses
cannot be allocated to the such Notes, under certain loss scenarios there will
not be enough principal and interest collected on the Mortgage Loans to pay the
Class A Notes all interest and principal amounts to which they are then
entitled.
Once Realized Losses have been allocated to the Subordinate Notes, such
Realized Losses will not be reinstated thereafter. However, Allocated Realized
Loss Amounts may be paid to the holders of such classes of Notes, after certain
distributions to the holders of the Class A Notes and Subordinate Notes with
lower numerical class designations, but before the Equity Certificates are
entitled to any distributions.
Any allocation of a Realized Loss to a Note will be made by reducing the
Note Balance thereof by the amount so allocated on the Payment Date in the month
following the calendar month in which such Realized Loss was incurred.
Notwithstanding anything to the contrary described herein, in no event will the
Note Balance of any Note be reduced more than once in respect of any particular
amount both (i) allocable to such Notes in respect of Realized Losses and (ii)
payable as principal to the holder of such Notes from Net Monthly Excess
Cashflow.
A "Bankruptcy Loss" is a Deficient Valuation or a Debt Service Reduction.
With respect to any Mortgage Loan, a "Deficient Valuation" is a valuation by a
court of competent jurisdiction of the Mortgaged Property in an amount less than
the then outstanding indebtedness under the Mortgage Loan, which valuation
results from a proceeding initiated under the United States Bankruptcy Code. A
"Debt Service Reduction" is any reduction in the amount which a mortgagor is
obligated to pay on a monthly basis with respect to a Mortgage Loan as a result
of any proceeding initiated under the United States Bankruptcy Code, other than
a reduction attributable to a Deficient Valuation.
P&I ADVANCES
Subject to the following limitations, each Servicer will be obligated to
advance or cause to be advanced on or before each Payment Date its own funds, or
funds in the Certificate Account that are not included in the Available Payment
Amount for such Payment Date, in an amount equal to the aggregate of all
payments of principal and interest, net of the related Servicing Fee, that were
due during the related Due Period on the Mortgage Loans serviced by such
Servicer and that were delinquent on the related Determination Date, plus
certain amounts representing assumed payments not covered by any current net
income on the Mortgaged Properties acquired by foreclosure or deed in lieu of
foreclosure (any such advance, a "P&I Advance").
P&I Advances are required to be made only to the extent they are deemed by
the related Servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making such P&I Advances is to
maintain a regular cash flow to the Noteholders, rather than to guarantee or
insure against losses. The Servicers will not be required to make any P&I
Advances with respect to reductions in the amount of the monthly payments on the
Mortgage Loans due to bankruptcy proceedings or the application of the Relief
Act.
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All P&I Advances will be reimbursable to the related Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which such unreimbursed P&I Advance was made. In addition, any P&I
Advances previously made in respect of any Mortgage Loan that are deemed by the
related Servicer to be nonrecoverable from related late collections, insurance
proceeds or liquidation proceeds may be reimbursed to the related Servicer out
of any funds in the Certificate Account prior to the payments on the Notes. In
the event that any Servicer fails in its obligation to make any required
advance, the Master Servicer will be obligated to make such advance, and in the
event that the Master Servicer fails in its obligation to make such advance, the
Indenture Trustee will be obligated to make such advance, in each such case to
the extent required in the related Servicing Agreement.
THE ISSUER
[Salomon] Trust Series ____-__ is a business trust formed under the laws of
the State of Delaware pursuant to the Owner Trust Agreement, dated as of
________ __, ____, between the Depositor and the Owner Trustee for the
transactions described in this Prospectus Supplement. The Owner Trust Agreement
constitutes the "governing instrument" under the laws of the State of Delaware
relating to business trusts. After its formation, the Issuer will not engage in
any activity other than (i) acquiring and holding the Mortgage Loans and the
proceeds therefrom, (ii) issuing the Notes and the Equity Certificates, (iii)
making payments on the Notes and the Equity Certificates and (iv) engaging in
other activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith. The Issuer is not
expected to have any significant assets other than the Trust Estate pledged as
collateral to secure the Notes. The assets of the Issuer will consist of the
Mortgage Loans pledged to secure the Notes. The Issuer's principal offices are
in __________, ________, in care of ________________, as Owner Trustee.
THE SELLER
__________________ (the "Seller"), in its capacity as mortgage loan seller,
will sell the Mortgage Loans to the ___________ pursuant to a Mortgage Loan
Purchase Agreement, dated as of _________ __, ____, between the Seller and the
__________ SPE.
THE __________ SPE
________________ (the "_________ SPE"), a special purpose entity that is an
affiliate of the Issuer and the Seller, will convey the Mortgage Loans to the
Depositor pursuant to an Ownership Transfer Agreement, dated as of ________ __,
____, between the _______ SPE and the Depositor.
S-44
<PAGE>
THE OWNER TRUSTEE
_________________ is the Owner Trustee under the Owner Trust Agreement. The
Owner Trustee is a _________ banking corporation and its principal offices are
located in _____________.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Noteholders under
the Owner Trust Agreement under any circumstances, except for the Owner
Trustee's own misconduct, gross negligence, bad faith or grossly negligent
failure to act or in the case of the inaccuracy of certain representations made
by the Owner Trustee in the Owner Trust Agreement. All persons into which the
Owner Trustee may be merged or with which it may be consolidated or any person
resulting from such merger or consolidation shall be the successor of the Owner
Trustee under the Owner Trust Agreement.
The principal compensation to be paid to the Owner Trustee in respect of
its obligations under the Owner Trust Agreement will have been paid by or on
behalf of the Issuer on or prior to the Closing Date.
THE INDENTURE TRUSTEE
____________________, a ____________ banking association, will act as
Indenture Trustee for the Notes pursuant to the Indenture. The Indenture
Trustee's offices for notices under the Indenture are located at
______________________________ and its telephone number is ______________.
The principal compensation to be paid to the Indenture Trustee in respect
of its obligations under the Indenture (the "Indenture Trustee Fee") will be
equal to (i) accrued interest at ________% per annum (the "Indenture Trustee Fee
Rate") on the Scheduled Principal Balance of each Mortgage Loan, payable
monthly, and (ii) any interest or other income earned on funds held in the
Certificate Account (to the extent not payable as compensation to the related
Servicer) as provided in the Indenture. The "Scheduled Principal Balance" of any
Mortgage Loan as of any date of determination is equal to the principal balance
thereof as of the Cut-off Date (after application of all scheduled principal
payments due on or before the Cut-off Date, whether or not received), reduced by
(x) the principal portion of all monthly payments due on or before the date of
determination, whether or not received, (y) all amounts allocable to unscheduled
principal that were received prior to the calendar month in which the date of
determination occurs, and (z) any Bankruptcy Loss occurring out of a Deficient
Valuation that was incurred prior to the calendar month in which the date of
determination occurs.
The Indenture will provide that the Indenture Trustee may withdraw funds
from the Certificate Account (i) to reimburse itself for all reasonable
out-of-pocket expenses incurred or made by it, including costs of collection and
including reasonable compensation and expenses, disbursements and advances of
its agents, counsel, accountants and experts and (ii) to reimburse the Owner
Trustee for all reasonable out-of pocket expenses incurred or made by the Owner
Trustee for all services rendered by the Owner Trustee it in the Owner Trustee's
execution of the trust created under the Owner Trust Agreement and in the
exercise and performance of any of the Owner Trustee's powers and duties under
the Owner Trust Agreement. Under the Indenture, the Issuer (from the assets of
the Trust Estate) shall indemnify the Indenture Trustee against any and all
loss, liability or expense (including reasonable attorneys' fees) incurred by
the Indenture Trustee in
S-45
<PAGE>
connection with the administration of the Trust Estate and the performance of
the Indenture Trustee's duties hereunder. The Issuer is not required, however,
to reimburse any expense or indemnify against any loss, liability or expense
incurred by the Indenture Trustee through the Indenture Trustee's own willful
misconduct, negligence or bad faith.
THE SERVICING AGREEMENTS
The following summary describes certain terms of the Servicing Agreements,
dated as of __________ __, ____ (the "Servicing Agreements"), among the Issuer,
the Indenture Trustee, the Master Servicer and the related Servicer. The summary
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, the provisions of the Servicing Agreements. Whenever particular
sections or defined terms of the Servicing Agreements are referred to, such
sections or defined terms are thereby incorporated herein by reference. The
Depositor will provide to a prospective or actual Noteholder without charge, on
written request, a copy (without exhibits) of the Servicing Agreements. Requests
should be addressed to the Secretary, Salomon Brothers Mortgage Securities VII,
Inc., Seven World Trade Center, New York, New York 10048.
ORIGINATORS AND SERVICERS
[ORIGINATOR]
The information set forth in the following paragraphs has been provided by
_______________. None of the Issuer, the other Originators, the Depositor, the
Master Servicer, the Seller, the _________ SPE, the Owner Trustee, the Indenture
Trustee or any of their respective affiliates has made or will make any
representation as to the accuracy or completeness of such information. The
following table summarizes ____________'s 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 __________ from other
loan originators.
<TABLE>
<CAPTION>
SIX-MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
---------------------------------------------------------------------------------------------------
<S> <C>
Originations.........
Sales................
</TABLE>
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 ___________ that were originated or purchased by __________:
S-46
<PAGE>
<TABLE>
<CAPTION>
AT
JUNE
AT DECEMBER 31, 30,
---------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C>
Total Outstanding Principal
Balance...............................
Number of Loans.........................
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal
Balance.......................
Delinquency as a Percentage
of Number of Loans............
61-90 Days
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
91 Days or More
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
Total Delinquencies:
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
FORECLOSURES PENDING(1)
Principal Balance...............
Number of Loans.................
Foreclosures Pending as a
Percentage of Total
Outstanding Principal
Balance.......................
Foreclosures Pending as
a Percentage of Number of
Loans...........................
NET LOAN LOSSES for the
Period(2).............................
NET LOAN LOSSES as a
Percentage of Total Outstanding
Principal Balance.....................
</TABLE>
S-47
<PAGE>
- ---------------
(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 ________ have been
conveyed to REMIC trust funds.
[ORIGINATOR]
The information set forth in the following paragraphs has been provided by
______________. None of the Issuer, the other Originators, the Depositor, the
Master Servicer, the Seller, the _________ SPE, the Owner Trustee, the Indenture
Trustee or any of their respective affiliates has made or will make any
representation as to the accuracy or completeness of such information.
[ORIGINATOR]
The information set forth in the following paragraphs has been provided by
________________ ("____________"). None of the Issuer, the other Originators,
the Depositor, the Master Servicer, the Seller, the __________ SPE, the Owner
Trustee, the Indenture Trustee or any of their respective affiliates has made or
will make any representation as to the accuracy or completeness of such
information. Pursuant to the related Servicing Agreement, ____________ will
serve as servicer for the Mortgage Loans sold indirectly by it to the Depositor
(in such capacity, with respect to such Mortgage Loans, the "Servicer").
Notwithstanding the foregoing, the Master Servicer and ___________ have advised
the Depositor that with respect to a portion of the Mortgage Loans initially to
be serviced by _____________, the servicing thereof is expected to be
transferred to the Master Servicer, whereupon the Master Servicer will act in
the capacity as "Servicer" under the applicable Servicing Agreement to the
extent of such Mortgage Loans. Such portion of the Mortgage Loans that is
expected to be subject to such servicing transfer represents approximately
_____% of the Mortgage Loans, by aggregate principal balance as of the Cut-off
Date.
The table below sets forth the overall delinquency experience on
residential one-to-four-family mortgage loans for non-conforming credits which
are currently serviced by ____________. No mortgage loan is considered
delinquent for purposes of the table until a payment is 30 days past due on a
contractual basis. It should be noted that ______________ commenced its
servicing activities for these types of non-conforming mortgage loans in ____
and that its portfolio consists of mortgage loans that were originated during
the periods from ____ to ____ in accordance with the underwriting standards it
had established or other underwriting guidelines that it determined were
substantially similar. The information in the table below is not intended to
indicate or predict the expected delinquency experience on past, current or
future pools of mortgage loans for which __________ _ is the primary servicer.
S-48
<PAGE>
<TABLE>
<CAPTION>
----------------
NON-CONFORMING MORTGAGE LOAN PORTFOLIO EXPERIENCE
Year Ended December 31, Six Months Ended
----------------------- ----------------
1995 1996 1997 June 30, 1998
---- ---- ---- -------------
<S> <C>
Total principal balance (at period end).........
Average portfolio principal balance(1)..........
DELINQUENCIES (at period end)(2) 30-59 Days:
Principal balance.............................
Percent(3)....................................
60-89 Days:
Principal balance.............................
Percent(3)....................................
90 Days or More:
Principal balance.............................
Percent(3)....................................
Total Delinquencies:
Principal balance.............................
Percent(3)....................................
FORECLOSURES
Principal balance.............................
Percent(3)....................................
REO (at period end).............................
Net gains/(losses) on liquidated loans..........
Percentage of net gains/(losses) on
liquidated loans (based on average
portfolio principal balance)..................
</TABLE>
- ----------
(1) Calculated by summing the actual outstanding principal balances at the end
of each month and dividing the total by the number of months in the
applicable period.
(2) Delinquency information does not include loans in foreclosure or REO.
(3) Percentages are expressed based upon the total outstanding principal
balance at the end of the indicated period.
(4) Annualized.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the mortgage portfolios set forth in the foregoing tables. The statistics shown
above represent the delinquency experience for the indicated mortgage servicing
portfolios only for the periods presented, whereas the aggregate delinquency
experience on the Mortgage Loans comprising the Mortgage Pool will depend on the
results obtained over the life of the Mortgage Pool. The mortgage servicing
portfolios set forth above include mortgage loans that were originated using a
variety of different underwriting procedures and standards which may have been
more selective. They include mortgage loans with a variety of payment and other
characteristics (including geographic location) which are not necessarily
representative of the payment and other characteristics of the Mortgage Loans
comprising the Mortgage Pool. It should be noted that if the residential real
estate market should experience an overall decline in property values, the
actual rates of delinquencies and foreclosures could be higher than those
previously experienced by ______________. In addition, adverse economic
conditions may affect the timely payment by mortgagors of scheduled payments of
principal and interest on the Mortgage Loans and, accordingly, the actual rates
of delinquencies and foreclosures with respect to the Mortgage Pool.
S-49
<PAGE>
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to each Servicer in respect of its
servicing activities for the Notes will be equal to accrued interest at the
Servicing Fee Rate of ____% per annum with respect to each Mortgage Loan
serviced by it for each calendar month on the same principal balance on which
interest on such Mortgage Loan accrues for such calendar month (the "Servicing
Fee"). As additional servicing compensation, each Servicer is entitled to retain
all assumption fees and late payment charges in respect of Mortgage Loans
serviced by it, to the extent collected from mortgagors, together with any
interest or other income earned on funds held in the Certificate Account (to the
extent not payable as compensation to the Indenture Trustee) and any escrow
accounts in respect of Mortgage Loans serviced by it.
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of such prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan, the
mortgagor is not charged interest on the amount of such prepayment for the month
in which such prepayment is made. Each Servicer is obligated to pay from its own
funds ("Compensating Interest") only those interest shortfalls attributable to
full and partial prepayments by the mortgagors on the Mortgage Loans serviced by
it ("Prepayment Interest Shortfall"), but only to the extent of its aggregate
Servicing Fee for the related Due Period. Each Servicer is obligated to pay
certain insurance premiums and certain ongoing expenses associated with the
Mortgage Pool in respect of Mortgage Loans serviced by it and incurred by such
Servicer in connection with its responsibilities under the related Servicing
Agreement and is entitled to reimbursement therefor as provided in such
Servicing Agreement. With respect to the Mortgage Loans serviced by _________,
_________ will also be entitled to reimbursement of servicing advances and
principal and interest advances made by it as servicer of such Mortgage Loans
prior to the Cut-off Date. See "Description of the Securities--Retained
Interest; Servicing Compensation and Payment of Expenses" in the Prospectus for
information regarding expenses payable by the Servicers.
SALE OF DEFAULTED MORTGAGE LOANS
If consent to the operation of the provisions described below shall have
been given by the related Servicer (unless the Directing Holder, as defined
below, is the Seller or an affiliate thereof, in which case such consent shall
not be required), then with respect to any Mortgage Loan that is delinquent in
excess of the number of days provided in the related Servicing Agreement, (i)
the holder of a majority in Percentage Interest of the Equity Certificates (the
"Directing Holder") may direct the related Servicer to commence foreclosure and
(ii) prior to commencement of foreclosure of any Mortgage Loan, such Servicer
will notify the Directing Holder of such proposed foreclosure in order to permit
the Directing Holder the right to instruct such Servicer to delay the proposed
foreclosure. In the case of the exercise by the Directing Holder of the right to
direct the related Servicer pursuant to either clause (i) or clause (ii) above,
the Directing Holder will provide to such Servicer an appraisal of the related
Mortgaged Property (the "Loan Appraisal"). Within two business days of
instructing the related Servicer to commence or delay foreclosure, the Directing
Holder will deposit in a segregated account maintained with the related Servicer
(the related "Collateral Account") for the benefit of the Noteholders an amount
equal to ___% of the Valuation (as defined below) of the related Mortgage Loan
plus three months' interest at the related Mortgage Rate. While foreclosure is
delayed pursuant to the direction of the Directing Holder, the Directing Holder
may direct the related Servicer to proceed with foreclosure at anytime.
With respect to any election by the Directing Holder to delay foreclosure,
the "Valuation" of any Mortgage Loan shall be the greater of the outstanding
principal balance thereof and the fair market value thereof as provided in the
related Loan Appraisal. With respect to any election by the Directing Holder to
commence foreclosure, the "Valuation" of any Mortgage Loan shall equal the
outstanding principal balance thereof.
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<PAGE>
Upon the liquidation of the related Mortgage Loan or the disposition of the
related Mortgaged Property in accordance with the requirements set forth in the
related Servicing Agreement, the related Servicer will calculate the amount, if
any, by which the Valuation exceeds the actual sales price obtained for the
related Mortgage Loan or the Mortgaged Property, as the case may be, and the
related Servicer will withdraw the amount of such excess from the Collateral
Account and deposit such amount into the related Certificate Account. If the
amount realized pursuant to the above-described procedures exceeds the
Valuation, the related Servicer will deposit immediately upon realization from
such proceeds such excess into the Certificate Account. The related Servicer
shall apply all such amounts as additional liquidation proceeds pursuant to the
related Servicing Agreement. If any election to delay foreclosure is to be
extended for a period in excess of three months from the Directing Holder's
direction to the related Servicer to delay foreclosure, the Directing Holder
will be required to deposit in the Collateral Account in advance the amount of
each additional month's interest at the related Mortgage Rate. If the
above-described procedures do not result in the Mortgage Loan being brought
current within six months of the Directing Holder's direction to the related
Servicer to delay foreclosure, the Directing Holder will be required to either
(i) purchase the Mortgage Loan for a purchase price equal to the fair market
value thereof as shown on the Loan Appraisal or (ii) allow the related Servicer
to proceed with the commencement of foreclosure. Should the Directing Holder
elect to purchase the Mortgage Loan, the related Servicer will first apply funds
on deposit in the related Collateral Account towards such purchase price; any
shortage will be paid by the Directing Holder and any excess will be returned to
it.
With respect to any Mortgage Loan as to which the Directing Holder has
directed the related Servicer to commence foreclosure or to delay foreclosure,
such Servicer may withdraw from the Collateral Account from time to time amounts
necessary to reimburse such Servicer for all P&I Advances and servicing advances
in accordance with the related Servicing Agreement. In the event that the
related Mortgage Loan is brought current, the amounts so withdrawn from the
Collateral Account by the related Servicer as reimbursement for P&I Advances or
servicing advances shall be redeposited therein by the related Servicer and such
Servicer shall be reimbursed as provided in the related Servicing Agreement.
Following foreclosure, liquidation, disposition or the bringing current of the
related Mortgage Loan, as applicable, all amounts remaining in the Collateral
Account will be released to the Directing Holder. In the event that amounts on
deposit in the Collateral Account are insufficient to cover the withdrawals that
the related Servicer is entitled to make for P&I Advances, servicing advances or
for deposit into the Certificate Account, the Directing Holder will be obligated
to pay such amounts to the related Servicer for deposit into the Collateral
Account. The Directing Holder may direct that amounts on deposit in the
Collateral Account be invested in Permitted Investments. Interest or other
income earned on funds in the Collateral Account will be paid to the Directing
Holder and the amount of any loss on such funds will be immediately deposited
into the Collateral Account by the Directing Holder when realized. The Directing
Holder will grant to the related Servicer for the benefit of the Noteholders a
security interest in the Collateral Account, all amounts deposited therein or
invested in Permitted Investments, and all proceeds of the foregoing.
Notwithstanding the foregoing, the provisions described above shall not be
operative in the case of the Mortgage Loans serviced by ___________.
SERVICER EVENTS OF DEFAULT
In addition to those Events of Default (as defined in the Prospectus)
pertaining to the servicing of the Mortgage Loans and described under
"Description of the Securities--Events of Default" in the Prospectus, upon the
occurrence of certain loss triggers with respect to the Mortgage Loans, the
Servicer may be removed as servicer of the Mortgage Loans serviced by it in
accordance with the terms of the related Servicing Agreement. If any Servicer is
removed in connection with an Event of Default applicable to such Servicer under
the terms of the related Servicing Agreement, the Master
S-51
<PAGE>
Servicer will become the successor Servicer of the Mortgage Loans serviced by
such terminated Servicer.
THE MASTER SERVICER
__________________ (the "Master Servicer") is the Master Servicer under
each of the Servicing Agreements. The Master Servicer is a ____________
corporation. The Master Servicer's principal offices are located in
_______________.
The principal compensation to be paid to the Master Servicer in respect of
its obligations under the Servicing Agreements (the "Master Servicing Fee") will
be equal to accrued interest at the Master Servicing Fee Rate on the Scheduled
Principal Balance of each Mortgage Loan, payable monthly. The "Master Servicing
Fee Rate" is equal to (i) ____% per annum in the case of each ____-____ Mortgage
Loan and (ii) ____% per annum in the case of each other Mortgage Loan.
THE INDENTURE AND OWNER TRUST AGREEMENT
The following summary describes certain terms of the Indenture. The summary
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, the provisions of the Owner Trust Agreement and Indenture.
Whenever particular defined terms of the Indenture are referred to, such defined
terms are thereby incorporated herein by reference. The Depositor will provide
to a prospective or actual Noteholder without charge, on written request, a copy
(without exhibits) of the Indenture and the Owner Trust Agreement. Requests
should be addressed to the Secretary, Salomon Brothers Mortgage Securities VII,
Inc., Seven World Trade Center, New York, New York 10048.
GENERAL
The Notes will be issued pursuant to the Indenture, a form of which is
filed as an exhibit to the Registration Statement. A Current Report on Form 8-K
relating to the Notes containing a copy of the Indenture and the Owner Trust
Agreement as executed will be filed by the Depositor with the Securities and
Exchange Commission within fifteen days of the initial issuance of the Notes.
Reference is made to the Prospectus for important information in addition to
that set forth herein regarding the Trust Estate, the terms and conditions of
the Indenture and the Owner Trust Agreement and the Notes. The Notes will be
transferable and exchangeable at the corporate trust offices of the Indenture
Trustee, located in _______________.
ASSIGNMENT OF MORTGAGE LOANS
On or prior to the date the Notes are issued, the Seller will convey each
Mortgage Loan to the __________ SPE, who in turn will convey each such Mortgage
Loan to the Depositor, who in turn will convey each Mortgage Loan to the Issuer.
At the time of issuance of the Notes, the Issuer will pledge all of its
right, title and interest in and to the Mortgage Loans, including all principal
and interest due on each such Mortgage Loan after the Cut-off Dates, without
recourse, to the Indenture Trustee pursuant to the Indenture as collateral for
the Notes; provided, however, that the Seller will reserve and retain all its
right, title and interest in and to principal and interest due on such Mortgage
Loan on or prior to the Cut-off Date (whether or not received on or prior to the
Cut-off Date), and to prepayments received prior to the Cut-off Date. The
Indenture Trustee, concurrently with such assignment, will authenticate and
deliver the Notes at the direction of the Issuer in exchange for, among other
things, the Mortgage Loans.
The Indenture will require the Issuer to deliver to the Indenture Trustee
or to a custodian with respect to each Mortgage Loan (i) the mortgage note
endorsed without recourse to the Indenture
S-52
<PAGE>
Trustee, (ii) the original mortgage with evidence of recording indicated thereon
and (iii) an assignment of the mortgage in recordable form to the Indenture
Trustee. Such assignments of Mortgage Loans are required to be recorded by or on
behalf of the Seller, at the expense of the Seller, in the appropriate offices
for real property records.
EVENTS OF DEFAULT
Notwithstanding the Prospectus, an "Event of Default" under the Indenture
with respect to the Notes is as follows: (a) the failure of the Issuer to pay
the Interest Payment Amount, the Principal Payment Amount or any
Overcollateralization Increase Amount on any Payment Date, in each case to the
extent that funds are available on such Payment Date to make such payments,
which continues unremedied for a period of five days; (b) the failure by the
Issuer on the Final Maturity Date to reduce the Note Balances of any Notes then
outstanding to zero; (c) a default in the observance or performance of any
covenant or agreement of the Issuer in the Indenture and the continuation of any
such default for a period of thirty days after notice to the Issuer by the
Indenture Trustee or by the holders of at least 25% of the Voting Rights of the
Notes; (d) any representation or warranty made by the Issuer in the Indenture or
in any certificate or other writing delivered pursuant thereto having been
incorrect in any material respect as of the time made, and the circumstance in
respect of which such representation or warranty being incorrect not having been
cured within thirty days after notice thereof is given to the Issuer by the
Indenture Trustee or by the holders of at least 25% of the Voting Rights of the
Notes; or (e) certain events of bankruptcy, insolvency, receivership or
reorganization of the Issuer.
Notwithstanding, the Prospectus, if an Event of Default occurs and is
continuing, the Indenture Trustee or the holders of a majority of the Voting
Rights may declare the Note Balance of all the Notes to be due and payable
immediately. Such declaration may, under certain circumstances, be rescinded and
annulled by the holders of a majority in aggregate outstanding Voting Rights.
If following an Event of Default, the Notes have been declared to be due
and payable, the Indenture Trustee may, in its discretion, notwithstanding such
acceleration, elect to maintain possession of the collateral securing the Notes
and to continue to apply payments on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes as they would
have become due if there had not been such a declaration. In addition, the
Indenture Trustee may not sell or otherwise liquidate the collateral securing
the Notes following an Event of Default, unless (a) the holders of 100% of the
then aggregate outstanding Voting Rights consent to such sale, (b) the proceeds
of such sale or liquidation are sufficient to pay in full the principal of and
accrued interest, due and unpaid at their respective Note Accrual Rates, on the
outstanding Notes at the date of such sale or (c) the Indenture Trustee
determines that such collateral would not be sufficient on an ongoing basis to
make all payments on such Notes as such payments would have become due if such
Notes had not been declared due and payable, and the Indenture Trustee obtains
the consent of the holders of 66 2/3% of the then aggregate outstanding Voting
Rights.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default, the Indenture provides that the Indenture
Trustee will have a prior lien on the proceeds of any such liquidation for
unpaid fees and expenses. As a result, upon the occurrence of such an Event of
Default, the amount available for payments to the Noteholders would be less than
would otherwise be the case. However, the Indenture Trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the Noteholders after the occurrence of such an Event of Default.
In the event the principal of the Notes is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an
S-53
<PAGE>
amount equal to the unpaid principal amount thereof less the amount of such
discount that is unamortized.
No Noteholder will have any right under the Indenture to institute any
proceeding with respect to such Indenture unless (a) such holder previously has
given to the Indenture Trustee written notice of default and the continuance
thereof, (b) the holders of Notes of any class evidencing not less than 25% of
the aggregate outstanding Note Balance constituting such class (i) have made
written request upon the Indenture Trustee to institute such proceeding in its
own name as Indenture Trustee thereunder and (ii) have offered to the Indenture
Trustee reasonable indemnity, (c) the Indenture Trustee has neglected or refused
to institute any such proceeding for 60 days after receipt of such request and
indemnity and (d) no direction inconsistent with such written request has been
given to the Indenture Trustee during such 60 day period by the holders of a
majority of the Note Balance of such class. However, the Indenture Trustee will
be under no obligation to exercise any of the trusts or powers vested in it by
the Indenture or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the holders of
Notes covered by such Indenture, unless such holders have offered to the
Indenture Trustee reasonable security or indemnity against the costs, expenses
and liabilities which may be incurred therein or thereby.
VOTING RIGHTS
At all times, 100% of all Voting Rights will be allocated among the holders
of the Class A Notes (or, after the Class A Notes have been paid in full, the
class of Subordinate Notes then outstanding with the lowest numerical class
designation) in proportion to the then outstanding Note Balances of their
respective Notes.
OPTIONAL REDEMPTION
The circumstances under which the obligations created by the Indenture will
terminate in respect of the Notes are described in "Description of the
Securities--Termination" in the Prospectus.
At its option, the majority holder of the Equity Certificates may redeem
the Notes, in whole but not in part, on any Payment Date on or after the Payment
Date on which the aggregate Note Balance is reduced to less than 20% of the
aggregate initial Note Balance. Any such redemption will be paid in cash at a
price equal to the sum of (w) 100% of the aggregate Note Balance then
outstanding, (x) the aggregate of any Allocated Realized Loss Amounts on the
Notes remaining unpaid immediately prior to such Payment Date, (y) the aggregate
of the Interest Payment Amounts on the Notes for such Payment Date and (z) the
aggregate of any Interest Carry Forward Amounts for such Payment Date. Upon any
such redemption, the remaining assets in the Trust Estate shall be released from
the lien of the Indenture.
In addition, with respect to the ____-___ Mortgage Loans, the majority
holder of the Equity Certificates may at its option obtain the release of such
portion of the Mortgage Pool (together with any properties acquired in respect
thereof) remaining in the Trust Estate from the lien of the Indenture, and in
connection therewith effect a partial redemption of the Notes, on any Payment
Date on or after the Payment Date following the Due Period in which the
aggregate principal balance of the ____-___ Mortgage Loans (and properties
acquired in respect thereof) remaining in the Trust Estate is reduced to less
than $_____________. The ____-___ Mortgage Loans have an aggregate principal
balance of approximately $__________ as of the Cut-off Date. Any such redemption
shall be paid in cash at a price generally equal to the sum of (x) 100% of the
then-outstanding principal balance of each such Mortgage Loan plus accrued
interest thereon at their respective Mortgage Rates through the last day of the
calendar month preceding the month in which such redemption occurs, (y) the then
fair market value of each such property and (z) the amount of any servicing
advances reimbursable to the related Servicer in respect of such Mortgage Loans.
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<PAGE>
For purposes of payments on the Notes and Equity Certificates on the Payment
Date of such redemption, such redemption price shall be applied by the Indenture
Trustee as a final liquidation of each of such Mortgage Loans and properties.
The redemption price relating to any such properties, at their then fair market
value, may result in a shortfall in payment to, and/or the allocation of
Realized Losses to, one or more classes of the Notes. Furthermore, the Master
Servicing Fee, the Servicing Fee and the Indenture Trustee Fee, as well as
expenses and reimbursements permitted to be paid from the assets of the Trust
Estate under the Indenture or the applicable Servicing Agreement, in each case
to the extent payable or reimbursable with respect to such Mortgage Loans, will
be payable from the amount received in respect of such redemption price and
therefore, as provided in the Indenture, will be excluded from the Available
Payment Amount for the Payment Date of such redemption.
In no event will the trust created by the Indenture continue beyond the
expiration of 21 years from the death of the survivor of the persons named in
the Indenture. See "Description of the Securities--Termination" in the
Prospectus.
FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Notes, Thacher Proffitt & Wood, counsel to the
Depositor, will deliver its opinion generally to the effect that based on the
application of existing law and assuming compliance with the Owner Trust
Agreement, for federal income tax purposes, (a) the Notes will be characterized
as indebtedness and not as representing an ownership interest in the Trust
Estate or an equity interest in the Issuer or the Depositor and (b) the Issuer
will not be (i) classified as an association taxable as a corporation for
federal income tax purposes or (ii) a "publicly traded partnership" as defined
in Treasury Regulation Section 1.7704. The Notes will not be treated as having
been issued with "original issue discount" (as defined in the Prospectus). The
prepayment assumption that will be used in determining the rate of amortization
of market discount and premium, if any, for federal income tax purposes will be
based on the assumption that the Mortgage Loans will prepay at a rate equal to
__% CPR. No representation is made that the Mortgage Loans will prepay at that
rate or at any other rate. See "Federal Income Tax Consequences" in the
Prospectus.
Taxable mortgage pool ("TMP") rules enacted as part of the Tax Reform Act
of 1986 treat certain arrangements in which debt obligations are secured or
backed by real estate mortgage loans as taxable corporations. An entity (or a
portion thereof) will be characterized as a TMP if (i) substantially all of its
assets are debt obligations and more than 50% of such debt obligations consist
of real estate mortgage loans or interests therein, (ii) the entity is the
obligor under debt obligations with two or more maturities, and (iii) payments
on the debt obligations referred to in clause (ii) bear a relationship to
payments on the debt obligations referred to in clause (i). Furthermore, a group
of assets held by an entity can be treated as a separate TMP if the assets are
expected to produce significant cashflow that will support one or more of the
entity's issues of debt obligation.
It is anticipated that the Issuer will be characterized as a TMP for
federal income tax purposes. In general, a TMP is treated as a "separate"
corporation not includible with any other corporation in a consolidated income
tax return, and is subject to corporate income taxation.
The Notes will not be treated as assets described in Section 7701(a)(19)(C)
of the Code or "real estate assets" under Section 856(c)(4)(A) of the Code. In
addition, interest on the Notes will not be treated as "interest on obligations
secured by mortgages on real property" under Section 856(c)(3)(B) of the Code.
The Notes will also not be treated as "qualified mortgages" under Section
860G(a)(3)(C) of the Code.
S-55
<PAGE>
Prospective investors in the Notes should see "Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the Prospectus for a
discussion of the application of certain federal income and state and local tax
laws to the Issuer and purchasers of the Notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated ________ __, ____ (the "Underwriting Agreement"), the Depositor
has agreed to sell, and Salomon Smith Barney Inc. (the "Underwriter") has agreed
to purchase the Notes. The Underwriter is obligated to purchase all Notes of the
respective classes offered hereby if it purchases any. The Underwriter is an
affiliate of the Depositor.
The Notes will be purchased from the Depositor by the Underwriter and will
be offered by the Underwriter to the public from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the Depositor from the sale of the Notes, before deducting
expenses payable by the Depositor, will be approximately ___% of the aggregate
initial Note Balance of the Notes. In connection with the purchase and sale of
the Notes, the Underwriter may be deemed to have received compensation from the
Depositor in the form of underwriting discounts.
The Offered Notes are offered subject to receipt and acceptance by the
Underwriter, to prior sale and to the Underwriter's right to reject any order in
whole or in part and to withdraw, cancel or modify the offer without notice. It
is expected that delivery of the Offered Notes will be made through the
facilities of DTC on or about the Closing Date.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended, or will contribute to payments the
Underwriter may be required to make in respect thereof.
SECONDARY MARKET
There can be no assurance that a secondary market for the Notes will
develop or, if it does develop, that it will continue. The primary source of
information available to investors concerning the Notes will be the monthly
statements discussed in the Prospectus under "Description of the
Securities--Reports to Securityholders", which will include information as to
the outstanding principal balance of the Notes and the status of the applicable
form of credit enhancement. There can be no assurance that any additional
information regarding the Notes will be available through any other source. In
addition, the Depositor is not aware of any source through which price
information about the Notes will be generally available on an ongoing basis. The
limited nature of such information regarding the Notes may adversely affect the
liquidity of the Notes, even if a secondary market for the Notes becomes
available.
LEGAL OPINIONS
Certain legal matters relating to the Notes will be passed upon for the
Depositor and the Underwriter by Thacher Proffitt & Wood, New York, New York.
S-56
<PAGE>
RATINGS
It is a condition of the issuance of the Notes that the Class A Notes be
rated "AAA" by _____________ ("____") and "AAA" by _______________ ("_____"),
that the Class M-1 Notes be rated at least "AA" by ____ and at least "AA" by
____, that the Class M-2 Notes be rated at least "A" by ____ and at least "A" by
_____ and that the Class M-3 Notes be rated at least "BBB" by _____.
The ratings of _____ and _____ assigned to the Notes address the likelihood
of the receipt by Noteholders of all payments to which such Noteholders are
entitled, other than payments of interest to the extent of any Interest Carry
Forward Amounts. The rating process addresses structural and legal aspects
associated with the Notes, including the nature of the underlying mortgage
loans. The ratings assigned to the Notes do not represent any assessment of the
likelihood that principal prepayments will be made by the mortgagors or the
degree to which the rate of such prepayments will differ from that originally
anticipated. The ratings do not address the possibility that Noteholders might
suffer a lower than anticipated yield due to non-credit events.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Notes are subsequently lowered for any reason, no person or entity is obligated
to provide any additional credit support or credit enhancement with respect to
the Notes.
The Depositor has not requested that any rating agency rate the Notes other
than as stated above. However, there can be no assurance as to whether any other
rating agency will rate the Notes, or, if it does, what rating would be assigned
by any such other rating agency. A rating on the Notes by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Notes as
stated above.
LEGAL INVESTMENT
The Class A Notes and the Class M-1 Notes will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") for so long as they are rated not lower than the second highest
rating category by a Rating Agency (as defined in the Prospectus) and, as such,
will be legal investments for certain entities to the extent provided in SMMEA.
SMMEA, however, provides for state limitation on the authority of such entities
to invest in "mortgage related securities", provided that such restricting
legislation was enacted prior to October 3, 1991. Certain states have enacted
legislation which overrides the preemption provisions of SMMEA. The Class M-2
Notes and the Class M-3 Notes will not constitute "mortgage related securities"
for purposes of SMMEA.
The Depositor makes no representations as to the proper characterization of
the Notes for legal investment or other purposes, or as to the ability of
particular investors to purchase the Notes under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of the
Notes. Accordingly, all institutions whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Notes constitute a legal investment
or are subject to investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
S-57
<PAGE>
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and the Code impose certain requirements on employee benefit plans and certain
other retirement plans and arrangements (including, but not limited to,
individual retirement accounts and annuities), as well as on collective
investment funds and certain separate and general accounts of insurance
companies in which such plans or arrangements are invested (all of which are
hereinafter referred to as a "Plan") and on persons who are fiduciaries with
respect to such Plans. ERISA and the Code prohibit certain transactions
involving the assets of a Plan and "disqualified persons" (within the meaning of
the Code; "Disqualified Persons") and "parties in interest" (within the meaning
of ERISA; "Parties in Interest") who have certain specified relationships to the
Plan. Accordingly, prior to making an investment in the Notes, investing Plans
should determine whether the Issuer, the Depositor, the Seller, the Trust
Estate, the Underwriter, any other underwriter, the Owner Trustee, the Indenture
Trustee, the Master Servicer, the Servicers, any other servicer, any
administrator, any provider of credit support, or any insurer or any of their
affiliates is a Party in Interest or Disqualified Person with respect to such
Plan and, if so, whether such transaction is subject to one or more statutory or
administrative exemptions. Additionally, an investment of the assets of a Plan
in securities may cause the assets included in the Trust Estate to be deemed
"Plan Assets" of such Plan, and any person with certain specified relationships
to the Trust Estate to be deemed a Party in Interest or Disqualified Person. The
U.S. Department of Labor (the "DOL") has promulgated regulations at 29 C.F.R.
Section 2510.3-101 (the "Plan Asset Regulations") defining the term "Plan
Assets" for purposes of applying the general fiduciary responsibility provisions
of ERISA and the prohibited transaction provisions of ERISA and Section 4975 of
the Code. Under the Plan Asset Regulations, generally, when a Plan acquires an
"equity interest" in another entity (such as the Trust Estate), the underlying
assets of that entity may be considered to be Plan Assets. The Plan Asset
Regulations provide that the term "equity interest" means any interest in an
entity other than an instrument which is treated as indebtedness under
applicable local law and which has no "substantial equity features." Although
not entirely free from doubt, it is believed that, as of the date hereof, the
Notes will be treated as debt obligations without significant equity features
for the purposes of the Plan Asset Regulations. Because of the factual nature of
certain of the above-described provisions of ERISA, the Code and the Plan Asset
Regulations, Plans or persons investing Plan Assets should carefully consider
whether such an investment might constitute or give rise to a prohibited
transaction under ERISA or the Code. Any Plan fiduciary which proposes to cause
a Plan to acquire any of the Notes should consult with its counsel with respect
to the potential consequences under ERISA and the Code of the Plan's acquisition
and ownership of such Notes.
S-58
<PAGE>
$___________ (APPROXIMATE)
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
ASSET-BACKED FLOATING RATE NOTES, SERIES ____-___
PROSPECTUS SUPPLEMENT
DATED _______ __, ____
MASTER SERVICER
SALOMON SMITH BARNEY
UNDERWRITER
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE CERTIFICATES OFFERED HEREBY IN ANY STATE WHERE THE OFFER
IS NOT PERMITTED.
WE DO NOT CLAIM THE ACCURACY OF THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS AS OF ANY DATE OTHER THAN THE DATES STATED ON
THEIR COVER PAGES.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
Offered Certificates, whether or not participating in this offering, may be
required to deliver a prospectus supplement and prospectus until _______ __,
- ----.
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND MAY BE DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Salomon
Brothers Mortgage Securities VII, Inc., [Salomon] Trust Series ____-__,
Asset-Backed Floating Rate Notes, Series ____-__, Class A, Class M-1, Class M-2
and Class M-3 Notes (the "Global Securities") will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, Cedel or Euroclear. The Global Securities will be
traceable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors through Cedel and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedel and Euroclear (in such capacity)
and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their Relevant Depositary
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can
be made on the desired value date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed notes issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
<PAGE>
TRADING BETWEEN DTC, SELLER AND CEDEL OR EUROCLEAR PARTICIPANTS. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Participant or a Euroclear Participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
Relevant Depositary to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (I.E., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their account one day later. As an alternative, if
Cedel or Euroclear has extended a line of credit to them, Cedel Participants or
Euroclear Participants can elect not to preposition funds and allow that credit
line to be drawn upon to finance settlement. Under this procedure, Cedel
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges, although
the result will depend on each Cedel Participant's or Euroclear Participant's
particular cost of funds. Since the settlement is taking place during New York
business hours, DTC Participants can employ their usual procedures for crediting
Global Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist to 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of Cedel Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
I-2
<PAGE>
York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel
Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons (as defined below), unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between such beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate: Exemption for
Non-U.S. Persons (Form W-8). Beneficial Holders of Global Securities that are
Non-U.S. Persons (as defined below) can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form 1001 (Holdership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8. Form
1001 may be filed by Noteholders or their agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
I-3
<PAGE>
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in, or under the laws of, the
United States or any political subdivision thereof (except, in the case of a
partnership, to the extent provided in regulations), or an estate whose income
is subject to United States federal income tax regardless of its source, or a
trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
Persons have the authority to control all substantial decisions of the trust.
The term "Non-U.S. Person" means any person who is not a U.S. Person. This
summary does not deal with all aspects of U.S. Federal income tax withholding
that may be relevant to foreign holders of the Global Securities. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
I-4
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
[Version 1]
MORTGAGE PASS-THROUGH CERTIFICATES
MORTGAGE-BACKED NOTES
(ISSUABLE IN SERIES)
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
Depositor
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 4 OF THIS
PROSPECTUS.
The securities will represent obligations of a trust fund only and will not
represent ownership interests in or obligations of any other entity.
This prospectus may be used to offer and sell the securities only if accompanied
by a prospectus supplement.
THE SECURITIES:
Salomon Brothers Mortgage Securities VII, Inc., as depositor, will sell the
securities, which may be in the form of mortgage pass-through certificates or
mortgage-backed notes. Each issue of securities will have its own series
designation and will evidence either:
o the ownership of certain trust fund assets, or
o debt obligations secured by certain trust fund assets.
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 future payments of principal and interest on the assets in
the related trust fund. 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. The related prospectus
supplement will specify each of these features.
THE TRUST FUND AND ITS ASSETS
As specified in the related prospectus supplement, the assets of a trust fund
will primarily include any or all of the following:
o 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, or beneficial
interests therein,
o pass-through or participation certificates issued or guaranteed by
the Government National Mortgage Association, the Federal National
Mortgage Association or the Federal Home Loan
Mortgage Corporation,
o pass-through or participation certificates or other
mortgage-backed securities issued or guaranteed by private
entities, or
o funding agreements secured by any of the above described assets.
The assets of the trust fund for a series of securities may also 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.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Offers of the securities may be made through one or more different methods,
including through underwriters as described in "Methods of Distribution" in the
related prospectus supplement. All certificates will be distributed by, or sold
through underwriters managed by:
SALOMON SMITH BARNEY
The date of this Prospectus is .
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TABLE OF CONTENTS
Important Notice About Information in this Prospectus
and each Accompanying Prospectus Supplement....................................3
Risk Factors...................................................................4
The Trust Funds...............................................................15
The Mortgage Loans.........................................................15
Agency Securities..........................................................21
Private Mortgage-Backed Securities.........................................27
Funding Agreements.........................................................29
Use of Proceeds...............................................................30
Yield Considerations..........................................................30
Maturity and Prepayment Considerations........................................31
The Depositor.................................................................33
Mortgage Loan Program.........................................................33
Underwriting Standards.....................................................33
Qualifications of Originators and Mortgage Loan
Sellers....................................................................35
Representations by or on behalf of Mortgage
Loan Sellers; Repurchases..................................................35
Description of the Securities.................................................37
General....................................................................38
Assignment of Trust Fund Assets............................................40
Deposits to Certificate Account............................................44
Payments on Mortgage Loans.................................................44
Payments on Agency Securities and Private
Mortgage-Backed Securities.................................................46
Distributions..............................................................47
Available Distribution Amount..............................................47
Interest on the Securities.................................................48
Principal of the Securities................................................48
Pre-Funding Account........................................................49
Allocation of Losses.......................................................50
Advances in Respect of Delinquencies.......................................50
Reports to Securityholders.................................................51
Collection and Other Servicing Procedures..................................52
Sub-Servicing..............................................................54
Realization Upon Defaulted Mortgage Loans..................................55
Retained Interest; Servicing or Administration
Compensation and Payment of Expenses.......................................56
Evidence as to Compliance..................................................57
Certain Matters Regarding the Master Servicer
and the Depositor..........................................................58
Events of Default and Rights Upon Event of
Default....................................................................59
Amendment..................................................................62
Termination................................................................63
Optional Purchase of Defaulted Mortgage
Loans......................................................................64
Duties of the Trustee......................................................64
The Trustee................................................................64
Description of Credit Support.................................................64
Subordination..............................................................65
Letter of Credit...........................................................66
Mortgage Pool Insurance Policy.............................................67
Special Hazard Insurance Policy............................................69
Bankruptcy Bond............................................................71
Financial Guarantee Insurance..............................................71
Reserve Fund...............................................................71
Cash Flow Agreements.......................................................72
Description of Primary Insurance Policies.....................................72
Primary Mortgage Insurance Policies........................................72
Primary Hazard Insurance Policies..........................................73
FHA Insurance..............................................................74
VA Guarantees..............................................................75
Certain Legal Aspects of Mortgage Loans.......................................75
General....................................................................75
Single-Family Loans and Multifamily Loans..................................76
Leases and Rents...........................................................76
Cooperative Loans..........................................................77
Contracts..................................................................78
Foreclosure on Mortgages...................................................79
Foreclosure on Mortgaged Properties Located
in the Commonwealth of Puerto Rico.........................................81
Foreclosure on Cooperative Shares..........................................82
Repossession with respect to Contracts.....................................83
Louisiana Law..............................................................84
Rights of Redemption with respect to Single-
Family Properties and Multifamily Properties...............................84
Notice of Sale; Redemption Rights with respect
to Manufactured Homes......................................................85
Anti-Deficiency Legislation and Other Limitations
on Lenders.................................................................85
Junior Mortgages...........................................................87
Consumer Protection Laws with respect to
Contracts..................................................................87
Other Limitations..........................................................88
Enforceability of Certain Provisions.......................................89
Subordinate Financing......................................................90
Applicability of Usury Laws................................................91
Alternative Mortgage Instruments...........................................91
Formaldehyde Litigation with respect to
Contracts..................................................................92
Soldiers' and Sailors' Civil Relief Act of 1940............................92
Environmental Legislation..................................................93
Forfeitures in Drug and RICO Proceedings...................................94
Negative Amortization Loans................................................94
Federal Income Tax Consequences...............................................95
General....................................................................95
REMICs.....................................................................96
Notes.....................................................................114
Grantor Trust Funds.......................................................115
Partnership Trust Funds...................................................126
State and Other Tax Consequences.............................................132
ERISA Considerations.........................................................132
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......................................................141
Legal Matters................................................................142
Financial Information........................................................142
Rating.......................................................................142
Available Information........................................................142
Reports to Securityholders...................................................143
Incorporation of Certain Information by
Reference....................................................................143
Index of Principal Definitions...............................................144
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IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
o this prospectus, which provides general information, some of
which may not apply to a particular series; and
o the accompanying prospectus supplement for a particular series,
which describes the specific terms of the securities of that
series. If the prospectus supplement contains information about a
particular series that differs from the information contained in
this prospectus, you should rely on the information in the
prospectus supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement. The information in this prospectus is
accurate only as of the date of this prospectus.
Beginning with the section titled "The Trust Funds", certain capitalized terms
are used in this prospectus to assist you in understanding the terms of the
securities. The capitalized terms used in this prospectus are defined on the
pages indicated under the caption "Index of Defined Terms" beginning on page 144
in this prospectus.
---------------------------
If you require additional information, the mailing address of our principal
executive offices is 390 Greenwich Street, 4th Floor, New York, New York 10013,
Attention: Secretary and the telephone number is (212) 816-6000. For other means
of acquiring additional information about us or a series of securities, see
"Incorporation of Certain Information by Reference" beginning on page 143 of
this prospectus.
---------------------------
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RISK FACTORS
The offered securities are not suitable investments for all investors. In
particular, you should not purchase the offered securities unless you understand
and are able to bear the prepayment, credit, liquidity and market risks
associated with such securities.
You should carefully consider, among other things, the following factors in
connection with the purchase of the securities offered hereby:
THE SECURITIES WILL HAVE LIMITED LIQUIDITY
There can be no assurance that a resale market for the securities of any
series will develop following the issuance and sale of any series of securities.
Even if a resale market does develop, it may not provide securityholders with
liquidity of investment or 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.
THE SECURITIES WILL BE LIMITED OBLIGATIONS OF THE RELATED TRUST FUND AND NOT OF
ANY OTHER PARTY
Unless the applicable prospectus supplement provides otherwise, the
securities of each series will be payable solely from the assets of the related
trust fund, including any applicable credit support, and will not have any
claims against the assets of any other trust fund or recourse to any other
party. The securities will not represent an interest in or obligation of the
depositor, the master servicer or any of their respective affiliates. Unless the
applicable prospectus supplement provides otherwise, the only obligations of the
foregoing entities with respect to the securities, any mortgage loan or any
other trust fund asset will be the repurchase or substitution obligations (if
any) of the depositor pursuant to certain limited representations and warranties
made with respect to the mortgage loans or other trust fund assets and the
master servicer's servicing obligations under the related servicing agreement,
(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).
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. Although payment of principal and interest on agency securities
will be guaranteed as described herein and in the related prospectus supplement
by GNMA, Fannie Mae or Freddie Mac, the securities of any series including
agency securities will not be so guaranteed.
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CREDIT SUPPORT WILL BE LIMITED; THE FAILURE OF CREDIT SUPPORT TO COVER LOSSES ON
THE TRUST FUND ASSETS MAY RESULT IN LOSSES ALLOCATED TO THE SECURITIES
Credit support is intended to reduce the effect of delinquent payments or
losses on the underlying trust fund assets on those classes of securities that
have the benefit of the credit support. With respect to each series of
securities, credit support will be provided in limited amounts, in one or more
of the forms referred to 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). SEE "DESCRIPTION OF CREDIT SUPPORT".
THE PAYMENT PERFORMANCE OF THE SECURITIES WILL BE RELATED TO THE PAYMENT
PERFORMANCE OF THE MORTGAGE LOANS IN THE RELATED TRUST FUNDS; GREATER RISK OF
LOSS IS ASSOCIATED WITH CERTAIN MORTGAGE LOANS
The securities will be directly or indirectly backed by mortgage loans
and/or manufactured housing, conditional sales contracts and installment loan
agreements. Certain mortgage loans may have a greater likelihood of delinquency
and foreclosure, and a greater likelihood of loss in the event thereof. In the
event that the mortgaged properties fail to provide adequate security for the
mortgage loans included in a trust fund, any resulting losses, to the extent not
covered by credit support, will be allocated to the related securities in the
manner described in the related prospectus supplement and consequently would
adversely affect the yield to maturity on such securities. The depositor cannot
assure you that the values of the mortgaged properties have remained or will
remain at the appraised values on the dates of origination of the related
mortgage loans. You should consider the following risks associated with certain
mortgage loans which may be included in the trust fund related to your security:
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 such mortgage loans 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.
BUYDOWN MORTGAGE LOANS. Buydown mortgage loans are subject to temporary
buydown plans pursuant to which the monthly payments made by the mortgagor
during the early years of such mortgage loan 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 and placed in a custodial account, (ii) investment
earnings on the amount, if any, contributed by the borrower, or (iii) additional
buydown funds to be contributed over time by the mortgagor's employer or another
source. 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
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level monthly payments after the buydown funds have been depleted and, for
certain buydown mortgage loans, during the initial buydown period. The inability
of a mortgagor to make such larger monthly payments could lead to losses on such
mortgage loans, and to the extent not covered by credit support, may adversely
affect the yield to maturity on the related securities.
BALLOON LOANS. Certain mortgage loans, 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.
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.
MULTIFAMILY LOANS. 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 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.
NON-CONFORMING LOANS. Non-conforming mortgage loans are mortgage loans that
do not qualify for purchase by government sponsored agencies such as the Federal
National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac") due to credit characteristics that to not satisfy
such Fannie Mae and Freddie Mac guidelines, including mortgagors whose
creditworthiness and repayment ability do not satisfy such Fannie Mae and
Freddie Mac underwriting guidelines and mortgagors who may have a record of
credit write-offs,
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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 Fannie Mae or Freddie
Mac 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.
HIGH LTV LOANS. Mortgage loans with loan-to-value ratios in excess of 80%
and as high as 125% and not insured by primary mortgage insurance policies are
designated by the depositor as "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 related securities.
JUNIOR LIEN MORTGAGE LOANS. Certain of the trust funds may contain mortgage
loans secured by junior liens and the related senior liens may not be included
in the trust fund. 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.
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PUERTO RICO AND GUAM LOANS. The risk of loss on mortgage loans secured by
properties located in Puerto Rico and Guam may be greater than on mortgage loans
that are made to mortgagors who are United States residents and citizens or that
are secured by properties located in the United States. In particular, the
procedure for the foreclosure of a real estate mortgage under the laws of the
Commonwealth of Puerto Rico varies from the procedures generally applicable in
each of the fifty states of the United States which may affect the satisfaction
of the related mortgage loan. In addition, the depositor is not aware of any
historical prepayment experience with respect to mortgage loans secured by
properties located in Puerto Rico or Guam and, accordingly, prepayments on such
loans may not occur at the same rate or be affected by the same factors as other
mortgage loans.
Certain of the types of loans which may be included in a trust fund may involve
additional uncertainties not present in traditional types of loans. You should
carefully consider the prospectus supplement describing the mortgage loans which
are to be included in the trust fund related to your security and the risks
associated with such mortgage loans.
DECLINING PROPERTY VALUES AND GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES
MAY PRESENT A GREATER RISK OF LOSS
An investment in securities such as the securities which represent, in
general, 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. The depositor cannot assure you that values of the mortgaged
properties have remained or will remain at the appraised values 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 trust fund 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 your yield to maturity on the securities.
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.
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VARYING UNDERWRITING STANDARDS OF UNAFFILIATED MORTGAGE LOAN SELLERS MAY PRESENT
A GREATER RISK OF LOSS
Mortgage loans to be included in a trust fund 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 related securities.
NONPERFECTION OF SECURITY INTERESTS IN MANUFACTURED HOMES MAY RESULT IN
LOSSES
Any conditional sales contracts and installment loan agreements with
respect to manufactured homes (each, a "Contract") included in a trust fund 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 Uniform Commercial Code 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, to the extent
not covered by credit support, may adversely affect the yield to maturity of the
related securities.
FORECLOSURE OF MORTGAGE LOANS MAY RESULT IN LIMITATIONS OR DELAYS IN RECOVERY
AND LOSSES ALLOCATED TO THE RELATED SECURITIES
Even assuming that the mortgaged properties provide adequate security for
the mortgage loans, 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
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
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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.
MORTGAGED PROPERTIES ARE SUBJECT TO CERTAIN ENVIRONMENTAL RISKS AND THE COST OF
ENVIRONMENTAL CLEAN-UP MAY INCREASE LOSSES ON THE RELATED MORTGAGE LOANS
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
operator 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 trust
fund 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
trust fund could experience losses which, to the extent not covered by credit
support, could adversely affect the yield to maturity on the related securities.
LIMITED NATURE OF RATINGS OF THE SECURITIES; DOWNGRADING OF A SECURITY MAY
ADVERSELY AFFECT THE LIQUIDITY OR MARKET VALUE OF SUCH SECURITY
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 to you 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. 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
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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 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. In the event any rating is revised or
withdrawn, the liquidity or the market value of the related security may be
adversely affected.
FAILURE OF THE MORTGAGE LOAN SELLER TO REPURCHASE OR REPLACE A MORTGAGE LOAN MAY
RESULT IN LOSSES ALLOCATED TO THE RELATED SECURITIES
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 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 support, may adversely affect the yield to maturity of the
related 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 related securities.
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BOOK-ENTRY REGISTRATION MAY AFFECT LIQUIDITY OF THE SECURITIES
Because transfers and pledges of securities registered in the name of a
nominee of the Depository Trust Company ("DTC") 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 since 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
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.
THE YIELD TO MATURITY ON YOUR SECURITIES WILL DEPEND ON A VARIETY OF FACTORS
INCLUDING PREPAYMENTS
The timing of principal payments on the securities of a series will be
affected by a number of factors, including the following:
o the extent of prepayments on the underlying mortgage loans in the
trust fund or, if the trust fund is comprised of underlying
securities, on the mortgage loans backing the underlying
securities;
o how payments of principal are allocated among the classes of
securities of that series as specified in the related prospectus
supplement;
o if any party has an option to terminate the related trust fund
early, the effect of the exercise of the option;
o the rate and timing of defaults and losses on the assets in the
related trust fund; and
o repurchases of assets in the related trust fund as a result of
material breaches of representations and warranties made by the
depositor, master servicer or mortgage loan seller.
Prepayments on mortgage loans are influenced by a number of factors,
including prevailing mortgage market interest rates, local and regional economic
conditions and homeowner mobility. The rate of prepayment of the mortgage loans
included in or underlying the assets in each trust fund may affect the yield to
maturity of the securities. In general, if you purchase a class of offered
securities at a price higher than its outstanding principal balance and
principal distributions on such class occur faster than you anticipate at the
time of purchase, the yield will be lower than you anticipate. Conversely, if
you purchase a class of offered securities at a price lower than its outstanding
principal balance and principal distributions on that class occur more slowly
than you anticipate at the time of purchase, the yield will be lower than you
anticipate.
The yield to maturity on certain types of classes of securities including
Strip Securities (as defined herein), Accrual Securities (as defined herein),
securities with an interest rate which
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fluctuates inversely with an index or certain other classes in a series
including more than one class of securities, may be relatively more sensitive to
the rate of prepayment on the related mortgage loans than other classes of
securities and, if applicable, to the occurrence of an early retirement of the
securities.
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.
EXERCISE OF OPTIONAL TERMINATION RIGHT WILL AFFECT THE YIELD TO MATURITY ON THE
RELATED SECURITIES
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.
The prospectus supplement for each series of securities will set forth the
party that may, at its option, purchase the assets of the related trust fund if
the aggregate principal balance of the mortgage loans and/or other trust fund
assets in the trust fund for that series is less than the percentage specified
in the related prospectus supplement of the aggregate principal balance of such
mortgage loans and/or other trust fund assets at the cut-off date for that
series (the "Clean-up Call"). Such percentage will be between 25% and 0%. The
exercise of such right will effect the early retirement of the securities of
that series. The prospectus supplement for each series of securities will set
forth the price to be paid by the terminating party and the amounts that the
holders of such securities will be entitled to receive upon such early
retirement.
In addition to the repurchase of the assets in the related trust fund
as described above, the related prospectus supplement may permit that, a holder
of a non-offered class of securities (the "Call Class") will have the right,
solely at its discretion, to terminate the related trust fund on any
distribution date after the 12th distribution date following the date of initial
issuance of the related series of securities and until such date as the Clean-up
Call becomes exercisable and thereby effect early retirement of the securities
of such series. Any such call will be of the entire trust fund at one time;
multiple calls with respect to any series of securities will not be permitted.
In such case, the holders of the related securities offered hereby will be paid
a price equal to 100% of the principal balance of such securities offered hereby
as of the day of such purchase plus accrued interest thereon at the applicable
interest rate during the related period on which interest accrues on such
securities (the "Call Price"). Further, the Call Class must remit to the related
trustee for distribution to the securityholders funds equal to the Call Price.
If such funds are not deposited with the related trustee, the securities will
remain outstanding. There will not be any additional remedies available to
securityholders. In addition, in the case of a trust fund for which a REMIC (as
defined herein) election or elections have been made, such termination will
constitute a "qualified liquidation" under Section 860F of the Internal Revenue
Code. In connection with a call by the Call Class, the final payment to the
securityholders will be made upon surrender of the related securities to the
trustee. Once the securities have been surrendered and paid in full, there will
not be any continuing liability from the securityholders or from the trust fund
to securityholders.
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A trust fund may also be terminated and the certificates retired upon
the master servicer's determination, if applicable and based upon an opinion of
counsel, that the REMIC status of the trust fund has been lost or that a
substantial risk exists that such status will be lost for the then current
taxable year.
The termination of a trust fund and the early retirement of securities by
any party may adversely affect the yield to holders of certain classes of such
related securities.
ERISA CONSIDERATIONS
If you are buying the offered securities on behalf of an individual
retirement account, Keogh plan or employee benefit plan, special rules may apply
to you. These rules are described in general in this prospectus under the
caption "ERISA Considerations." However, due to the complexity of regulations
that govern such plans, if you are subject to the Employment Retirement Income
Security Act of 1974, as amended ("ERISA") you are urged to consult your own
counsel regarding any consequences under ERISA of the acquisition, ownership and
disposition of the securities of any series offered hereby.
FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates (as defined herein) 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 (as defined herein),
regardless of the amount or timing of their receipt of cash payments, as
described in "Federal Income Tax Consequences--REMICs". Accordingly, under
certain circumstances, holders of offered securities that constitute REMIC
Residual Certificates may have taxable income and tax liabilities arising from
such investment during a taxable year in excess of the cash received during such
period. The requirement that holders of REMIC Residual Certificates report their
pro rata share of the taxable income and net loss of the REMIC will continue
until the certificate balances of all classes of securities of the related
series have been reduced to zero, even though holders of REMIC Residual
Certificates have received full payment of their stated interest and principal.
A portion (or, in certain circumstances, all) of such Certificateholder's share
of the REMIC taxable income may be treated as "excess inclusion" income to such
holder which (i) generally, will not be subject to offset by losses from other
activities, (ii) for a tax-exempt holder, will be treated as unrelated business
taxable income and (iii) for a foreign holder, will not qualify for exemption
from withholding tax. Individual holders of REMIC Residual Certificates may be
limited in their ability to deduct servicing fees and other expenses of the
REMIC. In addition, REMIC Residual Certificates are subject to certain
restrictions on transfer. Because of the special tax treatment of REMIC Residual
Certificates, the taxable income arising in a given year on a REMIC Residual
Certificate will not be equal to the taxable income associated with investment
in a corporate bond or stripped instrument having similar cash flow
characteristics and pre-tax yield. Therefore, the after-tax yield on the REMIC
Residual Certificate may be significantly less than that of a corporate bond or
stripped instrument having similar cash flow characteristics.
ADDITIONAL RISK FACTORS WILL BE SET FORTH IN THE PROSPECTUS SUPPLEMENT RELATED
TO A SERIES OF SECURITIES
The prospectus supplement relating to a series of offered securities will
set forth additional risk factors pertaining to the characteristics or behavior
of the assets to be included in a particular trust fund and, if applicable,
certain legal aspects of such trust fund assets as well as any risk factors
pertaining to the investment in a particular class of offered securities.
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THE TRUST FUNDS
Each series of Mortgage Pass-Through Certificates (the "Certificates") will
represent in the aggregate the entire beneficial ownership interest in, and each
series of Mortgage-Backed Notes (the "Notes"; the Certificates and the Notes,
together, the "Securities") 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) a segregated pool (a
"Mortgage Pool") of 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"), Fannie Mae
or Freddie Mac (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. All Trust Fund Assets will
have been purchased by the Depositor on or before the date of initial issuance
of the related Securities.
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, the District of
Columbia, Guam, Puerto Rico or any other territory of the United States. 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, on
or before the date of initial issuance of the related Securities, from a prior
holder thereof (a "Mortgage Loan Seller"), which prior holder may not be the
Originator thereof and may be an affiliate of the Depositor. SEE "MORTGAGE LOAN
PROGRAM--UNDERWRITING STANDARDS".
Unless otherwise specified below or in the related Prospectus Supplement,
all of the Mortgage Loans in a Mortgage Pool will (i) have individual principal
balances at origination of not less than $25,000 or more than $5,000,000, (ii)
have monthly payments due on the first day of each month,
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(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
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(ii) the risk of loss if the deficiency judgment is not realized upon. Moreover,
deficiency judgments may not be available in certain jurisdictions. In addition,
a junior mortgagee may not foreclose on the property securing a junior mortgage
unless it forecloses subject to the senior mortgages.
Liquidation expenses with respect to defaulted junior mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that the Master Servicer took the same steps in
realizing upon a defaulted junior mortgage loan having a small remaining
principal balance as it would in the case of a defaulted junior mortgage loan
having a large remaining principal balance, the amount realized after expenses
of liquidation would be smaller as a percentage of the outstanding principal
balance of the small junior mortgage loan than would be the case with the
defaulted junior mortgage loan having a large remaining principal balance.
Because the average outstanding principal balance of the Mortgage Loans is
smaller relative to the size of the average outstanding principal balance of the
loans in a typical pool of first priority mortgage loans, liquidation proceeds
may also be smaller as a percentage of the principal balance of a Mortgage Loan
than would be the case in a typical pool of first priority mortgage loans.
Unless otherwise specified in the related Prospectus Supplement, the
following requirements as to the Loan-to-Value Ratio of each Mortgage Loan of
the type described above shall apply. The "Loan-to-Value Ratio" of a Mortgage
Loan at any given time is the ratio (expressed as a percentage) of the then
outstanding principal balance of the Mortgage Loan, plus, in the case of a
Mortgage Loan secured by a junior lien, the outstanding principal balance of the
related Senior Liens, to the Value of the related Mortgaged Property. The Value
of a Single-Family Property, Multifamily Property or Cooperative Unit, other
than with respect to Refinance Loans, is the lesser of (a) the appraised value
determined in an appraisal obtained by the originator at origination of such
loan and (b) the sales price for such property. "Refinance Loans" are mortgage
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").
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With respect to each Mortgaged Property, unless otherwise provided in the
related Prospectus Supplement, the borrower will have represented that the
dwelling is either (a) an owner-occupied primary residence or (b) a vacation or
second home that (i) is not part of a mandatory rental pool and (ii) is suitable
for year-round occupancy. With respect to a vacation or second home, no income
derived from the property will be considered for underwriting purposes.
Unless otherwise specified in the related Prospectus Supplement, the
aggregate principal balance on the Cut-off Date of Mortgage Loans secured by
condominium units will not exceed 30% of the aggregate principal balance of the
Mortgage Loans in the related Mortgage Pool. A Mortgage Loan secured by a
condominium unit will not be included in a Mortgage Pool unless, at the time of
sale of such Mortgage Loan by the Mortgage Loan Seller, certain representations
and warranties as to the condominium project are made by the Mortgage Loan
Seller or an affiliate thereof or by such other person acceptable to the
Depositor having knowledge regarding the subject matter of such representations
and warranties. Unless otherwise specified in the related Prospectus Supplement,
such Mortgage Loan Seller, or another party on its behalf, will have made the
following representations and warranties. If a condominium project is subject to
developer control or to incomplete phasing or add-ons, at least 70% of the units
have been sold to bona fide purchasers and are occupied as primary residences or
vacation or second homes. If a condominium project has been controlled by the
unit owners (other than the developer) for less than two years and is not
subject to incomplete phasing or add-ons, at least 70% of the units have been
sold to bona fide purchasers and at least 60% of the units are occupied as
primary residences or vacation or second homes. The foregoing percentages may be
modified in the case of a particular project upon proof of demonstrated market
acceptance but in no event will any such percentage be reduced below 51%. If a
condominium project has been controlled by the unit owners (other than the
developer) for at least two years, has all common elements completed and is not
subject to phasing or add-ons, the Mortgage Loan Seller, or another party on its
behalf, must represent and warrant, unless otherwise specified in the related
Prospectus Supplement, that the marketability of the project has been proven and
that at least 90% of the units have been sold to bona fide purchasers. SEE
"MORTGAGE LOAN PROGRAM--REPRESENTATIONS BY OR ON BEHALF OF MORTGAGE LOAN
SELLERS; REPURCHASES" HEREIN FOR A DESCRIPTION OF CERTAIN OTHER REPRESENTATIONS
MADE BY OR ON BEHALF OF MORTGAGE LOAN SELLERS AT THE TIME MORTGAGE LOANS ARE
SOLD.
If provided in the related Prospectus Supplement, certain of the Mortgage
Pools may contain Mortgage Loans subject to temporary buydown plans ("Buydown
Mortgage Loans"), pursuant to 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
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such Mortgage Loan as to at least the principal amount thereof exceeding 75% of
the Value of the Mortgaged Property at origination of the Mortgage Loan. Such
insurance must remain in force at least until the Mortgage Loan amortizes to a
level that would produce a Loan-to-Value Ratio lower than 80%. SEE "DESCRIPTION
OF PRIMARY INSURANCE POLICIES--PRIMARY MORTGAGE INSURANCE POLICIES".
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then specifically known to the
Depositor, with respect to the Mortgage Loans, Agency Securities, Private
Mortgage-Backed Securities or Funding Agreements contained in the related Trust
Fund, including (i) the aggregate outstanding principal balance, the largest,
smallest and average outstanding principal balance of the Trust Fund Assets as
of the applicable Cut-off Date, and, with respect to Mortgage Loans secured by a
junior lien, the amount of the related Senior Liens, (ii) the type of property
securing the Mortgage Loans (e.g., one- to four-family houses, multifamily
residential dwellings, shares in Cooperatives and the related proprietary leases
or occupancy agreements, condominium units and other attached units, new or used
Manufactured Homes and vacation and second homes), (iii) the original terms to
maturity of the Mortgage Loans, (iv) the earliest origination date and latest
maturity date, (v) the aggregate principal balance of Mortgage Loans having
Loan-to-Value Ratios at origination exceeding 80%, or, with respect to Mortgage
Loans secured by a junior lien, the aggregate principal balance of Mortgage
Loans having combined Loan-to-Value Ratios exceeding 80%, (vi) the Interest
Rates or range of Interest Rates borne by the Mortgage Loans or mortgage loans
underlying the Agency Securities, Private Mortgage-Backed Securities or Funding
Agreements, (vii) the geographical distribution of the Mortgage Loans on a
state-by-state basis, (viii) the number and aggregate principal balance of
Buydown Mortgage Loans, if any, (ix) the weighted average Retained Interest, if
any, (x) with respect to ARM Loans, the adjustment dates, the highest, lowest
and weighted average margin, and the maximum Interest Rate variation at the time
of any adjustment and over the life of the ARM Loan, and (xi) with respect to
Mortgage Loans of the type described in (5) above, whether such loans provide
for payments of interest only for any period and the frequency and amount by
which, and the term during which, monthly payments adjust. If specific
information respecting the Trust Fund Assets is not known to the Depositor at
the time Securities are initially offered, more general information of the
nature described above will be provided in the Prospectus Supplement, and
specific information will be set forth in a report which will be available to
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.
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The Depositor will cause the Mortgage Loans comprising each Trust Fund to
be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Securities of the related series. The Master
Servicer named in the related Prospectus Supplement will service the Mortgage
Loans, either directly or through other loan servicing institutions pursuant to
a Pooling and Servicing Agreement or Servicing Agreement among the Depositor,
itself and the Trustee, and will receive a fee for such services. See "Mortgage
Loan Program" and "Description of the Securities". With respect to Mortgage
Loans serviced by the Master Servicer through a Sub- Servicer, the Master
Servicer will remain liable for its servicing obligations under the related
Pooling and Servicing Agreement or Servicing Agreement as if the Master Servicer
alone were servicing such Mortgage Loans.
The Depositor will make certain representations and warranties regarding
the Mortgage Loans, but its assignment of the Mortgage Loans to the Trustee will
be without recourse. SEE "DESCRIPTION OF THE SECURITIES-ASSIGNMENT OF TRUST FUND
ASSETS".
The obligations of the Master Servicer with respect to the Mortgage Loans
will consist principally of its contractual servicing obligations under the
related Pooling and Servicing Agreement or Servicing Agreement (including its
obligation to enforce certain purchase and other obligations of Sub-Servicers or
Mortgage Loan Sellers, or both, as more fully described herein under "Mortgage
Loan Program--Representations by or on behalf of Mortgage Loan Sellers;
Repurchases" and "Description of the Securities--Sub-Servicing" and
"--Assignment of Trust Fund Assets") and, unless otherwise provided in the
related Prospectus Supplement, its obligation to make certain cash advances in
the event of delinquencies in payments on or with respect to the Mortgage Loans
in amounts described herein under "Description of the Securities--Advances in
respect of Delinquencies". Any obligation of the Master Servicer to make
advances may be subject to limitations, to the extent provided herein and in the
related Prospectus Supplement.
SINGLE-FAMILY LOANS
The Single-Family Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by first mortgages or first deeds of trust (the
"Mortgages") creating a first lien on the Single-Family Properties. The
Single-Family Properties will consist of one- to four-family residences,
including detached and attached dwellings, townhouses, rowhouses, individual
condominium units, 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
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or occupancy agreements granting exclusive rights to occupy specific CooperativE
Units in the related buildings.
CONTRACTS
The Contracts will consist of manufactured housing conditional sales
contracts and installment loan agreements each secured by a Manufactured Home.
The Manufactured Homes securing the Contracts will consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of this paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under this chapter."
AGENCY SECURITIES
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 ("Freddie Mac Certificates"), (ii) Guaranteed Mortgage Pass-Through
Certificates issued and guaranteed as to timely payment of principal and
interest by the Federal National Mortgage Association ("Fannie Mae
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 principal distributions) or
the interest distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions (but not all such
distributions) on certain Freddie Mac, Fannie Mae 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, Fannie Mae or Freddie Mac 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 Freddie Mac or Fannie Mae 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
Freddie Mac's Cash or Guarantor Program, the GNMA I Program, the GNMA II Program
or another program specified in the Prospectus Supplement. The payment
characteristics of the Mortgage Loans underlying the Agency Securities will be
described in the related Prospectus Supplement.
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
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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 Fannie Mae as a seller-servicer of FHA Loans and/or VA Loans. The
mortgage loans underlying the GNMA Certificates will consist of FHA Loans and/or
VA Loans. Each such mortgage loan is secured by a one- to four-family
residential property. GNMA will approve the issuance of each such GNMA
Certificate in accordance with a guaranty agreement (a "Guaranty Agreement")
between GNMA and the GNMA Issuer. Pursuant to its Guaranty Agreement, a GNMA
Issuer will be required to advance its own funds in order to make timely
payments of all amounts due on each such GNMA Certificate, even if the payments
received by the GNMA Issuer on the FHA Loans or VA Loans underlying each such
GNMA Certificate are less than the amounts due on each such GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties and will provide for the payment by or on behalf of the
GNMA Issuer to the registered holder of such GNMA Certificate of scheduled
monthly payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly principal and
interest payment on each FHA Loan or VA Loan underlying such GNMA Certificate,
less the applicable servicing and guarantee fee which together equal the
difference between the interest on the FHA Loan or VA Loan and the pass-through
rate on the GNMA Certificate. In addition, each payment will include
proportionate pass-through payments of any prepayments of principal on the FHA
Loans or VA Loans underlying such GNMA Certificate and liquidation proceeds in
the event of a foreclosure or other disposition of any such FHA Loans or VA
Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such GNMA Certificate. In the event no payment is made by a
GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered holder of
the GNMA Certificates held in a Trust Fund, will have the right to proceed
directly against GNMA under the terms of the Guaranty Agreements relating to
such GNMA Certificates for any amounts that are not paid when due.
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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.
FEDERAL HOME LOAN MORTGAGE CORPORATION
Freddie Mac is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
"Freddie Mac Act"). The common stock of Freddie Mac is owned by the Federal Home
Loan Banks. Freddie Mac 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
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principal activity of Freddie Mac 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 Freddie Mac Certificates. Freddie Mac 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.
FREDDIE MAC CERTIFICATES
Each Freddie Mac 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 "Freddie Mac Certificate group"). Freddie Mac Certificates are sold
under the terms of a Mortgage Participation Certificate Agreement. A Freddie Mac
Certificate may be issued under either Freddie Mac's Cash Program or Guarantor
Program.
Mortgage loans underlying the Freddie Mac 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 Freddie Mac Act. A Freddie Mac Certificate group may include whole loans,
participation interests in whole loans and undivided interests in whole loans
and/or participations comprising another Freddie Mac Certificate group. Under
the Guarantor Program, any such Freddie Mac Certificate group may include only
whole loans or participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
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 Freddie Mac Certificate group represented by such Freddie
Mac Certificate, whether or not received. Freddie Mac also guarantees to each
registered holder of a Freddie Mac 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 Freddie
Mac's Gold PC Program, Freddie Mac 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, Freddie Mac indemnifies holders of
Freddie Mac Certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. Freddie Mac 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 Freddie Mac Certificates, including the timing
of demand for acceleration, Freddie Mac 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
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each mortgagor, and Freddie Mac has not adopted
standards which require that the demand be made within any specified period.
Freddie Mac 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
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Bank. The obligations of Freddie Mac under its guarantee are obligations solely
of Freddie Mac and are not backed by, nor entitled to, the full faith and credit
of the United States. If Freddie Mac were unable to satisfy such obligations,
distributions to holders of Freddie Mac Certificates would consist solely of
payments and other recoveries on the underlying mortgage loans and, accordingly,
monthly distributions to holders of Freddie Mac Certificates would be affected
by delinquent payments and defaults on such mortgage loans.
Registered holders of Freddie Mac Certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial repayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or the seller thereof.
Freddie Mac is required to remit each registered Freddie Mac Certificateholder's
pro rata share of principal payments on the underlying mortgage loans, interest
at the Freddie Mac 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 Freddie Mac.
Under Freddie Mac's Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a Freddie Mac Certificate
may exceed the pass-through rate on the Freddie Mac Certificate. Under such
program, Freddie Mac 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 Freddie Mac. 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 Freddie Mac Certificate group under the Cash Program
will vary since mortgage loans and participations are purchased and assigned to
a Freddie Mac Certificate group based upon their yield to Freddie Mac rather
than on the interest rate on the underlying mortgage loans. Under Freddie Mac's
Guarantor Program, the pass-through rate on a Freddie Mac Certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of Freddie Mac's management
and guaranty income as agreed upon between the seller and Freddie Mac.
Freddie Mac 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 Freddie Mac
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 Freddie Mac 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 Freddie Mac Certificates sold by Freddie Mac
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
Fannie Mae is a federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act (the "Charter Act"). Fannie Mae 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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Fannie Mae provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. Fannie Mae 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, Fannie
Mae helps to redistribute mortgage funds from capital-surplus to capital-short
areas.
FANNIE MAE CERTIFICATES
Fannie Mae Certificates are Guaranteed Mortgage Pass-Through Certificates
representing fractional undivided interests in a pool of mortgage loans formed
by Fannie Mae. Each mortgage loan must meet the applicable standards of the
Fannie Mae purchase program. Mortgage loans comprising a pool are either
provided by Fannie Mae from its own portfolio or purchased pursuant to the
criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae 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 Fannie Mae 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 Fannie Mae 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 Fannie Mae 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 Fannie Mae'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 Fannie Mae 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 Fannie Mae assumes
the entire risk for foreclosure losses), the annual interest rates on the
mortgage loans underlying a Fannie Mae Certificate will generally be between 55
basis points and 255 basis points greater than the annual Fannie Mae Certificate
pass-through rate. If specified in the Prospectus Supplement, Fannie Mae
Certificates may be backed by adjustable rate mortgages.
Fannie Mae guarantees to each registered holder of a Fannie Mae 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 Fannie Mae 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
Fannie Mae under its guarantees are obligations solely of Fannie Mae 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 Fannie Mae up to $2.25 billion outstanding at any time,
neither the United States nor any agency thereof is obligated to finance Fannie
Mae's operations or to assist Fannie Mae in any other manner. If Fannie Mae were
unable to satisfy its obligations, distributions to holders of Fannie Mae
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Fannie Mae Certificates would be affected by delinquent payments and defaults on
such mortgage loans.
Fannie Mae Certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae Certificates backed by
pools containing graduated payment
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mortgage loans or mortgage loans secured by multifamily projects) are available
in book-entry form only. Distributions of principal and interest on each Fannie
Mae Certificate will be made by Fannie Mae on the 25th day of each month to the
persons in whose name the Fannie Mae Certificate is entered in the books of the
Federal Reserve Banks (or registered on the Fannie Mae Certificate register in
the case of fully registered Fannie Mae Certificates) as of the close of
business on the last day of the preceding month. With respect to Fannie Mae
Certificates issued in book-entry form, distributions thereon will be made by
wire, and with respect to fully registered Fannie Mae 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 Freddie Mac, Fannie Mae or GNMA Certificates. The
underlying securities will be held under a trust agreement by Freddie Mac,
Fannie Mae or GNMA, each as trustee, or by another trustee named in the related
Prospectus Supplement. Freddie Mac, Fannie Mae 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, Fannie
Mae or Freddie Mac. 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
participations or 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
Fannie Mae or Freddie Mac 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
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the purpose of among other things, establishing trusts and acquiring and selling
housing loans to such trusts and selling beneficial interests in such trusts. If
so specified in the Prospectus Supplement, the PMBS Issuer may be an affiliate
of the Depositor. The obligations of the PMBS Issuer will generally be limited
to certain representations and warranties with respect to the assets conveyed by
it to the related trust. Unless otherwise specified in the related Prospectus
Supplement, the PMBS Issuer will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Mortgage-Backed Securities issued
under the PMBS Agreement. Additionally, although the mortgage loans underlying
the Private Mortgage-Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
UNDERLYING LOANS
The mortgage loans underlying the Private Mortgage-Backed Securities may
consist of fixed rate, level payment, fully amortizing loans or graduated
payment mortgage loans, buy-down loans, adjustable rate mortgage loans, or loans
having balloon or other special payment features. Such Mortgage Loans may be
secured by single family property, multifamily property, manufactured homes or
by an assignment of the proprietary lease or occupancy agreement relating to a
specific dwelling within a Cooperative and the related shares issued by such
Cooperative. Except as otherwise specified in the related Prospectus Supplement,
(i) no mortgage loan will have had a Loan-to-Value Ratio at origination in
excess of 95% (except in the case of High LTV Loans), (ii) each single family
loan secured by a mortgaged property having a loan-to-value ratio in excess of
80% at origination will be covered by a primary mortgage insurance policy
(except in the case of High LTV Loans), (iii) each mortgage loan will have had
an original term to stated maturity of not less than 5 years and not more than
40 years, (iv) no mortgage loan that was more than 30 days delinquent as to the
payment of principal or interest will have been eligible for inclusion in the
assets under the related PMBS Agreement, (v) each mortgage loan (other than a
cooperative loan) 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
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mortgage loans which comprise the underlying assets for the Private
Mortgage-Backed Securities including (A) the payment features of such mortgage
loans, (B) the approximate aggregate principal balance, if known, of underlying
mortgage loans insured or guaranteed by a governmental entity, (C) the servicing
fee or range of servicing fees with respect to the mortgage loans and (D) the
minimum and maximum stated maturities of the underlying mortgage loans at
origination, (iii) the maximum original term-to-stated maturity of the Private
Mortgage-Backed Securities, (iv) the weighted average term-to-stated maturity of
the Private Mortgage-Backed Securities, (v) the pass-through or certificate rate
of the Private Mortgage-Backed Securities, (vi) the weighted average
pass-through or certificate rate of the Private Mortgage-Backed Securities,
(vii) the PMBS Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the
PMBS Trustee for such Private Mortgage-Backed Securities, (viii) certain
characteristics of credit support, if any, such as reserve funds, insurance
policies, letters of credit or guarantees relating to the mortgage loans
underlying the Private Mortgage-Backed Securities or to such Private
Mortgage-Backed Securities themselves, (ix) the term on which the underlying
mortgage loans for such Private Mortgage-Backed Securities may, or are required
to, be purchased prior to their stated maturity or the stated maturity of the
Private Mortgage-Backed Securities and (x) the terms on which mortgage loans may
be substituted for those originally underlying the Private Mortgage-Backed
Securities.
FUNDING AGREEMENTS
If specified in the Prospectus Supplement for a series, the Depositor may
enter into a funding agreement with a limited-purpose subsidiary or affiliate of
a Mortgage Loan Seller (a "Finance Company") pursuant to which (i) the Depositor
will lend the net proceeds of the sale of the Securities to such Finance
Company, (ii) the Finance Company will pledge Trust Fund Assets owned by it to
secure the loan from the Depositor, and (iii) the Depositor will assign the
Funding Agreement, as so secured, to the Trust Fund for a series (a "Funding
Agreement"). No Finance Company will be authorized to engage in any business
activities other than the financing and sale of Trust Fund Assets.
Pursuant to a Funding Agreement (i) the Depositor will lend a Finance
Company the proceeds from the sale of a series of Securities and such Finance
Company will pledge to the Depositor as security therefor Trust Fund Assets
having an aggregate unpaid principal balance as of any date of determination
equal to at least the amount of the loan, and (ii) the Finance Company will
agree to repay such loan by causing payments on the Trust Fund Assets to be made
to the Trustee as assignee of the Depositor in such amounts as are necessary
(together with payments from the related Reserve Fund or other funds or
accounts) to pay accrued interest on such loan and to amortize the entire
principal amount of such loan. A Finance Company is not obligated to provide
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
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tax treatment of the related series, or (ii) deposit the amount of the Finance
Company's prepayment in the Certificate Account.
In the event of a default under a Funding Agreement, the Trustee will have
recourse to the related Finance Company for the benefit of the holders of the
Securities, including the right to foreclose upon the Trust Fund Assets securing
that Funding Agreement. The participating Finance Companies will be
limited-purpose finance entities and, therefore, it is unlikely that a
defaulting Finance Company will have any significant assets except those pledged
to the Trust Fund for the series and those that secure other mortgage-backed
securities and collateralized mortgage obligations. The Trustee has no recourse
to assets pledged to secure other securities except to the limited extent that
funds generated by such assets exceed the amount required to pay those
securities and are released from the lien securing such other securities and
returned to a Finance Company. For that reason, prospective purchasers of
Securities should make their investment decisions on the basis that the
Securities of a series have rights solely with respect to the assets transferred
to the Trust Fund for that series of Securities.
In the event of a default under a Funding Agreement and the sale by the
Trustee of the Trust Fund Assets securing the obligations of the Finance Company
under the Funding Agreement, the Trustee may distribute principal in an amount
equal to the unpaid principal balance of the Trust Fund Assets so liquidated
ratably among all classes of Securities within the series, or in such other
manner as may be specified in the related Prospectus Supplement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Trust Fund Assets or will be used by
the Depositor for general corporate purposes. The Depositor expects that it will
make additional sales of securities similar to the Securities from time to time,
but the timing and amount of offerings of Securities will depend on a number of
factors, including the volume of Trust Fund Assets acquired by the Depositor,
prevailing interest rates, availability of funds and general market conditions.
YIELD CONSIDERATIONS
Unless otherwise provided in the related Prospectus Supplement, each
monthly interest payment on a Trust Fund Asset is calculated as one-twelfth of
the applicable Interest Rate multiplied by the unpaid principal balance thereof.
Interest to be distributed on each Distribution Date to the holders of the
various classes of Securities (other than certain classes of Strip Securities)
of each series will be similarly calculated for the applicable period, as
one-twelfth of the applicable Security Interest Rate multiplied by the
outstanding Principal Balance thereof, except as provided below with respect to
prepayments. In the case of Strip Securities with no or, in certain 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-
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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 specified in the related Prospectus Supplement, partial principal
prepayments are applied on the first day of the month following receipt, with no
resulting reduction in interest payable for the period in which the partial
principal prepayment is made. Unless specified otherwise in the related
Prospectus Supplement, neither the Trustee, the Master Servicer nor the
Depositor will be obligated to fund shortfalls in interest collections resulting
from prepayments. Holders of Agency Securities are entitled to a full month's
interest in connection with prepayments in full of the underlying mortgage
loans. Full and partial principal prepayments collected during the applicable
Prepayment Period will be available for distribution to Securityholders on the
related Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, a "Prepayment Period" in respect of any Distribution Date will
commence on the first day of the month in which the preceding Distribution Date
occurs (or, as to the first Prepayment Period, the day after the Cut-off Date)
and will end on the last day of the month prior to the month in which the
related Distribution Date occurs. SEE "MATURITY AND PREPAYMENT CONSIDERATIONS"
AND "DESCRIPTION OF THE SECURITIES--GENERAL".
In addition, if so specified in the related Prospectus Supplement, a
holder of a non-offered class of Securities (the "Call Class") will have the
right, solely at its discretion, to terminate the related Trust Fund on any
Distribution Date after the 12th Distribution Date following the date of initial
issuance of the related series of Securities and until such date as the Clean-up
Call becomes exercisable and thereby effect early retirement of the Securities
of such series. Any such call will be of the entire Trust Fund at one time;
multiple calls with respect to any series of Securities will not be permitted.
Such termination would result in the concurrent retirement of all outstanding
Securities of the related series and would decrease the average lives of such
Securities, perhaps significantly. The earlier after the Closing Date that such
termination occurs, the greater would be such effect.
The Prospectus Supplement for each series of Securities may set forth
additional information regarding yield considerations.
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
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prohibiting prepayment for a specified period after the origination date (a
"Lockout Period" and the date of expiration thereof, a "Lockout Date"),
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. The Depositor is not aware of any historical prepayment experience
with respect to mortgage loans secured by properties located in Puerto Rico or
Guam and, accordingly, prepayments on such loans may not occur at the same rate
or be affected by the same factors as other mortgage loans.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates, the terms
of the mortgage loans (as affected by the existence of lockout provisions,
due-on-sale and due-on-encumbrance clauses and prepayment fees), the quality of
management of the mortgaged properties, possible changes in tax laws and the
availability of mortgage funds, may affect prepayment experience. Unless
otherwise provided in the related Prospectus Supplement, all Mortgage Loans,
mortgage loans underlying Private Mortgage- Backed Securities or mortgage loans
secured by Funding Agreements will contain due-on-sale provisions permitting the
lender to accelerate the maturity of such mortgage loan upon sale or certain
transfers by the borrower of the underlying Mortgaged Property. The Multifamily
Loans may contain due-on-encumbrance provisions (permitting the lender to
accelerate the maturity of the Multifamily Loan upon further encumbrance by the
borrower of the underlying Multifamily Property). Conventional mortgage loans
that underlie Freddie Mac Certificates and Fannie Mae 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
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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
Salomon Brothers Mortgage Securities VII, Inc (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 and is an affiliate
of Salomon Smith Barney Inc. The Depositor was organized for the purpose of
serving as a private secondary mortgage market conduit. The Depositor maintains
its principal office at 390 Greenwich Street, 4th Floor, New York, New York
10013. Its telephone number is (212) 816-6000.
The Depositor does not have, nor is it expected in the future to have, any
significant assets.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will be purchased by the Depositor, either directly or
indirectly, from the Mortgage Loan Sellers. The Mortgage Loans so acquired by
the Depositor will have been originated by the Originators in accordance with
the underwriting criteria specified below under "Underwriting Standards".
UNDERWRITING STANDARDS
All Mortgage Loans will have been subject to underwriting standards
acceptable to the Depositor and applied as described below. Each Mortgage Loan
Seller, or another party on its behalf, will represent and warrant that Mortgage
Loans purchased by or on behalf of the Depositor from it have been originated by
the related Originators in accordance with such underwriting standards.
Unless otherwise specified in the related Prospectus Supplement, the
underwriting standards are applied by the Originators to evaluate the borrower's
credit standing and repayment ability, and the value and adequacy of the
Mortgaged Property as collateral. Initially, a prospective borrower is required
to fill out a detailed application regarding pertinent credit information. As
part of the description of the borrower's financial condition, the borrower is
required to provide a current balance sheet describing assets and liabilities
and a statement of income and expenses, as well as an authorization to apply for
a credit report that summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In addition, an employment
verification is obtained that reports the borrower's current salary and may
contain information regarding length of employment and whether it is expected
that the borrower will continue such employment in the
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future. If a prospective borrower is self-employed, the borrower is required to
submit copies of signed tax returns. The borrower may also be required to
authorize verification of deposits at financial institutions where the borrower
has demand or savings accounts. In the case of a Multifamily Loan, the borrower
is also required to provide certain information regarding the related
Multifamily Property, including a current rent schedule, the type and length of
leases and pro forma operating income statements. In addition, the Depositor
will consider the location of the Multifamily Property, the availability of
competitive lease space and rental income of comparable properties in the
relevant market area, the overall economy and demographic features of the
geographic area and the mortgagor's prior experience in owning and operating
properties similar to the Multifamily Properties.
In determining the adequacy of the property as collateral, an appraisal is
made of each property considered for financing, except in the case of new
Manufactured Homes, as described under "The Trust Funds". Each appraiser is
selected in accordance with predetermined guidelines established for appraisers.
The appraiser is required to inspect the property and verify that it is in good
condition and that construction, if new, has been completed. With respect to
properties other than Multifamily Properties, the appraisal is based on the
market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the home. With respect to
Multifamily Properties, the appraisal must specify whether an income analysis, a
market analysis or a cost analysis was used. An appraisal employing the income
approach to value analyzes a property's cash flow, expenses, capitalization and
other operational information in determining the property's value. The market
approach to value analyzes the prices paid for the purchase of similar
properties in the property's area, with adjustments made for variations between
these other properties and the property being appraised. The cost approach
requires the appraiser to make an estimate of land value and then determine the
current cost of reproducing the building less any accrued depreciation. In any
case, the value of the property being financed, as indicated by the appraisal,
must be such that it currently supports, and is anticipated to support in the
future, the outstanding loan balance.
In the case of Single Family Loans and Contracts, once all applicable
employment, credit and property information is received, a determination is made
as to whether the prospective borrower has sufficient monthly income available
(i) to meet the borrower's monthly obligations on the proposed mortgage loan
(determined on the basis of the monthly payments due in the year of origination)
and other expenses related to the home (such as property taxes and hazard
insurance) and (ii) to meet monthly housing expenses and other financial
obligations and monthly living expenses. Unless otherwise provided in the
related Prospectus Supplement, the underwriting standards to be applied to the
Single Family Loans will be generally similar to the traditional underwriting
guidelines used by Fannie Mae and Freddie Mac 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 Fannie Mae and
Freddie Mac 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
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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 Fannie Mae
or Freddie Mac. Each Originator and Mortgage Loan Seller must be a HUD- approved
mortgagee or an institution the deposit accounts in which are insured by the
Bank Insurance Fund ("BIF") or Savings Association Insurance Fund ("SAIF") of
the Federal Deposit Insurance Corporation (the "FDIC"). In addition, with
respect to FHA Loans or VA Loans, each Originator must be approved to originate
such Mortgage Loans by the FHA or VA, as applicable. In addition, each
Originator and Mortgage Loan Seller must satisfy certain criteria as to
financial stability evaluated on a case by case basis by the Depositor.
REPRESENTATIONS BY OR ON BEHALF OF MORTGAGE LOAN SELLERS; REPURCHASES
Each Mortgage Loan Seller, or a party on its behalf, will have made
representations and warranties in respect of the Mortgage Loans sold by such
Mortgage Loan Seller. Such representations and warranties include, among other
things: (i) that any required hazard insurance
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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.
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.
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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 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 an agreement (the "Pooling and
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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 (the
"Indenture") between the related Issuer (the "Issuer") and the Trustee named in
the Prospectus Supplement. Such Trust Fund will be created pursuant to a trust
agreement (the "Owner Trust Agreement") between the Depositor and the Owner
Trustee. The Issuer will be the Depositor or an owner trust established by it
for the purpose of issuing such 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. Each series of
Securities evidencing interests in a Trust Fund consisting exclusively of Agency
Securities or Private Mortgage-Backed Securities will be issued pursuant to a
Trust Agreement between the Depositor and the Trustee (each Trust Agreement,
Owner Trust Agreement, Indenture, Servicing Agreement or Pooling and Servicing
Agreement, an "Agreement"). The provisions of each Agreement will vary depending
upon the nature of the Securities to be issued thereunder and the nature of the
related Trust Fund. Various forms of Pooling and Servicing Agreement, Servicing
Agreement, Owner Trust Agreement, Trust Agreement and Indenture have been filed
as exhibits to the Registration Statement of which this Prospectus is a part.
The following summaries describe certain provisions which may appear in each
Agreement. The Prospectus Supplement for a series of Securities will describe
any provision of the Agreement relating to such series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the related Agreements for each Trust
Fund and the related Prospectus Supplement. As used herein with respect to any
series, the term "Certificate" or the term "Note" refers to all of the
Certificates or Notes of that series, whether or not offered hereby and by the
related Prospectus Supplement, unless the context otherwise requires.
GENERAL
The Certificates of each series (including any class of Certificates not
offered hereby) will be issued in fully registered form only and will represent
the entire beneficial ownership interest in the Trust Fund created pursuant to
the related Agreement. The Notes of each series (including any class of Notes
not offered hereby) will be issued in fully registered form only and will
represent indebtedness of the Trust Fund created pursuant to the related
Agreement. If so provided in the Prospectus Supplement, any class of Securities
of any series may be represented by a certificate or note (the "DTC Registered
Securities") registered in the name of a nominee of The Depository Trust Company
("DTC"). The interests of beneficial owners of such Securities will be
represented by such entries on the records of participating members of DTC.
Definitive certificates or notes will be available for such Securities only
under limited circumstances as provided in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, each Trust Fund
will consist of (i) such Trust Fund Assets, or interests therein, exclusive of
any portion of interest payments (the "Retained Interest") on a Trust Fund Asset
retained by the Depositor or any previous owner thereof, as from time to time
are subject to the related Agreement; (ii) such assets as from time to time are
identified as deposited in the Certificate Account or any other account
maintained for the benefit of the Securityholders; (iii) with respect to Trust
Funds that include Mortgage Loans, (a) property acquired on behalf of
Securityholders by foreclosure, deed in lieu of foreclosure or repossession and
any revenues received thereon; (b) the rights of the Depositor under any hazard
insurance policies, FHA insurance policies, VA guarantees and primary mortgage
insurance policies, as described under "Description of Primary Insurance
Policies"; (c) the rights of the Depositor under the agreement or agreements
pursuant to which it acquired the Mortgage Loans in such Trust Fund; and (d) the
rights of the Trustee in any cash advance reserve fund or surety bond as
described under "Advances in respect of Delinquencies" and (iv) any letter of
credit, mortgage
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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. In addition, a series may include two or more classes of
Securities which differ as to 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. 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
stated principal amount (a "Principal Balance") and, unless otherwise provided
in the related Prospectus Supplement, 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.
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
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of Certificates in such a series will constitute "regular interests" in the
related REMIC as defined in the Code. As to each series of Certificates with
respect to which a REMIC election is to be made, the Master Servicer or the
Trustee will be obligated to take all actions required in order to comply with
applicable laws and regulations and, unless otherwise provided in the related
Prospectus Supplement, will be obligated to pay any Prohibited Transaction Taxes
or Contribution Taxes arising out of a breach of its obligations with respect to
such compliance without any right of reimbursement therefor from the Trust Fund
or from any Securityholder. Unless otherwise provided in the related Prospectus
Supplement, a Prohibited Transaction Tax or Contribution Tax resulting from any
other cause will be charged against the related Trust Fund, resulting in a
reduction in amounts otherwise distributable to Securityholders. SEE "FEDERAL
INCOME TAX CONSEQUENCES--REMICS-- PROHIBITED TRANSACTIONS TAX AND OTHER TAXES".
As to each series, the Securities of each class offered hereby will be
rated in one of the four highest rating categories by one or more nationally
recognized statistical rating organizations (each, a "Rating Agency").
ASSIGNMENT OF TRUST FUND ASSETS
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of any series of Securities, the Depositor will
cause the Mortgage Loans comprising the Mortgage Pool included in the related
Trust Fund to be assigned to the Trustee, together with all principal and
interest received by or on behalf of the Depositor on or with respect to such
Mortgage Loans after the close of business on the first day of the month of
formation of the related Trust Fund (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,
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the Master Servicer, the relevant Mortgage Loan Seller or any other prior
holder of the Mortgage Loan.
(2) With respect to each Cooperative Loan, the Cooperative Note, the
original security agreement, the proprietary lease or occupancy agreement,
the related stock certificate and related stock powers endorsed in blank,
and a copy of the original filed financing statement together with an
assignment thereof to the Trustee in a form sufficient for filing. Unless
otherwise provided in the related Prospectus Supplement, the Depositor will
promptly cause the assignment and financing statement of each related
Cooperative Loan to be filed in the appropriate public office, except in
states where in the opinion of counsel acceptable to the Trustee, such
filing is not required to protect the Trustee's interest in the Cooperative
Loan against the claim of any subsequent transferee or any successor to or
creditor of the Depositor, the Master Servicer, the relevant Mortgage Loan
Seller or any prior holder of the Cooperative Loan.
(3) With respect to each Contract, the original Contract endorsed,
without recourse, to the order of the Trustee and copies of documents and
instruments related to the Contract and the security interest in the
Manufactured Home securing the Contract, together with a blanket assignment
to the Trustee of all Contracts in the related Trust Fund and such
documents and instruments. In order to give notice of the right, title and
interest of the Securityholders to the Contracts, the Depositor will cause
to be executed and delivered to the Trustee a UCC-1 financing statement
identifying the Trustee as the secured party and identifying all Contracts
as collateral.
With respect to any Mortgage Loan secured by a Mortgaged Property located
in Puerto Rico (a "Puerto Rico Mortgage Loan"), the Mortgages with respect to
such Mortgage Loans either (i) secure a specific obligation for the benefit of a
specified person (a "Direct Puerto Rico Mortgage") or (ii) secure an instrument
transferable by endorsement (an "Endorsable Puerto Rico Mortgage"). Endorsable
Puerto Rico Mortgages do not require an assignment to transfer the related lien.
Rather, transfer of such mortgages follows an effective endorsement of the
related Mortgage Note and, therefore, delivery of the assignment referred to in
paragraph (1) above would be inapplicable. Direct Puerto Rico Mortgages,
however, require an assignment to be recorded with respect to any transfer of
the related lien and such assignment would be delivered to the Trustee.
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.
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With respect to the Mortgage Loans in a Mortgage Pool, the Depositor will
make representations and warranties as to the types and geographical
concentration of such Mortgage Loans and as to the accuracy in all material
respects of certain identifying information furnished to the Trustee in respect
of each such Mortgage Loan (e.g., original Loan-to-Value Ratio, principal
balance as of the Cut-off Date, Interest Rate, Net Interest Rate and maturity).
In addition, unless otherwise specified in the related Prospectus Supplement,
the Depositor will represent and warrant that, as of the Cut-off Date for the
related series of Securities, no Mortgage Loan was currently more than 30 days
delinquent as to payment of principal and interest and no Mortgage Loan was more
than 30 days delinquent more than once during the previous 12 months. Upon a
breach of any such representation of the Depositor that materially and adversely
affects the value of a Mortgage Loan or the interests of the Securityholders
therein, the Depositor will be obligated either to cure the breach in all
material respects, repurchase the Mortgage Loan at the Purchase Price or
substitute for such Mortgage Loan as described below.
Unless otherwise provided in the related Prospectus Supplement, if the
Depositor discovers or receives notice of any breach of its representations or
warranties with respect to a Mortgage Loan, the Depositor may, rather than
repurchase the Mortgage Loan as provided above, remove such Mortgage Loan from
the Trust Fund (a "Deleted Mortgage Loan") and substitute in its place one or
more Mortgage Loans (each, a "Substitute Mortgage Loan"), but only if (i) with
respect to a Trust Fund for which a REMIC election is to be made, such
substitution is effected within two years of the date of initial issuance of the
Certificates (plus permissible extensions) or (ii) with respect to a Trust Fund
for which no REMIC election is to be made, such substitution is effected within
120 days of the date of initial issuance of the Securities. Except as otherwise
provided in the related Prospectus Supplement, any Substitute Mortgage Loan
will, on the date of substitution, (i) have an outstanding principal balance,
after deduction of all scheduled payments due in the month of substitution, not
in excess of (and not more than $10,000 less than) the outstanding principal
balance, after deduction of all unpaid scheduled payments due as of the date of
substitution, of the Deleted Mortgage Loan, (ii) have an Interest Rate not less
than (and not more than 1% greater than) the Interest Rate of the Deleted
Mortgage Loan, (iii) have a Net Interest Rate equal to the Net Interest Rate of
the Deleted Mortgage Loan, (iv) have a remaining term to maturity not greater
than (and not more than one year less than) that of the Deleted Mortgage Loan
(v) have a Lockout Date, if applicable, not earlier than the Lockout Date on the
Deleted Mortgage Loan and (vi) comply with all of the representations and
warranties set forth in the Agreement as of the date of substitution. In
connection with any substitution, an amount equal to the difference between the
Purchase Price of the Deleted Mortgage Loan and the outstanding principal
balance of the Substitute Mortgage Loan (after deduction of all scheduled
payments due in the month of substitution), together with one month's interest
at the applicable Net Interest 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
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Trustee that no action has been taken or failed to be taken, no event has
occurred and no state of facts exists or has existed on or prior to the date of
the initial issuance of the Securities which has resulted or will result in the
exclusion from, denial of or defense to coverage under any applicable primary
mortgage insurance policy, FHA insurance policy, mortgage pool insurance policy,
special hazard insurance policy or bankruptcy bond, irrespective of the cause of
such failure of coverage but excluding any failure of an insurer to pay by
reason of the insurer's own breach of its insurance policy or its financial
inability to pay (such representation being referred to herein as the
"insurability representation"). SEE "DESCRIPTION OF PRIMARY INSURANCE POLICIES"
AND "DESCRIPTION OF CREDIT SUPPORT" HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT FOR INFORMATION REGARDING THE EXTENT OF COVERAGE UNDER THE
AFOREMENTIONED INSURANCE POLICIES. Upon a breach of the insurability
representation which materially and adversely affects the interests of the
Securityholders in a Mortgage Loan, the Depositor or the Mortgage Loan Seller,
as the case may be, will be obligated either to cure the breach in all material
respects or to purchase such Mortgage Loan at the Purchase Price, subject to the
limitations specified in the related Prospectus Supplement. The related
Prospectus Supplement may provide that the performance of an obligation to
repurchase Mortgage Loans following a breach of an insurability representation
will be ensured in the manner specified therein.
The obligation to repurchase or, other than with respect to the
insurability representation if applicable, to substitute Mortgage Loans as
described above constitutes the sole remedy available to the Securityholders or
the Trustee for any breach of the above described representations.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Pooling and Servicing Agreement or Servicing Agreement.
Upon a breach of any such representation of the Master Servicer which materially
and adversely affects the interests of the Securityholders, the Master Servicer
will be obligated to cure the breach in all material respects.
ASSIGNMENT OF AGENCY SECURITIES
The Depositor will cause the Agency Securities to be registered in the name
of the Trustee or its nominee, and the Trustee concurrently will execute,
countersign and deliver the Securities. Each Agency Security will be identified
in a schedule appearing as an exhibit to the related Agreement, which will
specify as to each Agency Security the original principal amount and outstanding
principal balance as of the Cut-off Date, the annual pass-through rate (if any)
and the maturity date.
ASSIGNMENT OF PRIVATE MORTGAGE-BACKED SECURITIES
The Depositor will cause Private Mortgage-Backed Securities to be
registered in the name of the Trustee. The Trustee (or the custodian) will have
possession of any certificated Private Mortgage- Backed Securities. Unless
otherwise specified in the related Prospectus Supplement, 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.
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ASSIGNMENT OF FUNDING AGREEMENTS
The Depositor will cause Funding Agreements to be registered in the name of
the Trustee. The Trustee (or the custodian) will have possession of any Funding
Agreement. Unless otherwise specified in the related Prospectus Supplement, the
Trustee will be in possession of or be assignee of record of any underlying
assets for Funding Agreements. See "The Trust Funds--Funding Agreements" herein.
Each Funding Agreement will be identified in a schedule appearing as an exhibit
to the related Agreement which will specify the original principal amount,
outstanding principal balance as of the Cut-off Date, annual pass-through rate
or interest rate and maturity date for each underlying asset secured by the
Funding Agreements.
DEPOSITS TO CERTIFICATE ACCOUNT
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Trust Fund
Assets (collectively, the "Certificate Account"), which must be either (i)
maintained with a bank or trust company, and in a manner, satisfactory to the
Rating Agency or Agencies rating any class of Securities of such series or (ii)
an account or accounts the deposits in which are insured by the BIF or the SAIF
(to the limits established by the FDIC) and the uninsured deposits in which are
otherwise secured such that the Securityholders have a claim with respect to the
funds in the Certificate Account or a perfected first priority security interest
against any collateral securing such funds that is superior to the claims of any
other depositors or general creditors of the institution with which the
Certificate Account is maintained. The collateral eligible to secure amounts in
the Certificate Account is limited to United States government securities and
other high-quality investments specified in the related Pooling and Servicing
Agreement or the related Servicing Agreement and Indenture ("Permitted
Investments"). A Certificate Account may be maintained as an interest bearing or
a non-interest bearing account, or the funds held therein may be invested
pending each succeeding Distribution Date in Permitted Investments. Unless
otherwise provided in the related Prospectus Supplement, any interest or other
income earned on funds in the Certificate Account will be paid to the Master
Servicer or the Trustee or their designee as additional compensation. The
Certificate Account may be maintained with an institution that is an affiliate
of the Master Servicer or the Trustee, provided that such institution meets the
standards set forth above. If permitted by the Rating Agency or Agencies and so
specified in the related Prospectus Supplement, a Certificate Account may
contain funds relating to more than one series of pass-through certificates and
may, if applicable, contain other funds respecting payments on mortgage loans
belonging to the Master Servicer or serviced or master serviced by it on behalf
of others.
Each Sub-Servicer servicing a Mortgage Loan pursuant to a Sub-Servicing
Agreement will establish and maintain one or more separate accounts which may be
interest bearing and which will comply with the standards with respect to
Certificate Accounts set forth above or such other standards as may be
acceptable to the Master Servicer (collectively, the "Sub-Servicing Account").
The Sub-Servicer is required to credit to the related Sub-Servicing Account on a
daily basis the amount of all proceeds of Mortgage Loans received by the
Sub-Servicer, less its servicing compensation. The Sub-Servicer shall remit to
the Master Servicer by wire transfer of immediately 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
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Pooling and Servicing Agreement or the related Servicing Agreement and Indenture
and described in the related Prospectus Supplement, the following payments and
collections received, or advances made, by the Master Servicer or on its behalf
subsequent to the Cut-off Date (other than payments due on or before the Cut-off
Date, and exclusive of any amounts representing a Retained Interest):
(i) all payments on account of principal, including principal
prepayments, on the
Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, net
of any portion thereof retained by the Master Servicer or by a Sub-Servicer
as its servicing compensation and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies and any special
hazard insurance policy (to the extent such proceeds are not applied to the
restoration of the property or released to the mortgagor in accordance with
the normal servicing procedures of the Master Servicer or the related
Sub-Servicer, subject to the terms and conditions of the related Mortgage
and Mortgage Note), any primary mortgage insurance policy, any FHA
insurance policy, any VA guarantee, any bankruptcy bond and any mortgage
pool insurance policy (collectively, "Insurance Proceeds") and all other
amounts received and retained in connection with the liquidation of
defaulted Mortgage Loans, by foreclosure or otherwise ("Liquidation
Proceeds"), together with the net proceeds on a monthly basis with respect
to any Mortgaged Properties acquired for the benefit of Securityholders by
foreclosure or by deed in lieu of foreclosure or otherwise;
(iv) any amounts required to be paid under any letter of credit, as
described below under "Description of Credit Support--Letter of Credit";
(v) any advances made as described below under "Advances in
respect of
Delinquencies";
(vi) if applicable, all amounts required to be transferred to the
Certificate Account from a reserve fund, as described below under
"Description of Credit
Support--Reserve Funds";
(vii) any Buydown Funds (and, if applicable, investment earnings
thereon) required to be deposited in the Certificate Account as described
below;
(viii) all proceeds of any Mortgage Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any Sub-Servicer or any
Mortgage Loan Seller as described under "Mortgage Loan
Program-Representations by or on behalf of Mortgage Loan Sellers;
Repurchases" or "--Assignment of Trust Fund Assets" above, exclusive of the
Retained Interest, if any, in respect of such Mortgage Loan, and all
proceeds of any Mortgage Loan repurchased as described under "Termination"
below;
(ix) all payments required to be deposited in the Certificate Account
with respect to any deductible clause in any blanket insurance policy
described under "Description of Primary Insurance Policies--Primary Hazard
Insurance Policies"; and
(x) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Certificate Account.
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With respect to each Buydown Mortgage Loan, the Master Servicer, or a
Sub-Servicer, will deposit related Buydown Funds in a custodial account, which
may be interest bearing, and that otherwise meets the standards for Certificate
Accounts set forth above (a "Buydown Account"). Unless otherwise specified in
the related Prospectus Supplement, the terms of all Buydown Mortgage Loans
provide for the contribution of Buydown Funds in an amount not less than either
(i) the total payments to be made from such funds pursuant to the related
buydown plan or (ii) if such Buydown Funds are present valued, that amount that,
together with investment earnings thereon at a specified rate, compounded
monthly, will support the scheduled level of payments due under the Buydown
Mortgage Loan. Neither the Master Servicer, the Sub-Servicer nor the Depositor
will be obligated to add to such Buydown Funds any of its own funds should
investment earnings prove insufficient to maintain the scheduled level of
payments. To the extent that any such insufficiency is not recoverable from the
borrower, distributions to Securityholders will be affected. With respect to
each Buydown Mortgage Loan, the Master Servicer will deposit in the Certificate
Account the amount, if any, of the Buydown Funds (and, if applicable, investment
earnings thereon) for each Buydown Mortgage Loan that, when added to the amount
due from the borrower on such Buydown Mortgage Loan, equals the full monthly
payment which would be due on the Buydown Mortgage Loan if it were not subject
to the buydown plan.
Unless otherwise specified in the related Prospectus Supplement, in the
event a Buydown Mortgage Loan is prepaid in full or liquidated, the related
Buydown Funds will be applied as follows. If the mortgagor on a Buydown Mortgage
Loan prepays such loan in its entirety during the Buydown Period, the Master
Servicer will withdraw from the Buydown Account and remit to the mortgagor in
accordance with the related buydown plan any Buydown Funds remaining in the
Buydown Account. If a prepayment by a mortgagor during the Buydown Period
together with Buydown Funds will result in a prepayment in full, the Master
Servicer will withdraw from the Buydown Account for deposit in the Certificate
Account the Buydown Funds and investment earnings thereon, if any, which
together with such prepayment will result in a prepayment in full. If the
mortgagor defaults during the Buydown Period with respect to a Buydown Mortgage
Loan and the Mortgaged Property is sold in liquidation (either by the Master
Servicer or the insurer under any related insurance policy), the Master Servicer
will withdraw from the Buydown Account the Buydown Funds and all investment
earnings thereon, if any, for deposit in the Certificate Account or remit the
same to the insurer if the Mortgaged Property is transferred to such insurer and
such insurer pays all of the loss incurred in respect of such default. In the
case of any such prepaid or defaulted Buydown Mortgage Loan the Buydown Funds in
respect of which were supplemented by investment earnings, the Master Servicer
will withdraw from the Buydown Account and either deposit in the Certificate
Account or remit to the borrower, depending upon the terms of the buydown plan,
any investment earnings remaining in the related Buydown Account.
Any Buydown Funds, and any investment earnings thereon, deposited in the
Certificate Account in connection with a full prepayment of the related Mortgage
Loan will be deemed to reduce the amount that would be required to be paid by
the borrower to repay fully the related Mortgage Loan if the Mortgage Loan were
not subject to the buydown plan.
PAYMENTS ON AGENCY SECURITIES AND PRIVATE MORTGAGE-BACKED SECURITIES
The Agency Securities and Private Mortgage-Backed Securities included in a
Trust Fund will be registered in the name of the Trustee so that all
distributions thereon will be made directly to the Trustee. The Trustee will
deposit or cause to be deposited into the Certificate Account for each Trust
Fund including Agency Securities and Private Mortgage-Backed Securities as and
when received, unless otherwise provided in the related Agreement, all
distributions received by the Trustee with respect to the related Agency
Securities and Private Mortgage-Backed Securities
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(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 each month on each date as
specified in the related Prospectus Supplement (each such date, a "Distribution
Date") commencing with the month following the month in which the applicable
Cut-off Date occurs. Except as otherwise specified in the related Prospectus
Supplement, distributions will be made to the persons in whose names the
Securities are registered at the close of business on the last business day of
the month preceding the month in which the Distribution Date occurs (the "Record
Date"), and the amount of each distribution will be determined as of the close
of business on the date specified in the related Prospectus Supplement (the
"Determination Date"). All distributions with respect to each class of
Securities on each Distribution Date will be allocated pro rata among the
outstanding Securities in such class. Payments to the holders of Securities of
any class on each Distribution Date will be made to the Securityholders of the
respective class of record on the next preceding Record Date (other than in
respect of the final distribution), based on the aggregate fractional undivided
interests in that class represented by their respective Securities. Payments
will be made either by wire transfer in immediately available funds to the
account of a Securityholder at a bank or other entity having appropriate
facilities therefor, if such Securityholder has so notified the Depositor or its
designee no later than the date specified in the related Prospectus Supplement
(and, if so provided in the related Prospectus Supplement, holds Securities in
the requisite amount specified therein), or by check mailed to the address of
the person entitled thereto as it appears on the Security Register (the
"Security Register"); provided, however, that the final distribution in
retirement of the Securities will be made only upon presentation and surrender
of the Securities at the office or agency of the Depositor or its agent
specified in the notice to Securityholders of such final distribution. With
respect to each series of Certificate or Notes, the Security Register will be
referred to as the "Certificate Register" or "Note Register", respectively.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement. Unless
provided otherwise in the related Prospectus Supplement, the "Available
Distribution Amount" for each Distribution Date equals the sum of the following
amounts:
(i) the total amount of all cash on deposit in the related
Certificate Account as of the corresponding Determination Date, exclusive
of:
(a) all scheduled payments of principal and interest collected
but due on a date subsequent to the related Due Period (unless the
related Prospectus Supplement provides otherwise, a "Due Period" with
respect to any Distribution Date will commence on the second day of the
month in which the immediately preceding Distribution Date occurs, or
the day after the Cut-off Date in the case of the first Due Period, and
will end on the first day of the month of the related Distribution
Date),
(b) all prepayments, together with related payments of the
interest thereon, Liquidation Proceeds, Insurance Proceeds and other
unscheduled recoveries received subsequent to the related Prepayment
Period, and
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(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 be on the basis of a notional amount and 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
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such Security, distributions generally will be applied to undistributed accrued
interest thereon, and thereafter to principal. The outstanding Principal Balance
of a Security will be reduced to the extent of distributions of principal
thereon, and in the case of Securities evidencing an interest in Mortgage Loans,
by the amount of any Realized Losses, as defined below, allocated thereto.
Unless the related Prospectus Supplement provides otherwise, the initial
aggregate Principal Balance of all classes of Securities of a series will equal
the outstanding aggregate principal balance of the related Trust Fund Assets as
of the applicable Cut-off Date. The initial aggregate Principal Balance of a
series and each class thereof will be specified in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement,
distributions of principal will be made on each Distribution Date to the class
or classes of Securities entitled thereto until the Principal Balance of such
class has been reduced to zero. With respect to a Senior/Subordinate Series,
unless otherwise provided in the related Prospectus Supplement, distributions
allocable to principal 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.
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ALLOCATION OF LOSSES
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale or otherwise (a "Liquidated Loan"), the amount of the
Realized Loss incurred in connection with such liquidation will equal the
excess, if any, of the unpaid principal balance of the Liquidated Loan
immediately prior to liquidation, over the aggregate amount of Liquidation
Proceeds derived from such liquidation remaining after application of such
proceeds to unpaid accrued interest on the Liquidated Loan and to reimburse the
Master Servicer or any Sub-Servicer for related unreimbursed servicing expenses.
With respect to certain Mortgage Loans the principal balances of which have been
reduced in connection with bankruptcy proceedings, the amount of such reduction
(a "Deficient Valuation") also will be treated as a Realized Loss. As to any
series of Securities other than a Senior/Subordinate Series, unless specified
otherwise in the related Prospectus Supplement, any Realized Loss not covered as
described under "Description of Credit Support" will be allocated among all of
the Securities on a pro rata basis.
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
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Series, out of any amounts otherwise distributable on the Subordinate Securities
of such series; provided, however, that any such advance will be reimbursable
from any amounts in the Certificate Account to the extent that the Master
Servicer shall determine that such advance (a "Nonrecoverable Advance") is not
ultimately recoverable from Related Proceeds and, in the case of a
Senior/Subordinate Series, the Principal Balance of the Subordinate Securities
has been reduced to zero. If advances have been made by the Master Servicer from
excess funds in the Certificate Account, the Master Servicer will replace such
funds in the Certificate Account on any future Distribution Date to the extent
that funds in the Certificate Account on such Distribution Date are less than
payments required to be made to Securityholders on such date. If so specified in
the related Prospectus Supplement, the obligations of the Master Servicer to
make advances may be secured by a cash advance reserve fund or a surety bond. If
applicable, information regarding the characteristics of, and the identity of
any obligor on, any such surety bond, will be set forth in the related
Prospectus Supplement.
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;
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(ix) the aggregate Principal Balance of each class of Securities
(including any class of Securities not offered hereby) at the close of
business on such Distribution Date, separately identifying any reduction in
such Principal Balance due to the allocation of any Realized Loss;
(x) the Special Hazard Subordination Amount, if any, at the
close of business on such Distribution Date;
(xi) the aggregate amount of principal prepayments made and
Realized Losses
incurred during the related Prepayment Period;
(xii) the amount deposited in the Reserve Fund, if any, on such
Distribution Date;
(xiii) the amount remaining in the Reserve Fund, if any, as of the
close of business on such Distribution Date;
(xiv) the aggregate unpaid Accrued Security Interest, if any, on
each class of Securities at the close of business on such Distribution
Date;
(xv) in the case of Securities with a variable Security Interest
Rate, the Security Interest Rate applicable to such Distribution Date, as
calculated in accordance with the method specified in the related
Prospectus Supplement;
(xvi) in the case of Securities with an adjustable Security
Interest Rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable 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
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related Pooling and Servicing Agreement or Servicing Agreement and any related
insurance policy, bankruptcy bond, letter of credit or other instrument
described under "Description of Primary Insurance Policies" or "Description of
Credit Support" (any such instrument providing coverage as to losses resulting
from physical damage, a "Hazard Insurance Instrument", any such instrument
providing coverage as to credit or other risks, a "Credit Insurance Instrument",
and collectively, the "Insurance Instruments"). Consistent with the above, the
Master Servicer may, in its discretion, waive any late payment charge in respect
of a late Mortgage Loan payment and, only upon determining that the coverage
under any related Insurance Instrument will not be affected, extend or cause to
be extended the due dates for payments due on a Mortgage Note for a period not
greater than 180 days.
In certain instances in which a Mortgage Loan is in default (or if default
is reasonably foreseeable), and if determined by the Master Servicer to be in
the best interests of the related Securityholders, the Master Servicer may
permit certain modifications of the Mortgage Loan rather than proceeding with
foreclosure. In making such determination, the estimated Realized Loss that
might result if such Mortgage Loan were liquidated would be taken into account.
Such modifications may have the effect of reducing the Mortgage Rate, forgiving
the payment of principal or interest or extending the final maturity date of the
Mortgage Loan. Any such modified Mortgage Loan may remain in the related Trust
Fund, and the reduction in collections resulting from such modification may
result in reduced distributions of interest (or other amounts) on, or may extend
the final maturity of, one or more classes of the related Securities.
In connection with any significant partial prepayment of a Mortgage Loan,
the Master Servicer, to the extent not inconsistent with the terms of the
Mortgage Note and local law and practice, may permit the Mortgage Loan to be
reamortized such that the monthly payment is recalculated as an amount that will
fully amortize the remaining principal amount thereof by the original maturity
date based on the original Mortgage Rate, provided that such reamortization
shall not be permitted if it would constitute a modification of the Mortgage
Loan for federal income tax purposes.
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
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agreement will be retained by or on behalf of the Master Servicer as additional
servicing compensation. See "Certain Legal Aspects of Mortgage
Loans--Enforceability of Certain Provisions". In connection with any such
assumption, the terms of the related Mortgage Loan may not be changed.
With respect to Multifamily Loans, the related mortgagor's failure to make
required payments may reflect inadequate operating income or the diversion of
that income from the service of payments due under the Multifamily Loan, and may
call into question such mortgagor's ability to make timely payment of taxes and
to pay for necessary maintenance of the related Mortgaged Property. The Master
Servicer will monitor any Multifamily Loan which is in default, contact the
mortgagor concerning the default, evaluate whether the causes of the default can
be cured over a reasonable period without significant impairment of the value of
the Mortgaged Property, initiate corrective action in cooperation with the
mortgagor if cure is likely, inspect the Mortgaged Property and take such other
actions as it would normally take with respect to similar loans serviced for its
own portfolio. A significant period of time may elapse before the Master
Servicer is able to assess the success of such corrective action or the need for
additional initiatives. Alternatively, the Master Servicer may determine to
institute foreclosure proceedings with respect to a Multifamily Loan soon after
default.
SUB-SERVICING
Any Master Servicer may delegate its servicing obligations in respect of
the Mortgage Loans to third-party servicers (each, a "Sub-Servicer"), but such
Master Servicer will remain obligated under the related Pooling and Servicing
Agreement or Servicing Agreement. Each Sub-Servicer will be required to perform
the customary functions of a servicer of comparable loans, including collecting
payments from borrowers and remitting such collections to the Master Servicer;
maintaining primary hazard insurance as described herein and in any related
Prospectus Supplement, and filing and settling claims thereunder, subject in
certain cases to the right of the Master Servicer to approve in advance any such
settlement; maintaining escrow or impoundment accounts of borrowers for payment
of taxes, insurance and other items required to be paid by any borrower pursuant
to the Mortgage Loan; processing assumptions or substitutions, although, 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.
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The Master Servicer will be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of whether the Master Servicer's compensation
pursuant to the related Agreement is sufficient to pay such fees. However, a
Sub-Servicer may be entitled to a Retained Interest in certain Mortgage Loans.
Each Sub-Servicer will be reimbursed by the Master Servicer for certain
expenditures which it makes, generally to the same extent the Master Servicer
would be reimbursed under the related Pooling and Servicing Agreement or
Servicing Agreement. See "Description of the Securities--Retained Interest,
Servicing Compensation and Payment of Expenses".
The Master Servicer may require any Sub-Servicer to agree to indemnify the
Master Servicer for any liability or obligation sustained by the Master Servicer
in connection with any act or failure to act by the Sub-Servicer in its
servicing capacity. Unless otherwise provided in the related Prospectus
Supplement, each Sub-Servicer is required to maintain a fidelity bond and an
errors and omissions policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the Master Servicer.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
As servicer of the Mortgage Loans, the Master Servicer, on behalf of
itself, the Trustee and the Securityholders, will present claims to the insurer
under each Insurance Instrument, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Mortgage Loans. As set forth above, all collections by or on behalf of
the Master Servicer under any Insurance Instrument, other than amounts to be
applied to the restoration of a Mortgaged Property or released to the mortgagor,
are to be deposited in the Certificate Account for the related Trust Fund,
subject to withdrawal as heretofore described. Unless otherwise provided in the
Prospectus Supplement relating to a series of Securities, the Master Servicer or
its designee will not receive payment under any letter of credit included as an
Insurance Instrument with respect to a defaulted Mortgage Loan unless all
Liquidation Proceeds and Insurance Proceeds which it deems to be finally
recoverable have been realized; however, the Master Servicer will be entitled to
reimbursement for any unreimbursed advances and reimbursable expenses
thereunder.
If any property securing a defaulted Mortgage Loan is damaged and proceeds,
if any, from the related Hazard Insurance Instrument are insufficient to restore
the damaged property to a condition sufficient to permit recovery under the
related Credit Insurance Instrument, if any, the Master Servicer is not required
to expend its own funds to restore the damaged property unless it 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
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expenses incurred with respect to the Mortgage Loan and any unreimbursed
advances of delinquent monthly payments made with respect to the Mortgage Loan.
If the Master Servicer or its designee recovers Insurance Proceeds with
respect to any defaulted Mortgage Loan, the Master Servicer will be entitled to
withdraw or cause to be withdrawn from the Certificate Account out of such
proceeds, prior to distribution thereof to Securityholders, amounts representing
its normal servicing compensation on such Mortgage Loan, unreimbursed servicing
expenses incurred with respect to the Mortgage Loan and any unreimbursed
advances of delinquent monthly payments made with respect to the Mortgage Loan.
In the event that the Master Servicer has expended its own funds to restore
damaged property and such funds have not been reimbursed under any Insurance
Instrument, it will be entitled to withdraw from the Certificate Account out of
related Liquidation Proceeds or Insurance Proceeds an amount equal to such
expenses incurred by it, in which event the Trust Fund may realize a loss up to
the amount so charged. Because Insurance Proceeds cannot exceed deficiency
claims and certain expenses incurred by the Master Servicer, no such payment or
recovery will result in a recovery to the Trust Fund which exceeds the principal
balance of the defaulted Mortgage Loan together with accrued interest thereon at
the Net Interest Rate. In addition, when property securing a defaulted Mortgage
Loan can be resold for an amount exceeding the outstanding principal balance of
the related Mortgage Loan together with accrued interest and expenses, it may be
expected that, if retention of any such amount is legally permissible, the
insurer will exercise its right under any related mortgage pool insurance policy
to purchase such property and realize for itself any excess proceeds. See
"Description of Primary Insurance Policies" and "Description of Credit Support".
With respect to collateral securing a Cooperative Loan, any prospective
purchaser will generally have to obtain the approval of the board of directors
of the relevant Cooperative before purchasing the shares and acquiring rights
under the proprietary lease or occupancy agreement securing the Cooperative
Loan. See "Certain Legal Aspects of Mortgage Loans-Foreclosure on Cooperatives".
This approval is usually based on the purchaser's income and net worth and
numerous other factors. The necessity of acquiring such approval could limit the
number of potential purchasers for those shares and otherwise limit the Master
Servicer's ability to sell, and realize the value of, those shares.
RETAINED INTEREST; SERVICING OR ADMINISTRATION COMPENSATION AND PAYMENT
OF EXPENSES
The Prospectus Supplement for a series of Securities will specify whether
there will be any Retained Interest in the Trust Fund Assets, and, if so, the
owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related Agreement.
A Retained Interest in a Trust Fund Asset represents a specified portion of the
interest 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
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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 and late payment charges, to the extent
collected from mortgagors. Unless otherwise specified in the related Prospectus
Supplement, any interest or other income which may be earned on funds held in
the Certificate Account or any Sub-Servicing Account may be paid as additional
compensation to the Trustee, the Master Servicer or the Sub-Servicers, as the
case may be. Any Sub-Servicer will receive a portion of the Master Servicer's
primary compensation as its sub-servicing compensation.
With respect to a series of Securities consisting of Mortgage Loans, in
addition to amounts payable to any Sub-Servicer, the Master Servicer will pay
from its servicing compensation certain expenses incurred in connection with its
servicing of the Mortgage Loans, including, without limitation, payment of the
fees and disbursements of the Trustee and independent accountants, payment of
expenses incurred in connection with distributions and reports to
Securityholders, and payment of any other expenses described in the related
Prospectus Supplement.
The Master Servicer is entitled to reimbursement for certain expenses
incurred by it in connection with the liquidation of defaulted Mortgage Loans,
including under certain circumstances reimbursement of expenditures incurred by
it in connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Securityholders to receive any
related Liquidation Proceeds. The Master Servicer is also entitled to
reimbursement from the Certificate Account for Advances. With respect to a
series of Securities relating to Agency Securities, the Trustee shall pay all
expenses incurred in administration thereof, subject to the limitations
described in the related Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Pooling and Servicing Agreement and each Servicing Agreement with
respect to a series of Securities consisting of Mortgage Loans, will provide
that on or before a specified date in each year, beginning with the first such
date at least six months after the related Cut-off Date, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that,
on the basis of the examination by such firm conducted substantially in
compliance with either the Uniform Single Program for Mortgage Bankers or the
Audit Program for Mortgages serviced for Freddie Mac, 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
Freddie Mac, 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 Freddie Mac (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.
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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 (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 the
Depositor or an affiliate of the Depositor and may have other normal business
relationships with the Depositor or the Depositor's affiliates.
Each Pooling and Servicing Agreement and each Servicing Agreement will
provide that the Master Servicer may resign from its obligations and duties
under the related Agreement only if such resignation, and the appointment of a
successor, will not result in a downgrading of any class of Securities or upon a
determination that its duties under the related Agreement are no longer
permissible under applicable law. No such resignation will become effective
until the Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the related Agreement.
Each Pooling and Servicing Agreement and each Servicing Agreement will
further provide that neither the Master Servicer, the Depositor nor any
director, officer, employee, or agent of the Master Servicer or the Depositor
will be under any liability to the related Trust Fund or Securityholders for any
action taken, or for refraining from the taking of any action, in good faith
pursuant to the related Agreement, or for errors in judgment; provided, however,
that neither the Master Servicer, the Depositor nor any such person will be
protected against any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. Each Pooling and Servicing Agreement and each Servicing Agreement
will further provide that the Master Servicer, the Depositor and any director,
officer, employee or agent of the Master Servicer or the Depositor will be
entitled to indemnification by the related Trust Fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the related Agreement or the Securities, other than any loss,
liability or expense is related to any specific Mortgage Loan or Mortgage Loans
(unless any such loss, liability or expense otherwise reimbursable pursuant to
the related Agreement) and any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Pooling and Servicing Agreement and each Servicing
Agreement will provide that neither the Master Servicer nor the Depositor will
be under any obligation to appear in, prosecute or defend any legal action which
is not incidental to its respective responsibilities under the related Agreement
and which in its opinion may involve it in any expense or liability. The Master
Servicer or the Depositor may, however, in its discretion undertake any such
action which it may deem necessary or desirable with respect to the related
Agreement and the rights and duties of the parties thereto and the interests of
the Securityholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Securityholders, and the Master Servicer or the Depositor, as
the case may be, will 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.
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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, Fannie Mae or Freddie Mac.
EVENTS OF DEFAULT AND RIGHTS UPON EVENTS OF DEFAULT
POOLING AND SERVICING AGREEMENT
Unless otherwise provided in the related Prospectus Supplement for a series
of Certificates that includes Mortgage Loans, Events of Default under each
Pooling and Servicing Agreement will consist of (i) any failure by the Master
Servicer to distribute or cause to be distributed to Securityholders, or to
remit to the Trustee for distribution to Certificateholders, any required
payment that continues unremedied for five days after the giving of written
notice of such failure to the Master Servicer by the Trustee or the Depositor,
or to the Master Servicer, the Depositor and the Trustee by the holders of
Certificates evidencing not less than 25% of the Voting Rights; (ii) any failure
by the Master Servicer duly to observe or perform in any material respect any of
its other covenants or obligations under the Agreement which continues
unremedied for thirty days (fifteen days in the case of a failure to pay the
premium for any insurance instrument required to be maintained pursuant to the
Agreement) after the giving of written notice of such failure to the Master
Servicer by the Trustee or the Depositor, or to the Master Servicer, the
Depositor and the Trustee by the holders of Certificates evidencing not less
than 25% of the Voting Rights; and (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings and certain actions by or on behalf of the Master Servicer
indicating its insolvency or inability to pay its obligations.
So long as an Event of Default under a Pooling and Servicing Agreement
remains unremedied, the Depositor or the Trustee may, and at the direction of
holders of Certificates evidencing not less than 51% of the Voting Rights, the
Trustee shall, terminate all of the rights and obligations of the Master
Servicer under the Pooling and Servicing Agreement relating to such Trust Fund
and in and to the Mortgage Loans (other than any Retained Interest of the Master
Servicer), whereupon the Trustee will succeed to all of the responsibilities,
duties and liabilities of the Master Servicer under such Agreement (except that
if the Trustee is prohibited by law from obligating itself to make advances
regarding delinquent mortgage loans, then the Trustee will not be so obligated)
and will be entitled to similar compensation arrangements. In the event that the
Trustee is unwilling or unable so to act, it may or, at the written request of
the holders of Certificates entitled to at least 51% of the Voting Rights, it
shall appoint, or petition a court of competent jurisdiction for the appointment
of, a housing loan servicing institution acceptable to the Rating Agency with a
net worth at the time of such appointment of at least $15,000,000 (or such other
amount as may be provided in the related Prospectus Supplement) to act as
successor to the Master Servicer under the Agreement. Pending such appointment,
the Trustee is obligated to act in such capacity. The Trustee and any such
successor may agree upon the servicing compensation to be paid, which in no
event may be greater than the compensation payable to the Master Servicer under
the related Agreement.
No Certificateholder will have the right under any Pooling and Servicing
Agreement to institute any proceeding with respect thereto unless such holder
previously has given to the Trustee written notice of default and unless the
holders of Certificates evidencing not less than 25% of the Voting Rights have
made written request upon the Trustee to institute such proceeding in its own
name 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
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under no obligation to exercise any of the trusts or powers vested in it by any
Pooling and Servicing Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the holders of
Certificates covered by such Agreement, unless such Certificateholders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
SERVICING AGREEMENT
Unless otherwise provided in the related Prospectus Supplement for a series
of Notes, a "Servicing Default" under the related Servicing Agreement generally
will include: (i) any failure by the Master Servicer to make a required deposit
to the Certificate Account or, if the Master Servicer is so required, to
distribute to the holders of any class of Notes or Equity Certificates of such
series any required payment which continues unremedied for five business days
(or other period of time described in the related Prospectus Supplement) after
the giving of written notice of such failure to the Master Servicer by the
Trustee or the Issuer; (ii) any failure by the Master Servicer duly to observe
or perform in any material respect any other of its covenants or agreements in
the Servicing Agreement with respect to such series of Notes which continues
unremedied for 45 days after the giving of written notice of such failure to the
Master Servicer by the Trustee or the Issuer; (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings regarding the Master Servicer and certain actions by the
Master Servicer indicating its insolvency or inability to pay its obligations
and (iv) any other Servicing Default as set forth in the Servicing Agreement.
So long as a Servicing Default remains unremedied, either the Depositor or
the Trustee may, by written notification to the Master Servicer and to the
Issuer or the Trustee or Trust Fund, as applicable, terminate all of the rights
and obligations of the Master Servicer under the Servicing Agreement (other than
any right of the Master Servicer as Noteholder or as holder of the Equity
Certificates and other than the right to receive servicing compensation and
expenses for servicing the Mortgage Loans during any period prior to the date of
such termination), whereupon the Trustee will succeed to all responsibilities,
duties and liabilities of the Master Servicer under such Servicing Agreement
(other than the obligation to purchase Mortgage Loans under certain
circumstances) and will be entitled to similar compensation arrangements. In the
event that the Trustee would be obligated to succeed the Master Servicer but is
unwilling so to act, it may appoint (or if it is unable so to act, it shall
appoint) or petition a court of competent jurisdiction for the appointment of an
approved mortgage servicing institution with a net worth of at least $15,000,000
to act as successor to the Master Servicer under the Servicing Agreement (unless
otherwise set forth in the Servicing Agreement). Pending such appointment, the
Trustee is obligated to act in such capacity. The Trustee and such successor may
agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the initial Master Servicer under the Servicing
Agreement.
INDENTURE
Unless otherwise provided in the related Prospectus Supplement for a series
of Notes, an Event of Default under the Indenture generally will include: (i) a
default for five days or more (or other period of time described in the related
Prospectus Supplement) in the payment of any principal of or interest on any
Note of such series; (ii) failure to perform any other covenant of the Depositor
or the Trust Fund in the Indenture which continues for a period of thirty days
after notice thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iii) any representation or warranty made by the
Depositor or the Trust Fund in the Indenture or in any
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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.
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
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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 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
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Voting Rights evidenced by any Note will be the portion of the voting rights of
all of the Notes in the related series allocated in the manner described in the
related Prospectus Supplement.
TERMINATION
The obligations created by the related Agreements for each series of
Securities will terminate upon the payment to Securityholders of that series of
all amounts held in the Certificate Account or by the Master Servicer and
required to be paid to them pursuant to such Agreements following the earlier of
(i) the final payment or other liquidation of the last Trust Fund Asset subject
thereto or the disposition of all underlying property subject to the Trust Fund
Assets acquired upon foreclosure of any such Trust Fund Asset and (ii) the
purchase of all of the assets of the Trust Fund by the party entitled to effect
such termination, under the circumstances and in the manner set forth in the
related Prospectus Supplement. In no event, however, will the trust created by
the related Agreements continue beyond the date specified in the related
Prospectus Supplement. Written notice of termination of the related Agreements
will be given to each Securityholder, and the final distribution will be made
only upon surrender and cancellation of the Securities at an office or agency
appointed by the Trustee which will be specified in the notice of termination.
Any such purchase of assets of the Trust Fund shall be made at a price
approximately equal to (A) in the case of a series of Securities evidencing
interests in a Trust Fund that includes Mortgage Loans, the greater of (i) the
sum of (a) 100% of the Stated Principal Balance of each Mortgage Loan as of the
day of such purchase plus accrued interest thereon at the applicable Net
Interest Rate to the first day of the month following such purchase plus (b) the
appraised value of any underlying property subject to the Mortgage Loans
acquired for the benefit of Securityholders, and (ii) the aggregate fair market
value of all of the assets in the Trust Fund (as determined by the Trustee, the
Master Servicer, and, if different than both such persons, the person entitled
to effect such termination), in each case taking into account accrued interest
at the applicable Net Interest Rate to the first day of the month following such
purchase and (B) in the case of a series of Securities evidencing interests in a
Trust Fund that includes Agency Securities or Private Mortgage-Backed
Securities, the sum of 100% of the unpaid principal balance of each outstanding
Trust Fund Asset as of the day of such purchase plus accrued interest thereon at
the Net Interest Rate to the first day of the month of such purchase, or at such
other price as may be specified in the related Prospectus Supplement. The
exercise of such right will effect early retirement of the Securities of that
series, but the right of the person entitled to effect such termination is
subject to the aggregate principal balance of the outstanding Trust Fund Assets
for such series at the time of purchase being less than the percentage of the
aggregate principal balance of the Trust Fund Assets at the Cut-off Date for
that series specified in the related Prospectus Supplement, which percentage
will be between 25% and 0% (the "Clean-up Call").
In addition to the repurchase of the assets in the related Trust Fund
at the Clean-up Call, if so specified in the related Prospectus Supplement, a
holder of a non-offered class of Securities (the "Call Class") will have the
right, solely at its discretion, to terminate the related Trust Fund on any
Distribution Date after the 12th Distribution Date following the date of initial
issuance of the related series of Securities and until such date as the Clean-up
Call becomes exercisable and thereby effect early retirement of the Securities
of such series. Any such call will be of the entire Trust Fund at one time;
multiple calls with respect to any series of Securities will not be permitted.
In such case, the holders of the Securities offered hereby will be paid a price
equal to 100% of the Principal Balance of the Securities offered hereby as of
the day of such purchase plus accrued interest thereon at the applicable
Security Interest Rate during the related period on which interest accrues on
such securities (the "Call Price"). Further, the Call Class must remit to the
related Trustee for distribution to the Securityholders funds equal to the Call
Price. If such funds are not deposited with
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the related Trustee, the Securities will remain outstanding. There will not be
any additional remedies available to Securityholders. In addition, in the case
of a Trust Fund for which a REMIC election or elections have been made, such
termination will constitute a "qualified liquidation" under Section 860F of the
Code. In connection with a call by the Call Class, the final payment to the
Securityholders will be made upon surrender of the related Securities to the
Trustee. Once the Securities have been surrendered and paid in full, there will
not be any continuing liability from the Securityholders or from the Trust Fund
to Securityholders.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer has the option to purchase from the Trust Fund any Mortgage Loan 90
days or more delinquent at a purchase price generally equal to the outstanding
principal balance of such Mortgage Loan as of the date of purchase, plus all
accrued and unpaid interest on such principal balance computed at the Interest
Rate.
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
any Agreement, the Securities or any Mortgage Loan or related document and is
not accountable for the use or application by or on behalf of the Master
Servicer of any funds paid to the Master Servicer or its designee in respect of
the Securities or the Mortgage Loans, or deposited into or withdrawn from the
Certificate Account or any other account by or on behalf of the Master Servicer.
If no Event of
Default has occurred and is continuing, the Trustee is required to perform only
those duties specifically required under the related Agreement. However, upon
receipt of the various certificates, reports or other instruments required to be
furnished to it, the Trustee is required to examine such documents and to
determine whether they conform to the requirements of the related Agreement.
THE TRUSTEE
The Trustee or Indenture Trustee (each, a "Trustee") under each Pooling and
Servicing Agreement, Trust Agreement or Indenture 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. The commercial
bank, national banking association or trust company serving as Trustee or Owner
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
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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
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,
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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 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);
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(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.
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,
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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 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
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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 Freddie Mac, Fannie Mae, 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
Freddie Mac, Fannie Mae, 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.
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
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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 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.
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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".
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
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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.
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.
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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 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
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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 Federal Housing Administration ("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. If so
provided in the related Prospectus Supplement, certain of the Mortgage Loans
will be insured by the FHA.
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 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
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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 United States Department of Veterans Affairs (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. If so provided in the Prospectus Supplement,
certain of the Mortgage Loans will be guaranteed by the VA.
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".
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
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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.
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
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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 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
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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.
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
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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.
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
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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 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
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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 MORTGAGED PROPERTIES LOCATED IN THE COMMONWEALTH OF
PUERTO RICO
Under the laws of the Commonwealth of Puerto Rico the foreclosure of a real
estate mortgage usually follows an ordinary "civil action" filed in the Superior
Court for the district where the mortgage property is located. If the defendant
does not contest the action filed, a default judgment is rendered for the
plaintiff and the mortgaged property is sold at public auction, after
publication of the sale for two weeks, by posting written notice in three public
places in the municipality where the auction will be held, in the tax collection
office and in the public school of the municipality where the mortgagor resides,
if known. If the residence of the mortgagor is not known, publication in one of
the newspapers of general circulation in the Commonwealth of Puerto Rico must be
made at least once a week for two weeks. There may be as many as three public
sales of the mortgaged property. If the defendant contests the foreclosure, the
case may be tried and judgment rendered based on the merits of the case.
There are no redemption rights after the public sale of a foreclosed
property under the laws of the Commonwealth of Puerto Rico. Commonwealth of
Puerto Rico law provides for a summary proceeding for the foreclosure of a
mortgage, but it is very seldom used because of concerns regarding the validity
of such actions. The process may be expedited if the mortgagee can obtain the
consent of the defendant to the execution of a deed in lieu of foreclosure.
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Under Commonwealth of Puerto Rico law, in the case of the public sale upon
foreclosure of a mortgaged property that (a) is subject to a mortgage loan that
was obtained for a purpose other than the financing or refinancing of the
acquisition, construction or improvement of such property and (b) is occupied by
the mortgagor as his principal residence, the mortgagor of such property has a
right to be paid the first $1,500 from the proceeds obtained on the public sale
of such property. The mortgagor can claim this sum of money from the mortgagee
at any time prior to the public sale or up to one year after such sale. Such
payment would reduce the amount of sales proceeds available to satisfy the
Mortgage Loan and may increase the amount of the loss.
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.
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
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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 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
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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 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
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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 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.
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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.
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
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reasonable diligence have determined that the Mortgage Loan was subject to the
provisions of the Homeownership Act. The maximum damages that may be recovered
under the Homeownership Act from an assignee is the remaining amount of
indebtedness plus the total amount paid by the borrower in connection with the
Mortgage Loan.
FOR COOPERATIVE LOANS
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are junior to senior mortgages or deeds of trust which are not part
of the Trust Fund. The rights of the Securityholders as the holders of a junior
deed of trust or a junior mortgage are subordinate in lien priority and in
payment priority to those of the holder of the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or beneficiary to receive and
apply hazard insurance and condemnation proceeds and, upon default of the
mortgagor, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage or the sale
pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's
lien will be extinguished unless the junior lienholder satisfies the defaulted
senior loan or asserts its subordinate interest in a property in foreclosure
proceedings. SEE "--FORECLOSURE ON MORTGAGES" HEREIN.
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a senior mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity Act,
Regulation "B", the Fair Credit Reporting Act, the 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
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Homeownership Act as Mortgage Loans as described in "--Anti-Deficiency
Legislation and Other Limitations on Lenders" above.
Manufactured housing contracts often contain provisions obligating the
obligor to pay late charges if payments are not timely made. In certain cases,
federal and state law may specifically limit the amount of late charges that may
be collected. Unless otherwise provided in the related Prospectus Supplement,
under the Agreement, late charges will be retained by the Master Servicer as
additional servicing compensation, and any inability to collect these amounts
will not affect payments to Securityholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses which the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due thereunder.
Most of the Contracts in a Trust Fund will be subject to the requirements
of the FTC Rule. Accordingly, the Trustee, as holder of the Contracts, will be
subject to any claims or defenses that the purchaser of the related manufactured
home may assert against the seller of the manufactured home, subject to a
maximum liability equal to the amounts paid by the obligor on the Contract. If
an obligor is successful in asserting any such claim or defense, and if the
Mortgage Loan Seller had or should have had knowledge of such claim or defense,
the Master Servicer will have the right to require the Mortgage Loan Seller to
repurchase the Contract because of a breach of its Mortgage Loan Seller's
representation and warranty that no claims or defenses exist that would affect
the obligor's obligation to make the required payments under the Contract. The
Mortgage Loan Seller would then have the right to require the originating dealer
to repurchase the Contract from it and might also have the right to recover from
the dealer for any losses suffered by the Mortgage Loan Seller with respect to
which the dealer would have been primarily liable to the obligor.
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a lender to
realize upon collateral and/or enforce a deficiency judgment. For example, 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.
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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. Freddie Mac has
taken the position in its published mortgage servicing standards that, out of a
total of eleven "window period states", five states (Arizona, Michigan,
Minnesota, New Mexico and Utah) have enacted statutes extending, on various
terms and for varying periods, the prohibition on enforcement of due-on-sale
clauses with respect to certain categories of Window Period Loans. The Garn-St
Germain Act also sets forth nine specific instances in which a mortgage lender
covered by the Garn-St Germain Act (including federal savings and loan
associations and federal savings banks) may not exercise a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, certain transfers by operation of law,
leases of fewer than three years and the creation of a junior encumbrance.
Regulations promulgated under the Garn-St Germain Act also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to a
due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a Mortgage Loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off,
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which may have an impact upon the average life of the Mortgage Loans related to
a series and the number of such Mortgage Loans which may be outstanding until
maturity.
TRANSFER OF MANUFACTURED HOMES
Generally, manufactured housing contracts contain provisions prohibiting
the sale or transfer of the related manufactured homes without the consent of
the obligee on the contract and permitting the acceleration of the maturity of
such contracts by the obligee on the contract upon any such sale or transfer
that is not consented to. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will, to the extent it has knowledge of such
conveyance or proposed conveyance, exercise or cause to be exercised its rights
to accelerate the maturity of the related Contracts through enforcement of
due-on-sale clauses, subject to applicable state law. In certain cases, the
transfer may be made by a delinquent obligor in order to avoid a repossession
proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the due-on-sale clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of due-on-sale
clauses applicable to the Manufactured Homes. Consequently, in some cases the
Master Servicer may be prohibited from enforcing a due-on-sale clause in respect
of certain Manufactured Homes.
PREPAYMENT CHARGES AND PREPAYMENTS
Generally, Mortgage Loans may be prepaid in full or in part without
penalty. Generally, Multifamily Loans may contain provisions limiting
prepayments on such loans, including prohibiting prepayment for a specified
period after origination, prohibiting partial prepayments entirely or requiring
the payment of a prepayment penalty upon prepayment in full or in part. The
regulations of the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision, prohibit the imposition of a prepayment penalty or
equivalent fee for or in connection with the acceleration of a loan by exercise
of a due-on-sale clause. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage to a refinancing lender.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
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APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision that expressly
rejects application of the federal law. In addition, even where Title V is not
so rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor has been advised by counsel that a court interpreting Title V
would hold that mortgage loans originated on or after January 1, 1980 are
subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no Mortgage
Loans originated after the date of such state action will be eligible for
inclusion in a Trust Fund if such Mortgage Loans bear interest or provide for
discount points or charges in excess of permitted levels. No Mortgage Loan
originated prior to January 1, 1980 will bear interest or provide for discount
points or charges in excess of permitted levels.
Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the Trust Fund.
ALTERNATIVE MORTGAGE INSTRUMENTS
ARM Loans originated by non-federally chartered lenders have historically
been subject to a variety of restrictions. Such restrictions differed from state
to state, resulting in difficulties in determining whether a particular
alternative mortgage instrument originated by a state-chartered lender complied
with applicable law. These difficulties were simplified substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act ("Title VIII").
Title VIII provides that, notwithstanding any state law to the contrary, (i)
state-chartered banks may originate "alternative mortgage instruments"
(including ARM Loans) in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks, (ii) state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect
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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
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(including a borrower who was in reserve status and is called to active duty
after origination of the Mortgage Loan), may not be charged interest (including
fees and charges) above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon application
of the lender. The Relief Act applies to borrowers who are members of the Army,
Navy, Air Force, Marines, National Guard, Reserves, Coast Guard, and officers of
the U.S. Public Health Service assigned to duty with the military. Because the
Relief Act applies to borrowers who enter military service (including reservists
who are called to active duty) after origination of the related Mortgage Loan,
no information can be provided as to the number of loans that may be affected by
the Relief Act. Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of the Master Servicer to collect full
amounts of interest on certain of the Mortgage Loans. Any shortfalls in interest
collections resulting from the application of the Relief Act would result in a
reduction of the amounts distributable to the holders of the related series of
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
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environmental lien and, in some states, even prior recorded liens are
subordinated to environmental liens. In the latter states, the security interest
of the Trust in a related parcel of real property that is subject to such an
environmental lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged property
prior to the origination of the mortgage loan or prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Accordingly, the Master Servicer has
not made and will not make such evaluations prior to the origination of the
Mortgage Loans. Neither the Master Servicer nor any replacement Servicer will be
required by any Agreement to undertake any such evaluations prior to foreclosure
or accepting a deed-in-lieu of foreclosure. The Master Servicer does not make
any representations or warranties or assume any liability with respect to the
absence or effect of contaminants on any related real property or any casualty
resulting from the presence or effect of contaminants. However, the Master
Servicer will not be obligated to foreclose on related real property or accept a
deed-in-lieu of foreclosure if it knows or reasonably believes that there are
material contaminated conditions on such property. A failure so to foreclose may
reduce the amounts otherwise available to 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.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the material federal income tax
consequences of the purchase, ownership and disposition of the Certificates
offered hereunder and does not purport to discuss all federal income tax
consequences that may be applicable to particular categories of investors, some
of which (such as banks, insurance companies and foreign investors) may be
subject to special rules. In addition, the following discussion represents an
interpretation of the law at the time of this Prospectus, and does not represent
an opinion of Thacher Proffitt & Wood, counsel to the Depositor, except with
respect to the first paragraph under "--REMICs--Classification of REMICs", the
first paragraph under "--REMICs--Tiered REMIC Structures", the first paragraph
under "--Notes", the first paragraph under --Grantor Trust Funds--Classification
of Grantor Trust Funds", the first paragraph under "--Partnership Trust
Funds--Classification of Partnership Trust Funds" and the first paragraph under
"--Partnership Trust Funds--Taxation of Debt Certificateholders--Treatment of
the Debt Certificates as Indebtedness" herein.
Further, the authorities on which this discussion, and the opinions
referred to below, are based are subject to change or differing interpretations,
which could apply retroactively. Taxpayers and preparers of tax returns
(including those filed by any REMIC or other issuer) should be aware that under
applicable Treasury regulations a provider of advice on specific issues of law
is not considered an income tax return preparer unless the advice (i) is given
with respect to events that have occurred at the time the advice is rendered and
is not given with respect to the consequences of contemplated actions, and (ii)
is directly relevant to the determination of an entry on a tax return.
Accordingly, it is recommended that taxpayers consult their own tax advisors and
tax return preparers regarding the preparation of any item on a tax return, even
where the anticipated tax treatment has been discussed herein. In addition to
the federal income tax consequences described herein, potential investors should
consider the state and local tax consequences, if any, of the purchase,
ownership and disposition of the Certificates. See "State and Other Tax
Consequences." It is recommended that Certificateholders consult their own tax
advisors concerning the federal, state, local or other tax consequences to them
of the purchase, ownership and disposition of the Certificates offered
hereunder.
The following discussion addresses securities of four general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, that the Trustee will elect to have treated as a real estate
mortgage investment conduit ("REMIC") under Sections 860A through 860G (the
"REMIC Provisions") of the Internal Revenue Code of 1986 (the "Code"), (ii)
certificates ("Grantor Trust Certificates") representing interests in a Trust
Fund ("Grantor Trust Fund") as to which no such election will be made, (iii)
certificates ("Partnership Certificates") representing interests in a Trust Fund
("Partnership Trust Fund") which is treated as a partnership for federal income
tax purposes, and (iv) certificates ("Debt Certificates") representing
indebtedness of a Partnership Trust Fund for federal income tax purposes. The
Prospectus Supplement for each series of Certificates will indicate which of the
foregoing treatments will apply to such series and, if a REMIC election (or
elections) will be made for the related Trust Fund, will identify all "regular
interests" and "residual interests" in the REMIC. For purposes of this tax
discussion, (i) references to a "Certificateholder" or a "holder" are to the
beneficial owner of a Certificate and (ii) unless indicated otherwise in the
applicable Prospectus Supplement, references to "Mortgage Loans" include Agency
Securities, Private Mortgage-Backed Securities and Funding Agreements.
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The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code and
in the Treasury regulations issued thereunder (the "OID Regulations"), and in
part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the "REMIC Regulations"). The OID Regulations do not adequately address certain
issues relevant to, and in some instances provide that they are not applicable
to, securities such as the Certificates.
REMICS
CLASSIFICATION OF REMICS
Upon the issuance of each series of REMIC Certificates, Thacher Proffitt &
Wood, counsel to the Depositor, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement, the related Trust Fund (or each applicable portion thereof)
will qualify as a REMIC and the REMIC Certificates offered with respect thereto
will be considered to evidence ownership of "regular interests" ("REMIC Regular
Certificates") or "residual interests" ("REMIC Residual Certificates") in that
REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC will
include provisions designed to maintain the Trust Fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any Trust Fund as
a REMIC will be 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.
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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 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.
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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 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
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the Certificateholders and the IRS will be based on the position that the
portion of the purchase price paid for the interest accrued with respect to
periods prior to the Closing Date is treated as part of the overall cost of such
REMIC Regular Certificate (and not as a separate asset the cost of which is
recovered entirely out of interest received on the next Distribution Date) and
that portion of the interest paid on the first Distribution Date in excess of
interest accrued for a number of days corresponding to the number of days from
the Closing Date to the first Distribution Date should be included in the stated
redemption price of such REMIC Regular Certificate. However, the OID Regulations
state that all or some portion of such accrued interest may be treated as a
separate asset the cost of which is recovered entirely out of interest paid on
the first Distribution Date. It is unclear how an election to do so would be
made under the OID Regulations and whether such an election could be made
unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of such REMIC Regular Certificate. Under the OID Regulations, original
issue discount of only a de minimis amount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each payment of stated principal
is made, based on the product of the total amount of such de minimis original
issue discount and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "Taxation
of Owners of REMIC Regular Certificates--Market Discount" for a description of
such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to the day prior to each Distribution Date and begins on the first day following
the immediately preceding accrual period (or in the case of the first such
period, begins on the Closing Date), a calculation will be made of the portion
of the original issue discount that accrued during such accrual period. The
portion of original issue discount that accrues in any accrual period will equal
the excess, if any, of (i) the sum of (A) the present value, as of the end of
the accrual period, of all of the distributions remaining to be made on the
REMIC Regular Certificate, if any, in future periods and (B) the distributions
made on such REMIC Regular Certificate during the accrual period of amounts
included in the stated redemption 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
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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 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.
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However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
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PREMIUM
A REMIC Regular Certificate purchased at a cost (excluding any portion of
such cost attributable to accrued qualified stated interest) greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of such a REMIC Regular Certificate may elect under Section
171 of the Code to amortize such premium under the constant yield method over
the life of the Certificate. If made, such an election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related debt instrument, rather than as a separate interest deduction. The
OID Regulations also permit Certificateholders to elect to include all interest,
discount and premium in income based on a constant yield method, further
treating the Certificateholder as having made the election to amortize premium
generally. See "Taxation of Owners of REMIC Regular Certificates--Market
Discount" above. The Committee Report states that the same rules that apply to
accrual of market discount (which rules will require use of a Prepayment
Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether such Certificates have original issue
discount) will also apply in amortizing bond premium under Section 171 of the
Code.
REALIZED LOSSES
Under Section 166 of the Code, both corporate holders of the REMIC Regular
Certificates and noncorporate holders of the REMIC Regular Certificates that
acquire such Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their Certificates become wholly or partially worthless as the
result of one or more realized losses on the Mortgage Loans. However, it appears
that a noncorporate holder that does not acquire a REMIC Regular Certificate in
connection with a trade or business will not be entitled to deduct a loss under
Section 166 of the Code until such holder's Certificate becomes wholly worthless
(i.e., until its outstanding principal balance has been reduced to zero) and
that the loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that as the result of a realized loss
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL
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
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tax rules that differ significantly from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Mortgage Loans or as debt instruments issued by the
REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
regard to the timing or amount of cash distributions by the REMIC. Ordinary
income derived from REMIC Residual Certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Code on the deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations, however,
do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions," 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
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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 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.
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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.
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Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the REMIC. However, such bases increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may
not amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder, see "--Taxation of Owners of REMIC
Residual Certificates--General" above.
EXCESS INCLUSIONS
Any "excess inclusions" with respect to a REMIC Residual Certificate will
be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
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For REMIC Residual Certificateholders, excess inclusions (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates," below.
Furthermore, for purposes of the alternative minimum tax, 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
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disregarded in accordance with the above-described rules which would result in
the retention of tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
MARK-TO-MARKET RULES
On December 24, 1996, the IRS released final regulations (the
"Mark-to-Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities owned by a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The Mark-to- Market Regulations provide that for purposes of this mark-to-market
requirement, a REMIC Residual Certificate issued after January 4, 1995 is not
treated as a security and thus may not be marked to market. Prospective
purchasers of a REMIC Residual Certificate should consult their tax advisors
regarding the possible application of the mark-to-market requirement to REMIC
Residual Certificates.
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
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servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount equal to the amount of such fees and other deductions will be
included in such holder's gross income. Accordingly, such REMIC Certificates may
not be appropriate investments for individuals, estates, or trusts, or
pass-through entities beneficially owned by one or more individuals, estates or
trusts. Such prospective investors should carefully consult with their own tax
advisors prior to making an investment in such Certificates.
SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the selling Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Certificate. The adjusted basis of
a REMIC Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to such REMIC Regular Certificate (including
original issue discount and market discount income) and reduced (but not below
zero) by distributions on such REMIC Regular Certificate received by such
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described under "--Taxation of Owners
of REMIC Residual Certificates--Basis Rules, Net Losses and Distributions."
Except as provided in the following four paragraphs, any such gain or loss will
be capital gain or loss, provided such REMIC Certificate is held as a capital
asset (generally, property held for investment) within the meaning of Section
1221 of the Code.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the "applicable Federal
rate" (generally, a rate based on an average of current yields on Treasury
securities having 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)
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at the time the taxpayer enters into the conversion transaction, subject to
appropriate reduction for prior inclusion of interest and other ordinary income
items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead will
be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (a "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions a prohibited transaction means the
disposition of a Mortgage Loan, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the REMIC Certificates. It is not anticipated that any REMIC
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value 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
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obligations, as the case may be, under the related Pooling and Servicing
Agreement and in respect of compliance with applicable laws and regulations. Any
such tax not borne by the Master Servicer or the Trustee will be charged against
the related Trust Fund resulting in a reduction in amounts payable to holders of
the related REMIC Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) of the total anticipated excess inclusions
with respect to such REMIC Residual Certificate for periods after the transfer
and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents. Such a tax generally would
be imposed on the transferor of the REMIC Residual Certificate, except that
where such transfer is through an agent for a disqualified organization, the tax
would instead be imposed on such agent. However, a transferor of a REMIC
Residual Certificate would in no event be liable for such tax with respect to a
transfer if the transferee furnishes to the transferor an affidavit that the
transferee is not a disqualified organization and, as of the time of the
transfer, the transferor does not have actual knowledge that such affidavit is
false. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in such
entity are not held by disqualified organizations and (ii) information necessary
for the application of the tax described herein will be made available.
Restrictions on the transfer of REMIC Residual Certificates and certain other
provisions that are intended to meet this requirement will be included in the
Pooling and Servicing Agreement, and will be discussed more fully in any
Prospectus Supplement relating to the offering of any REMIC Residual
Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the 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
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or instrumentality of the foregoing (but would not include instrumentalities
described in Section 168(h)(2)(D) of the Code or the Federal Home Loan Mortgage
Corporation), (ii) any organization (other than a cooperative described in
Section 521 of the Code) that is exempt from federal income tax, unless it is
subject to the tax imposed by Section 511 of the Code or (iii) any organization
described in Section 1381(a)(2)(C) of the Code. For these purposes, a
"pass-through entity" means any regulated investment company, real estate
investment trust, trust, partnership or certain other entities described in
Section 860E(e)(6) of the Code. In addition, a person holding an interest in a
pass-through entity as a nominee for another person will, with respect to such
interest, be treated as a pass-through entity.
TERMINATION
A REMIC will terminate immediately after the Distribution Date following
receipt by the REMIC of the final payment in respect of the Mortgage Loans or
upon a sale of the REMIC's assets following the adoption by the REMIC of a plan
of complete liquidation. The last distribution on a REMIC Regular Certificate
will be treated as a payment in retirement of a debt instrument. In the case of
a REMIC Residual Certificate, if the last distribution on such REMIC Residual
Certificate is less than the REMIC Residual Certificateholder's adjusted basis
in such Certificate, such REMIC Residual Certificateholder should (but may not)
be treated as realizing a loss equal to the amount of such difference, and such
loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
Solely for purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and REMIC Residual Certificateholders will be
treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Trustee will file REMIC federal income tax returns on behalf of
the related REMIC, and under the terms of the related Agreement, will be
irrevocably appointed by the holders of the largest percentage interest in the
related REMIC Residual Certificates as their agent to perform all of the duties
of the "tax matters person" with respect to the REMIC in all respects.
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
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discount income information and the information set forth in the following
paragraph upon request in accordance with the requirements of the applicable
regulations. The information must be provided by the later of 30 days after the
end of the quarter for which the information was requested, or two weeks after
the receipt of the request. The REMIC must also comply with rules requiring a
REMIC Regular Certificate issued with original issue discount to disclose on its
face the amount of original issue discount and the issue date, and requiring
such information to be reported to the IRS. Reporting with respect to the REMIC
Residual Certificates, including income, excess inclusions, investment expenses
and relevant information regarding qualification of the REMIC's assets will be
made as required under the Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount."
Unless otherwise specified in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the Trustee.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES
Payments of interest and principal, as well as payments of proceeds from
the sale of REMIC Certificates, may be subject to the "backup withholding tax"
under Section 3406 of the Code at a rate of 31% if recipients of such payments
fail to furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax. Furthermore,
certain penalties may be imposed by the IRS on a recipient of payments that is
required to supply information but that does not do so in the proper manner.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new regulations (the "New Withholding
Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Withholding
Regulations attempt to unify certification requirements and modify reliance
standards. The New Withholding Regulations will generally be effective for
payments made after December 31, 1999, subject to certain transition rules.
Prospective investors are urged to consult their tax advisors regarding the New
Withholding Regulations.
FOREIGN INVESTORS IN REMIC CERTIFICATES
A REMIC Regular Certificateholder that is not a "United States person" (as
defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not, unless otherwise disclosed in the
related Prospectus Supplement, be subject to United States federal income or
withholding tax in respect of a distribution on a REMIC Regular Certificate,
provided that the holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such
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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.
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
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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.
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.
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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. 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
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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 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
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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.
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
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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 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.
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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 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
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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 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
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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
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by reason of prepayments, those provisions will apply to the Grantor Trust Strip
Certificates for taxable years beginning after August 5, 1997. It is unclear
whether those provisions would be applicable to the Grantor Trust Strip
Certificates that do not represent an interest in any such pool or for taxable
years beginning prior to August 5, 1997, or whether use of a prepayment
assumption may be required or permitted in the absence of such provisions. It is
also uncertain, if a prepayment assumption is used, whether the assumed
prepayment rate would be determined based on conditions at the time of the first
sale of the Grantor Trust Strip Certificate or, with respect to any subsequent
holder, at the time of purchase of the Grantor Trust Strip Certificate by that
holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. It currently is intended to base
information returns or reports to the IRS and Certificateholders on the
Prepayment Assumption disclosed in the related Prospectus Supplement and on a
constant yield computed using a representative initial offering price for each
class of Certificates. However, neither the Depositor nor the Trustee will make
any representation that the Mortgage Loans will in fact prepay at a rate
conforming to the Prepayment Assumption or at any other rate and
Certificateholders should bear in mind that the use of a representative initial
offering price will mean that such information returns or reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders of each series who bought at that price.
Prospective purchasers of the Grantor Trust Strip Certificates should consult
their own tax advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Mortgage Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete Mortgage Loans, or if the Prepayment
Assumption is not used, then when a Mortgage Loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the Grantor Trust Strip Certificate that
is allocable to such Mortgage Loan.
POSSIBLE APPLICATION OF CONTINGENT PAYMENT RULES
The coupon stripping rules' general treatment of stripped coupons is to
regard them as newly issued debt instruments in the hands of each purchaser. To
the extent that payments on the Grantor Trust Strip Certificates would cease if
the Mortgage Loans were prepaid in full, the Grantor Trust Strip Certificates
could be considered to be debt instruments providing for contingent payments.
Under the OID Regulations, debt instruments providing for contingent payments
are not subject to the same rules as debt instruments providing for
noncontingent payments. Regulations were promulgated on June 14, 1996, regarding
contingent payment debt instruments (the "Contingent Payment Regulations"), but
it appears that Grantor Trust Strip Certificates, to the extent subject to
Section 1272(a)(6) of the Code as described above due to their similarity to
other mortgage-backed securities (such as REMIC regular interests and debt
instruments subject to Section 1272(a)(6) of the Code) that are expressly
excepted from the application of the Contingent Payment Regulations, are or may
be excepted from such regulations. Like the OID Regulations, the Contingent
Payment Regulations do not specifically address securities, such as the Grantor
Trust Strip Certificates, that are subject to the stripped bond rules of Section
1286 of the Code.
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If the contingent payment rules under the Contingent Payment Regulations
were to apply, the holder of a Grantor Trust Strip Certificate would be required
to apply the "noncontingent bond method". Under the "noncontingent bond method",
the issuer of a Grantor Trust Strip Certificate determines a projected payment
schedule on which interest will accrue. Holders of Grantor Trust Strip
Certificates are bound by the issuer's projected payment schedule. The projected
payment schedule consists of all noncontingent payments and a projected amount
for each contingent payment based on the projected yield (as described below) of
the Grantor Trust Strip Certificate.
The projected amount of each payment is determined so that the projected
payment schedule reflects the projected yield. The projected amount of each
payment must reasonably reflect the relative expected values of the payments to
be received by the holders of a Grantor Trust Strip Certificate. The projected
yield referred to above is a reasonable rate, not less than the "applicable
Federal rate" that, as of the issue date, reflects general market conditions,
the credit quality of the issuer, and the terms and conditions of the Mortgage
Loans. The holder of a Grantor Trust Strip Certificate would be required to
include as interest income in each month the adjusted issue price of the Grantor
Trust Strip Certificate at the beginning of the period multiplied by the
projected yield, 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
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transaction, subject to appropriate reduction for prior inclusion of interest
and other ordinary income items from the transaction. Finally, a taxpayer may
elect to have net capital gain taxed at ordinary income rates rather than
capital gains rates in order to include such net capital gain in total net
investment income for that taxable year, for purposes of the rule that limits
the deduction of interest on indebtedness incurred to purchase or carry property
held for investment to a taxpayer's net investment income.
GRANTOR TRUST REPORTING
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.
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PARTNERSHIP TRUST FUNDS
CLASSIFICATION OF PARTNERSHIP TRUST FUNDS
With respect to each series of Partnership Certificates or Debt
Certificates, Thacher Proffitt & Wood, counsel to the Depositor, will deliver
its opinion that the Trust Fund will not be a taxable mortgage pool or an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the related Pooling and Servicing Agreement and related documents
will be complied with, and on counsel's conclusions that (1) the Trust Fund will
not have certain characteristics necessary for a business trust to be classified
as an association taxable as a corporation and (2) the nature of the income of
the Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income on the
related Mortgage Loans, possibly reduced by its interest expense on the Debt
Certificates. Any such corporate income tax could materially reduce cash
available to make payments on the Debt Certificates and distributions on the
Partnership Certificates and Certificateholders could be liable for any such tax
that is unpaid by the Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN PARTNERSHIP CERTIFICATES AND DEBT
CERTIFICATES.
For federal income tax purposes, (i) Partnership Certificates and Debt
Certificates held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans ... secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v); (ii) interest on
Debt Certificates held by a real estate investment trust will not be treated as
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B), and Debt
Certificates held by a real estate investment trust will not constitute "real
estate assets" or "Government securities" within the meaning of Code Section
856(c)(4)(A), but Partnership Certificates held by a real estate investment
trust will qualify under those sections based on the real estate investments
trust's proportionate interest in the assets of the Partnership Trust Fund based
on capital accounts; and (iii) Partnership Certificates and Debt Certificates
held by a regulated investment company will not constitute "Government
securities" within the meaning of Code Section 851(b)(4)(A)(i).
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
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corporation with the adverse consequences described above (and the taxable
corporation would not be able to deduct interest on the Debt Certificates).
Debt Certificates generally will be subject to the same rules of taxation
as REMIC Regular Certificates issued by a REMIC, as described above, except that
(i) income reportable on Debt Certificates is not required to be reported under
the accrual method unless the holder otherwise uses the accrual method and (ii)
the special rule treating a portion of the gain on sale or exchange of a REMIC
Regular Certificate as ordinary income is inapplicable to Debt Certificates. See
"-- REMICs -- Taxation of Owners of REMIC Regular Certificates" and "--Sales of
REMIC Certificates."
TAXATION OF OWNERS OF PARTNERSHIP CERTIFICATES
TREATMENT OF THE PARTNERSHIP TRUST FUND AS A PARTNERSHIP.
If so specified in the applicable Prospectus Supplement, the Depositor will
agree, and the Certificateholders will agree by their purchase of Certificates,
to treat the Partnership Trust Fund as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
Partnership Trust Fund, the partners of the partnership being the
Certificateholders (including the Depositor), and the Debt Certificates (if any)
being debt of the partnership. However, the proper characterization of the
arrangement involving the Partnership Trust Fund, the Partnership Certificates,
the Debt Certificates, and the Depositor is not clear, because there is no
authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Certificates have certain
features characteristic of debt, the Partnership Certificates might be
considered debt of the Depositor or the Partnership Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Partnership Certificates as equity in a partnership, described below. The
following discussion assumes that the Partnership Certificates represent equity
interests in a partnership.
PARTNERSHIP TAXATION.
As a partnership, the Partnership Trust Fund will not be subject to federal
income tax. Rather, each Certificateholder will be required to separately take
into account such holder's allocated share of income, gains, losses, deductions
and credits of the Partnership Trust Fund. It is anticipated that the
Partnership Trust Fund's income will consist primarily of interest earned on the
Mortgage Loans (including appropriate adjustments for market discount, original
issue discount and bond premium) as described above under "-- Grantor Trust
Funds -- Taxation of Owners of Grantor Trust 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
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Period equal to the sum of (i) the interest that accrues on the Partnership
Certificates in accordance with their terms for such Due Period, including
interest accruing at the applicable pass-through rate for such Due Period and
interest on amounts previously due on the Partnership Certificates but not yet
distributed; (ii) any Partnership Trust Fund income attributable to discount on
the Mortgage Loans that corresponds to any excess of the principal amount of the
Partnership Certificates over their initial issue price; and (iii) any other
amounts of income payable to the Certificateholders for such Due Period. Such
allocation will be reduced by any amortization by the Partnership Trust Fund of
premium on Mortgage Loans that corresponds to any excess of the issue price of
Partnership Certificates over their principal amount. All remaining taxable
income of the Partnership Trust Fund will be allocated to the Depositor. Based
on the economic arrangement of the parties, this approach for allocating
Partnership Trust Fund income should be permissible under applicable Treasury
regulations, although no assurance can be given that the IRS would not require a
greater amount of income to be allocated to Certificateholders. Moreover, even
under the foregoing method of allocation, Certificateholders may be allocated
income equal to the entire pass-through rate plus the other items described
above even though the Trust Fund might not have sufficient cash to make current
cash distributions of such amount. Thus, cash basis holders will in effect be
required to report income from the Partnership Certificates on the accrual basis
and Certificateholders may become liable for taxes on Partnership Trust Fund
income even if they have not received cash from the Partnership Trust Fund to
pay such taxes.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of the
Master Servicer but not interest expense) allocable to an individual, estate or
trust Certificateholder would be miscellaneous itemized deductions subject to
the limitations described above under "--Grantor Trust Funds -- Taxation of
Owners of Grantor Trust Fractional Interest Certificates." Accordingly, such
deductions might be disallowed to the individual in whole or in part and might
result in such holder being taxed on an amount of income that exceeds the amount
of cash actually distributed to such holder over the life of the Partnership
Trust Fund.
Discount income or premium amortization with respect to each Mortgage Loan
would be calculated in a manner similar to the description above under "--
Grantor Trust Funds -- Taxation of Owners of Grantor Trust Fractional Interest
Certificates - If Stripped Bond Rules Do Not Apply." Notwithstanding such
description, it is intended that the Partnership Trust Fund will make all tax
calculations relating to income and allocations to Certificateholders on an
aggregate basis with respect to all Mortgage Loans held by the Partnership Trust
Fund rather than on a Mortgage Loan-by-Mortgage Loan basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Partnership Trust Fund might be required to incur additional expense, but it is
believed that there would not be a material adverse effect on
Certificateholders.
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"
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and "Premium." (As indicated above, the Partnership Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Mortgage Loan-by-Mortgage Loan basis).
If the Partnership Trust Fund acquires the Mortgage Loans at a market
discount or premium, the Partnership Trust Fund will elect to include any such
discount in income currently as it accrues over the life of the Mortgage Loans
or to offset any such premium against interest income on the Mortgage Loans. As
indicated above, a portion of such market discount income or premium deduction
may be allocated to Certificateholders.
SECTION 708 TERMINATION.
Under Section 708 of the Code, the Partnership Trust Fund will be deemed to
terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, the Partnership Trust Fund will
be considered to distribute its assets to the partners, who would then be
treated as recontributing those assets to the Partnership Trust Fund, as a new
partnership. The Partnership Trust Fund will not comply with certain technical
requirements that might apply when such a constructive termination occurs. As a
result, the Partnership Trust Fund may be subject to certain tax penalties and
may incur additional expenses if it is required to comply with those
requirements. Furthermore, the Partnership Trust Fund might not be able to
comply due to lack of data. Under proposed Treasury regulations, the foregoing
treatment would be replaced by a new regime under which a 50% or greater
transfer, as described above, would cause a deemed contribution of the assets of
a Partnership Trust Fund (the "old partnership") to a new Partnership Trust Fund
(the "new partnership") in exchange for interests in the new partnership. Such
interests would be deemed distributed to the partners of the old partnership in
liquidation thereof, which would not constitute a sale or exchange. It is not
known when or whether such proposed Treasury regulations will be adopted in
final (or temporary) form.
DISPOSITION OF CERTIFICATES.
Generally, capital gain or loss will be recognized on a sale of Partnership
Certificates in an amount equal to the difference between the amount realized
and the seller's tax basis in the Partnership Certificates sold. A
Certificateholder's tax basis in an Partnership Certificate will generally equal
the holder's cost increased by the holder's share of Partnership Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Partnership Certificate. In addition, both the tax basis in the
Partnership Certificates and the amount realized on a sale of an Partnership
Certificate would include the holder's share of the Debt Certificates and other
liabilities of the Partnership Trust Fund. A holder acquiring Partnership
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Partnership Certificates, and, upon sale or other
disposition of some of the Partnership Certificates, allocate a portion of such
aggregate tax basis to the Partnership Certificates sold (rather than
maintaining a separate tax basis in each Partnership Certificate for purposes of
computing gain or loss on a sale of that Partnership Certificate).
Any gain on the sale of an Partnership Certificate attributable to the
holder's share of unrecognized accrued market discount on the Mortgage Loans
would generally be treated as 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.
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If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Partnership Certificates that exceeds the
aggregate cash distributions with respect thereto, such excess will generally
give rise to a capital loss upon the retirement of the Partnership Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES.
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will be
apportioned among the Certificateholders in proportion to the principal amount
of Partnership Certificates owned by them as of the close of the last day of
such Due Period. As a result, a holder purchasing Partnership Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
The use of such a Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the Certificateholders.
The Depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
SECTION 731 DISTRIBUTIONS.
In the case of any distribution to a Certificateholder, no gain will be
recognized to that Certificateholder to the extent that the amount of any money
distributed with respect to such Certificate exceeds the adjusted basis of such
Certificateholder's interest in the Certificate. To the extent that the amount
of money distributed exceeds such Certificateholder's adjusted basis, gain will
be currently recognized. In the case of any distribution to a Certificateholder,
no loss will be recognized except upon a distribution in liquidation of a
Certificateholder's interest. Any gain or loss recognized by a Certificateholder
will be capital gain or loss.
SECTION 754 ELECTION.
In the event that a Certificateholder sells its Partnership Certificates at
a profit (loss), the purchasing Certificateholder will have a higher (lower)
basis in the Partnership Certificates than the selling Certificateholder had.
The tax basis of the Partnership Trust Fund's assets would not be adjusted to
reflect that higher (or lower) basis unless the Partnership Trust Fund were to
file an election under Section 754 of the Code. In order to avoid the
administrative complexities that would be involved in keeping accurate
accounting records, as well as potentially onerous information reporting
requirements, the Partnership Trust Fund will not make such election.
As a result,
Certificateholder might be allocated a greater or lesser amount of Partnership
Trust Fund income than would be appropriate based on their own purchase price
for Partnership
Certificates.
ADMINISTRATIVE MATTERS.
The Trustee is required to keep or have kept complete and accurate books of
the Partnership Trust Fund. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Partnership Trust Fund and will report each Certificateholder's
allocable share of items of Partnership Trust Fund income and expense to holders
and the IRS on Schedule K-1. The Trustee
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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 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
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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.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences", potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
Securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Securities offered
hereunder.
ERISA CONSIDERATIONS
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), impose certain fiduciary and prohibited transaction
restrictions on employee pension and
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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 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
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Interest with respect to such Plan. Neither Plans nor persons investing Plan
Assets should acquire or hold Securities in reliance upon the availability of
any exception under the
DOL Regulations.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. Any person who has discretionary authority or control with
respect to the management or disposition of Plan Assets and any person who
provides investment advice with respect to such Plan Assets for a fee is a
fiduciary of the investing Plan. If the Mortgage Loans, Agency Securities,
Private Mortgage-Backed Securities, Funding Agreements and other assets included
in the Trust Fund were to constitute Plan Assets, then any party exercising
management or discretionary control with respect to those Plan Assets may be
deemed to be a Plan "fiduciary," and thus subject to the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to any investing Plan. In
addition, the acquisition or holding of Securities by or on behalf of a Plan or
with Plan Assets, as well as the operation of the Trust Fund, may constitute or
involve a prohibited transaction under ERISA and the Code unless a statutory or
administrative exemption is available.
The DOL issued an individual exemption, Prohibited Transaction Exemption
91-23 (56 Fed. Reg. 15936, April 18, 1991) (the "Exemption"), to Salomon Smith
Barney Inc. (formerly known as Smith Barney Inc.), which generally exempts from
the application of the prohibited transaction provisions of Section 406 of
ERISA, and the excise taxes imposed on such prohibited transactions pursuant to
Section 4975(a) and (b) of the Code, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the initial
purchase, holding and subsequent resale of mortgage pass-through certificates
underwritten by an Underwriter (as hereinafter defined), provided that certain
conditions set forth in the Exemption are satisfied. For purposes of this
Section "ERISA Considerations", the term "Underwriter" shall include (a) Salomon
Smith Barney Inc., (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with Salomon
Smith Barney Inc. and (c) any member of the underwriting syndicate or selling
group of which a person described in (a) or (b) is a manager or co-manager with
respect to a class of Certificates.
The Exemption sets forth six general conditions which must be satisfied for
the Exemption to apply. First, the acquisition of Certificates by a Plan or with
Plan Assets must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
Exemption only applies to Certificates evidencing rights and interests that are
not subordinated to the rights and interests evidenced by other Certificates of
the same trust. Third, the Certificates at the time of acquisition by a Plan or
with Plan Assets must be rated in one of the three highest generic rating
categories by Standard & Poor's Structured Rating Group, Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc.
(collectively, the "Exemption Rating Agencies"). Fourth, the Trustee cannot be
an affiliate of any member of the "Restricted Group" which consists of any
Underwriter, the Depositor, the Trustee, the Master Servicer, any Sub-Servicer
and any obligor with respect to assets included in the Trust Fund 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
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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 (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
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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
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Code, for transactions involving an insurance company general account. Pursuant
to Section 401(c) of ERISA, the DOL is required to issue final regulations
("401(c) Regulations") no later than December 31, 1997 which are to provide
guidance for the purpose of determining, in cases where insurance policies
supported by an insurer's general account are issued to or for the benefit of a
Plan on or before December 31, 1998, which general account assets constitute
Plan Assets. Section 401(c) of ERISA generally provides that, until the date
which is 18 months after the 401(c) Regulations become final, no person shall be
subject to liability under Part 4 of Title I of ERISA and Section 4975 of the
Code on the basis of a claim that the assets of an insurance company general
account constitute Plan Assets, unless (i) as otherwise provided by the
Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal or
state criminal law. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued to
Plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) Regulations may be treated as Plan Assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan Assets of any Plan invested in
such separate account. Insurance companies contemplating the investment of
general account assets in the 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.
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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.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax- Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusion" of a REMIC allocated to a REMIC Residual Certificate and held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to federal
income tax.
See "Federal
Income Tax Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions" above.
CONSULTATION WITH COUNSEL
There can be no assurance that any DOL exemption will apply with respect to
any particular Plan that acquires the Securities or, even if all the conditions
specified therein were satisfied, that any such exemption would apply to
transactions involving the Trust Fund. Prospective Plan investors should consult
with their legal counsel concerning the impact of ERISA and the Code and the
potential consequences to their specific circumstances prior to making an
investment in the Securities. Neither the Depositor, the Trustee, the Master
Servicer nor any of their respective affiliates will make any representation to
the effect that the Securities satisfy all legal requirements with respect to
the investment therein by Plans generally or any particular Plan or to the
effect that the Securities are an appropriate investment for Plans generally or
any particular Plan.
BEFORE PURCHASING THE SECURITIES, A FIDUCIARY OF A PLAN OR OTHER PLAN ASSET
INVESTOR SHOULD ITSELF CONFIRM THAT (A) ALL THE SPECIFIC AND GENERAL CONDITIONS
SET FORTH IN THE EXEMPTION, ONE OF THE CLASS EXEMPTIONS OR SECTION 401(C) OF
ERISA WOULD BE SATISFIED AND (B) IN THE CASE OF A SECURITY PURCHASED UNDER THE
EXEMPTION, THE SECURITY CONSTITUTES A "CERTIFICATE" FOR PURPOSES OF THE
EXEMPTION. IN ADDITION TO MAKING ITS OWN DETERMINATION AS TO THE AVAILABILITY OF
THE EXEMPTIVE RELIEF PROVIDED IN THE EXEMPTION, ONE OF THE CLASS EXEMPTIONS OR
SECTION 401(C) OF ERISA, THE PLAN FIDUCIARY SHOULD CONSIDER ITS GENERAL
FIDUCIARY OBLIGATIONS UNDER ERISA IN DETERMINING WHETHER TO PURCHASE THE
SECURITIES ON BEHALF OF A PLAN.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Securities will specify which
classes of Securities of such series, if any, will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Any class of Securities that is not rated in one of the two
highest rating categories by one or more nationally recognized statistical
rating agencies or that represents an interest in a Trust Fund that includes
junior Mortgage Loans will not constitute "mortgage related securities" for
purposes of SMMEA "Mortgage related securities" are legal investments to the
same extent that, under applicable law, obligations issued by or guaranteed as
to principal and interest by the United States or any agency or instrumentality
thereof constitute
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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 contractual commitment was made or such securities acquired prior
to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
On April 23, 1998, the Federal Financial Institutions Examination
Council issued a revised supervisory policy statement (the "1998 Policy
Statement") applicable to all depository institutions, setting forth guidelines
for investments in "high-risk mortgage securities". The 1998 Policy Statement
has been adopted by the Federal Reserve Board, the Office of the Comptroller of
the Currency, the FDIC, the National Credit Union Administration (the "NCUA")
and the Office of Thrift Supervision (the "OTS") with an effective date of May
26, 1998. The 1998 Policy Statement rescinds a 1992 policy statement that had
required, prior to purchase, a depository institution to determine whether a
mortgage derivative product that it is considering acquiring is high-risk, and,
if so, that the proposed acquisition would reduce the institution's overall
interest rate risk. The 1998 Policy Statement eliminates former constraints on
investing in certain "high-risk" mortgage derivative products and substitutes
broader guidelines for evaluating and monitoring investment risk.
On December 1, 1998, the Office of Thrift Supervision (the "OTS") issued
Thrift Bulletin 13a, entitled, "Management of Interest Rate Risk, Investment
Securities, and Derivatives Activities" ("TB 13a"), which is applicable to
thrift institutions regulated by the OTS. TB 13a has an effective date of
December 1, 1998. One of the primary purposes of TB 13a is to require thrift
institutions, prior to taking any investment position, to (i) conduct a
pre-purchase portfolio sensitivity analysis for any "significant transaction"
involving securities or financial derivatives and (ii) conduct a pre-purchase
price sensitivity analysis of any "complex security" or financial derivative.
For the purposes of TB 13a, "complex security" includes among other things any
collateralized mortgage obligation ("CMO") or REMIC security, other than any
"plain vanilla" mortgage pass-through security (that is, securities that are
part of a single class of securities in the related pool, that are non-callable
and do not have any special features). Accordingly, the offered securities may
be viewed as "complex securities". The OTS recommends that while a thrift
institution should conduct its own in-house pre-acquisition analysis, it may
rely on an analysis conducted by an independent third-party as long as
management understands the analysis and its key assumptions. Further, TB 13a
recommends that the use of "complex securities with high price sensitivity" be
limited to transactions and strategies that lower a thrift institution's
portfolio interest rate risk. TB 13a warns that an investment in complex
securities by thrift institutions that do not have adequate risk measurement,
monitoring and control systems may be viewed by the OTS examiners as an unsafe
and unsound practice.
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Prospective investors in the Securities, including in particular the
classes of Securities that do not constitute "mortgage related securities" for
purposes of SMMEA should consider the matters
discussed in the following paragraph.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS IN DETERMINING WHETHER
AND TO WHAT EXTENT THE SECURITIES CONSTITUTE LEGAL INVESTMENTS FOR SUCH
INVESTORS OR ARE SUBJECT TO INVESTMENT, CAPITAL OR OTHER RESTRICTIONS, AND, IF
APPLICABLE, WHETHER SMMEA HAS BEEN OVERRIDDEN IN ANY JURISDICTION RELEVANT TO
SUCH INVESTOR.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the Supplements to this Prospectus
will be offered in series. The distribution of the Securities may be effected
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Salomon Smith Barney Inc. ("Salomon
Smith Barney") acting as underwriter with other underwriters, if any, named
therein. In such event, the Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Securities agreed to be
purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of the Securities, underwriters may
receive compensation from the Depositor or from purchasers of the Securities in
the form of discounts, concessions or commissions. The Prospectus Supplement
will describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that the Securities
will be distributed by Salomon Smith Barney acting as agent or in some cases as
principal with respect to Securities which it has previously purchased or agreed
to purchase. If Salomon Smith Barney acts as agent in the sale of Securities,
Salomon Smith Barney will receive a selling commission with respect to each
series of Securities, depending on market conditions, expressed as a percentage
of the aggregate principal balance of the related Mortgage Loans as of the
Cut-off Date. The exact percentage for each series of Securities will be
disclosed in the related Prospectus Supplement. To the extent that Salomon Smith
Barney elects to purchase Securities as principal, Salomon Smith Barney may
realize losses or profits based upon the difference between its purchase price
and the sales price. The Prospectus Supplement with respect to any series
offered other than through underwriters will contain information regarding the
nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Securities of such series.
The Depositor will indemnify Salomon Smith Barney and any underwriters
against certain civil liabilities, including liabilities under the Securities
Act of 1933, or will contribute to payments Salomon Smith Barney and any
underwriters may be required to make in respect thereof.
In the ordinary course of business, Salomon Smith Barney and the Depositor
may engage in various securities and financing transactions, including
repurchase agreements to provide interim financing of the Depositor's mortgage
loans pending the sale of such mortgage loans or interests therein, including
the Securities.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such
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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.
RATING
It is a condition to the issuance of any class of Securities that they
shall have been rated not lower than investment grade, that is, in one of the
four highest rating categories, by at least one Rating Agency.
Any such ratings on the Securities address the likelihood of receipt by the
holders thereof of all collections on the underlying mortgage assets to which
such holders are entitled. These ratings address the structural, legal and
issuer-related aspects associated with such Securities, the nature of the
underlying mortgage assets and the credit quality of the guarantor, if any. Such
ratings do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which such prepayments might differ
from those originally anticipated. As a result, Securityholders might suffer a
lower than anticipated yield, and, in addition, holders of Strip Securities in
extreme cases might fail to recoup their initial investments.
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, Suite 1300, 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).
142
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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 Freddie Mac's most recent Offering Circular for Freddie Mac
Certificates, Freddie Mac's most recent Information Statement and any subsequent
information statement, any supplement to any information statement relating to
Freddie Mac and any quarterly report made available by Freddie Mac after
December 31, 1983 can be obtained by writing or calling the Freddie Mac 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
Freddie Mac'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 Fannie Mae's most recent Prospectus for Fannie Mae Certificates
are available from Fannie Mae's Mortgage Backed Securities Office, 3900
Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-6547). Fannie Mae's
annual report and quarterly financial statements, as well as other financial
information, are available from Fannie Mae'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 Fannie Mae'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
These 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 390 Greenwich
Street, 4th Floor, New York, New York 10013, Attention: Mortgage Finance, or by
telephone at (212) 816-6000. The Depositor has determined that its financial
statements are not material to the offering of any Securities offered hereby.
143
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
- ---- ----------
1998 Policy Statement ...............................................140
401(c) Regulations ..................................................138
Accrual Securities ...................................................39
Accrued Certificate Interest .........................................48
Accrued Note Interest ................................................48
Accrued Security Interest ............................................48
Agreement ............................................................38
ARM Loans ............................................................16
Available Distribution Amount ........................................47
Average Interest Rate ...............................................136
Bankruptcy Amount ....................................................64
BIF ..................................................................35
Buydown Account ......................................................46
Buydown Funds ........................................................18
Buydown Mortgage Loans ...............................................18
Buydown Period .......................................................18
Call Class ...................................................13, 31, 63
Call Price .......................................................13, 63
Cash Flow Agreement ..................................................72
Certificate ..........................................................38
Certificate Account ..................................................44
Certificate Principal Balance ........................................48
Certificate Register .................................................47
Certificateholders ...................................................52
Charter Act ..........................................................25
Class Exemptions ....................................................137
Clean-up Call ....................................................13, 63
Closing Date .........................................................98
Code .............................................................39, 95
Commission ..........................................................142
Committee Report .....................................................98
Contingent Payment Regulations ......................................123
Contracts ............................................................15
Contributions Tax ...................................................110
Cooperative ..........................................................15
Cooperative Loans ....................................................15
Cooperative Notes ....................................................20
Cooperative Unit .....................................................15
Credit Support .......................................................39
Cut-off Date .........................................................40
Defaulted Mortgage Amount ............................................64
Deficient Valuation ..................................................50
Deleted Mortgage Loan ................................................42
Depositor ........................................................15, 33
Determination Date ...................................................47
Distribution Date ....................................................47
DOL .................................................................133
DOL Regulations .....................................................133
DTC ..................................................................38
DTC Registered Securities ............................................38
Due Period ...........................................................47
Equity Certificates ..................................................38
ERISA ...............................................................132
ERISA Permitted Investments .........................................137
ERISA Plans .........................................................133
Event of Default .....................................................60
144
<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
- ---- ----------
Excluded Plan .......................................................135
Exemption ...........................................................134
Exemption Rating Agencies ...........................................134
FDIC .................................................................35
FHA Loans ............................................................21
FHLMC .................................................................6
FHLMC Act ............................................................23
FHLMC Certificates ...................................................21
Finance Company ......................................................29
Financial Guarantee Insurance ........................................71
FNMA ..................................................................6
FNMA Certificates ....................................................21
FTC Rule .............................................................88
Funding Agreement ....................................................29
Garn-St Germain Act ..................................................89
GNMA Certificates ....................................................21
GNMA Issuer ..........................................................22
Grantor Trust Certificates ...........................................95
Grantor Trust Fractional Interest Certificate .......................115
Grantor Trust Fund ...................................................95
Grantor Trust Strip Certificate .....................................115
Guaranty Agreement ...................................................22
High LTV Loans .......................................................17
Holder-in-Due-Course .................................................88
Housing Act ..........................................................21
HUD ..................................................................74
Indenture ............................................................38
Insurance Instruments ................................................53
Insurance Proceeds ...................................................45
Interest Rate ........................................................16
IRS ..................................................................98
Issue Premium .......................................................105
Issuer ...............................................................38
Letter of Credit Bank ................................................66
Liquidated Loan ......................................................50
Liquidation Proceeds .................................................45
Loan-to-Value Ratio ..................................................17
Lockout Date .........................................................32
Lockout Period .......................................................32
Manufacturer's Invoice Price .........................................17
Mark-to-Market Regulations ..........................................108
Master Servicer ......................................................58
Mortgage Loan Seller .................................................15
Mortgage Notes .......................................................20
Mortgaged Properties .................................................15
Mortgages ............................................................20
Multifamily Loans ....................................................15
Multifamily Properties ...............................................15
NCUA ................................................................140
Net Interest Rate ....................................................40
New Withholding Regulations .........................................113
Nonrecoverable Advance ...............................................51
Note Principal Balance ...............................................48
Note Register ........................................................47
Noteholders ..........................................................52
145
<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
- ---- ----------
OID Regulations ......................................................96
Originator ...........................................................15
OTS .................................................................140
Owner Trust Agreement ................................................38
Owner Trustee ........................................................64
Parties in Interest .................................................133
Permitted Investments ................................................44
Plan Assets .........................................................133
Plans ...............................................................133
PMBS Agreement .......................................................27
PMBS Issuer ..........................................................27
PMBS Servicer ........................................................27
PMBS Trustee .........................................................27
Pooling and Servicing Agreement ......................................37
Pre-Funding Account ..................................................49
Pre-Funding Limit ...................................................136
Pre-Funding Period ..................................................136
Prepayment Assumption ...........................................98, 118
Prepayment Period ....................................................31
Principal Balance ................................................39, 48
Prohibited Transactions Tax .........................................110
PTCE ................................................................137
PTCE 83-1 ...........................................................137
Purchase Price .......................................................37
Rating Agency ........................................................40
Record Date ..........................................................47
Related Proceeds .....................................................50
Relief Act ...........................................................92
REMIC ................................................................95
REMIC Certificates ...................................................95
REMIC Provisions .....................................................95
REMIC Regular Certificates ...........................................96
REMIC Regulations ....................................................96
REMIC Residual Certificates ..........................................96
Reserve Fund .........................................................71
Reserve Funds ........................................................66
Retained Interest ....................................................38
SAIF .................................................................35
Sales of Grantor Trust Certificates .................................117
Salomon Smith Barney ................................................141
Scheduled Principal Balance ..........................................65
Security Interest Rate ...............................................39
Security Register ....................................................47
Securityholders .................................................51, 143
Senior Liens .........................................................16
Senior Percentage ....................................................49
Senior Securities ....................................................39
Senior/Subordinate Series ............................................39
Servicing Default ....................................................60
Single Family Loans ..................................................15
Single Family Properties .............................................15
SMMEA ...............................................................139
Special Hazard Amount ................................................64
Special Hazard Realized Losses .......................................65
Special Hazard Subordination Amount ..................................65
146
<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
- ---- ----------
Stated Principal Balance .............................................37
Strip Securities .....................................................39
Stripped Interest ....................................................30
Sub-Servicer .........................................................54
Sub-Servicing Account ................................................44
Sub-Servicing Agreement ..............................................54
Subordinate Securities ...............................................39
Subsequent Mortgage Loans ...........................................136
Substitute Mortgage Loan .............................................42
Tax Favored Plans ...................................................133
Tax-Exempt Investor .................................................139
Tiered REMICs ........................................................97
Title V ..............................................................91
Title VIII ...........................................................91
Trustee ..............................................................64
UBTI ................................................................139
Underwriter .........................................................134
VA Loans .............................................................22
Window Period Loans ..................................................89
147
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
{Version 2]
MORTGAGE PASS-THROUGH CERTIFICATES (ISSUABLE IN SERIES)
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
- --------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 4 OF THIS
PROSPECTUS.
The certificates will represent obligations of a trust fund only and will not
represent ownership interests in or obligations of any other entity.
This prospectus may be used to offer and sell the certificates only if
accompanied by a prospectus supplement.
- --------------------------------------------------------------------------------
THE OFFERED CERTIFICATES:
Salomon Brothers Mortgage Securities VII, Inc., as depositor, will
establish one or more trust funds to issue and sell from time to time mortgage
pass-through certificates.
Each series of certificates will consist of one or more classes of
certificates that may (i) provide for the accrual of interest thereon based on
fixed, variable or adjustable rates; (ii) be senior or subordinate to one or
more other classes of certificates in respect of certain distributions on the
certificates; (iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions; (iv) be entitled
to interest distributions, with disproportionately low, nominal or no principal
distributions; (v) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events, such as the
retirement of one or more other classes of certificates of such series; (vi)
provide for distributions of principal sequentially, or based on specified
payment schedules or other methodologies, to the extent of available funds;
and/or (vii) provide for cash distributions based on available funds, in each
case as described in the related prospectus supplement.
THE TRUST FUND AND ITS ASSETS
As specified in the related prospectus supplement, the assets of a
trust fund will primarily include any or all of the following:
o various types of multifamily or commercial mortgage loans,
o mortgage-backed securities evidencing interests in, or secured
by pledges of, one or more of various types of multifamily or
commercial mortgage loans,
o securities evidencing interests in, or secured by pledges of,
mortgage-backed securities of the type described above.
The assets of a trust fund for a series of certificates may also
include letters of credit, insurance policies, guarantees, 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.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Offers of the certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described
herein under "Methods of Distribution" and in the related Prospectus Supplement.
There will have been no public market for any series of certificates prior to
the offering thereof. No assurance can be given that such a market will develop
as a result of such an offering. All securities will be distributed by, or sold
by underwriters managed by:
SALOMON SMITH BARNEY
--------------------
The date of this Prospectus is .
<PAGE>
TABLE OF CONTENTS
PAGE
----
RISK FACTORS............................................................ 4
DESCRIPTION OF THE TRUST FUNDS.......................................... 12
Mortgage Assets................................................ 12
Mortgage Loans................................................. 12
MBS and Tiered MBS............................................. 15
Certificate Accounts........................................... 16
Credit Support................................................. 16
Cash Flow Agreements........................................... 17
USE OF PROCEEDS......................................................... 17
YIELD CONSIDERATIONS.................................................... 17
General........................................................ 17
Pass-Through Rate.............................................. 17
Timing of Payment of Interest and Principal.................... 17
Principal Prepayments.......................................... 18
Prepayments -- Maturity and Weighted Average Life.............. 18
Other Factors Affecting Weighted Average Life.................. 19
Negative Amortization.......................................... 20
THE DEPOSITOR........................................................... 20
DESCRIPTION OF THE CERTIFICATES......................................... 21
General........................................................ 21
Distributions.................................................. 21
Available Distribution Amount.................................. 22
Distributions of Interest on the Certificates.................. 22
Distributions of Principal of the Certificates................. 23
Distributions on the Certificates of Prepayment Premiums or
in Respect of Equity Participations.......................... 23
Distributions in Respect of Spread Certificates................ 24
Allocation of Losses and Shortfalls............................ 24
Advances in Respect of Delinquencies........................... 24
Reports to Certificateholders.................................. 25
Termination.................................................... 27
Book-Entry Registration and Definitive Certificates............ 27
DESCRIPTION OF THE AGREEMENTS........................................... 29
Assignment of Mortgage Assets; Repurchases..................... 29
Representations and Warranties; Repurchases.................... 30
Certificate Account............................................ 31
Collection and Other Servicing Procedures...................... 34
Sub-Servicers.................................................. 35
Special Servicers.............................................. 35
Realization Upon Defaulted Whole Loans......................... 35
Hazard Insurance Policies...................................... 38
Due-on-Sale and Due-on-Encumbrance Provisions.................. 39
Retained Interest; Servicing Compensation and Payment of
Expenses..................................................... 40
Evidence as to Compliance...................................... 40
Certain Matters Regarding a Master Servicer and the Depositor.. 41
Events of Default.............................................. 42
Rights Upon Event of Default................................... 42
Amendment...................................................... 43
List of Certificateholders..................................... 43
The Trustee.................................................... 44
Duties of the Trustee.......................................... 44
Certain Matters Regarding the Trustee.......................... 44
Resignation and Removal of the Trustee......................... 44
DESCRIPTION OF CREDIT SUPPORT........................................... 45
General........................................................ 45
Subordinate Certificates....................................... 45
Cross-Support Provisions....................................... 45
Insurance or Guarantees with Respect to Mortgage Loans......... 46
Letter of Credit............................................... 46
Insurance Policies and Surety Bonds............................ 46
Reserve Funds.................................................. 46
Credit Support with Respect to MBS and Tiered MBS.............. 47
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS................................. 47
General........................................................ 47
Types of Mortgage Instruments.................................. 47
Leases and Rents............................................... 48
Personalty..................................................... 48
Foreclosure.................................................... 48
Bankruptcy Laws................................................ 51
Environmental Considerations................................... 52
Due-on-Sale and Due-on-Encumbrance Provisions.................. 54
Subordinate Financing.......................................... 54
Default Interest and Limitations on Prepayments................ 55
Applicability of Usury Laws.................................... 55
Americans with Disabilities Act................................ 55
Soldiers' and Sailors' Civil Relief Act of 1940................ 56
Forfeitures in Drug and RICO Proceedings....................... 56
FEDERAL INCOME TAX CONSEQUENCES......................................... 56
General........................................................ 56
REMICS......................................................... 57
Grantor Trust Funds............................................ 72
STATE AND OTHER TAX CONSIDERATIONS...................................... 80
ERISA CONSIDERATIONS.................................................... 80
LEGAL INVESTMENT........................................................ 85
METHOD OF DISTRIBUTION.................................................. 87
LEGAL MATTERS........................................................... 88
FINANCIAL INFORMATION................................................... 88
RATING.................................................................. 88
AVAILABLE INFORMATION................................................... 88
REPORTS TO CERTIFICATEHOLDERS........................................... 88
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE....................... 89
INDEX OF PRINCIPAL DEFINITIONS.......................................... 90
2
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of certificates is contained in two
separate documents:
o this prospectus, which provides general information, some of
which may not apply to a particular series; and
Y the accompanying prospectus supplement for a particular
series, which describes the specific terms of the securities
of that series. If the prospectus supplement contains
information about a particular series that differs from the
information contained in this prospectus, you should rely on
the information in the prospectus supplement.
You should rely only on the information contained in this prospectus
and the accompanying prospectus supplement. We have not authorized anyone to
provide you with information that is different from that contained in this
prospectus and the accompanying prospectus supplement. The information in this
prospectus is accurate only as of the date of this prospectus.
Beginning with the section titled "Description of The Trust Funds",
certain capitalized terms are used in this prospectus to assist you in
understanding the terms of the securities. The capitalized terms used in this
prospectus are defined on the pages indicated under the caption "Index of
Defined Terms" beginning on page 90 in this prospectus.
-------------------
If you require additional information, the mailing address of our
principal executive offices is 390 Greenwich Street, New York, New York 10013,
Attention: Secretary and the telephone number is (212) 816-6000. For other means
of acquiring additional information about us or a series of securities, see
"Incorporation of Certain Information by Reference" beginning on page 89 of this
prospectus.
-------------------
3
<PAGE>
RISK FACTORS
The offered certificates are not suitable investments for all
investors. In particular, you should not purchase the offered certificates
unless you understand and are able to bear the prepayment, credit, liquidity and
market risks associated with such securities.
You should carefully consider, among other things, the following
factors in connection with the purchase of the certificates offered hereby:
THE CERTIFICATES WILL HAVE LIMITED LIQUIDITY
There can be no assurance that any resale market for the certificates
of any series will develop following the issuance and sale of any series of
certificates. Even if a resale market does develop, it might not provide
investors with liquidity of investment or continue while certificates of such
series remain outstanding. Any such secondary market may provide less liquidity
to investors than any comparable market for securities evidencing interests in
single-family mortgage loans. The market value of certificates will fluctuate
with changes in prevailing rates of interest. Consequently, sales of
certificates by a holder in any secondary market that may develop may be at a
discount from 100% of their original principal balance or from their purchase
price. Furthermore, secondary market purchasers may look only hereto, to the
related prospectus supplement and to the reports to certificateholders as
described herein under the heading "Description of the Certificates -- Reports
to Certificateholders", " -- Book-Entry Registration and Definitive
Certificates" and "Description of the Agreements -- Evidence as to Compliance"
for information concerning the certificates. Except to the extent described in
this prospectus and in the related prospectus supplement, certificateholders
will have no redemption rights and the certificates are subject to early
retirement only under certain specified circumstances described herein and in
the related prospectus supplement. See "Description of the Certificates --
Termination". Salomon Smith Barney Inc., through one or more of its affiliates,
currently expects to make a secondary market in the offered certificates, but
has no obligation to do so.
THE CERTIFICATES WILL BE LIMITED OBLIGATIONS OF THE RELATED TRUST FUND ONLY AND
NOT OF ANY OTHER PARTY
Unless otherwise specified in the related prospectus supplement, a
series of certificates will not have any claim against or security interest in
the trust funds for any other series. If the related trust fund is insufficient
to make payments on such certificates, no other assets will be available for
payment of the deficiency. Additionally, certain amounts remaining in certain
funds or accounts, including any accounts maintained as credit support, may be
withdrawn under certain conditions, as described in the related prospectus
supplement. In the event of such withdrawal, such amounts will not be available
for future payment of principal of or interest on the certificates. If so
provided in the prospectus supplement for a series of certificates consisting of
one or more classes of subordinate certificates, on any distribution date in
respect of which losses or shortfalls in collections on the assets of the trust
fund have been incurred, the amount of such losses or shortfalls will be borne
first by one or more classes of the subordinate certificates, and, thereafter,
by the remaining classes of certificates in the priority and manner and subject
to the limitations specified in such prospectus supplement.
THE YIELD TO MATURITY AND AVERAGE LIFE OF THE CERTIFICATES WILL DEPEND ON A
VARIETY OF FACTORS INCLUDING PREPAYMENTS
The timing of principal payments on the certificates of a series will
be affected by a number of factors, including the following:
o the extent of prepayments on the underlying mortgage loans in
the trust fund or, if the trust fund is comprised of
underlying securities, on the mortgage loans backing the
underlying securities;
o how payments of principal are allocated among the classes of
certificates of that series as specified in the related
prospectus supplement;
4
<PAGE>
o if any party has an option to terminate the related trust fund
early, the effect of the exercise of the option;
o the rate and timing of defaults and losses on the assets in
the related trust fund; and
o repurchases of assets in the related trust fund as a result of
material breaches of representations and warranties made by
the depositor, the master servicer or another party.
Prepayments on the mortgage loans in any trust fund generally will
result in a faster rate of principal payments on one or more classes of the
related certificates than if payments on such mortgage loans were made as
scheduled. Thus, the prepayment experience on the mortgage loans may affect the
average life of each class of related certificates. The rate of principal
payments on pools of mortgage loans varies between pools and from time to time
is influenced by a variety of economic, demographic, geographic, social, tax,
legal and other factors. There can be no assurance as to the rate of prepayment
on the mortgage loans in any trust fund or that the rate of payments will
conform to any model described herein or in any prospectus supplement. If
prevailing interest rates fall significantly below the applicable rates borne by
the mortgage loans included in a trust fund, principal prepayments are likely to
be higher than if prevailing rates remain at or above the rates borne by those
mortgage loans. As a result, the actual maturity of any class of certificates
could occur significantly earlier than expected.
A series of certificates may include one or more classes of
certificates with priorities of payment and, as a result, yields on other
classes of certificates, including classes of offered certificates, of such
series may be more sensitive to prepayments on mortgage loans. A series of
certificates may include one or more classes offered at a significant premium or
discount. Yields on such classes of certificates will be sensitive, and in some
cases extremely sensitive, to prepayments on mortgage loans and, where the
amount of interest payable with respect to a class is disproportionately high,
as compared to the amount of principal, a holder might, in some prepayment
scenarios, fail to recoup its original investment.
A series of certificates may include one or more classes of
certificates that provide for distribution of principal thereof from amounts
attributable to interest accrued but not currently distributable on one or more
other classes of certificates. As a result, yields on the first such
certificates will be sensitive to the provisions of those other classes of
certificates relating to the amount and timing of interest accruals thereon.
In general, if you purchase a class of offered certificates at a price
higher than its outstanding principal balance and principal distributions on
such class occur faster than you anticipate at the time of purchase, the yield
will be lower than you anticipate. Conversely, if you purchase a class of
offered certificates at a price lower than its outstanding principal balance and
principal distributions on that class occur more slowly than you anticipate at
the time of purchase, the yield will be lower than you anticipate.
See "Yield Considerations" herein and, if applicable, in the related
prospectus supplement.
THE LIMITED NATURE OF RATINGS ON THE CERTIFICATES AND THE DOWNGRADING OF A
CERTIFICATE RATING MAY ADVERSELY AFFECT THE LIQUIDITY OR MARKET VALUE OF SUCH
CERTIFICATE
Any rating assigned by a rating agency to a class of certificates will
reflect such rating agency's assessment solely of the likelihood that holders of
certificates of such class will receive payments to which such
certificateholders are entitled under the related agreement. Such rating will
not constitute an assessment of the likelihood that principal prepayments on the
related mortgage loans will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated or the likelihood of
early optional termination of the series of certificates. Such rating will not
address the possibility that prepayment at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that an investor purchasing a certificate at a significant
premium or a purchasing an interest-only certificate might fail to recoup its
initial investment under certain prepayment scenarios. Each prospectus
supplement will identify any payment to which holders of offered certificates of
the related series are entitled that is not covered by the applicable rating.
5
<PAGE>
The amount, type and nature of credit support, if any, established with
respect to a series of certificates will be determined on the basis of criteria
established by each rating agency rating classes of the certificates of such
series. Such criteria are sometimes based upon an actuarial analysis of the
behavior of mortgage loans in a larger group. Such analysis is often the basis
upon which each rating agency determines the amount of credit support required
with respect to each such class. There can be no assurance that the historical
data supporting any such actuarial analysis will accurately reflect future
experience nor any assurance that the data derived from a large pool of mortgage
loans accurately predicts the delinquency, foreclosure or loss experience of any
particular pool of mortgage loans. No assurance can be given that values of any
mortgaged properties have remained or will remain at their levels on the
respective dates of origination of the related mortgage loans. Moreover, there
is no assurance that appreciation of real estate values generally will limit
loss experiences on commercial properties or multifamily properties. If the
commercial or multifamily residential real estate markets should experience an
overall decline in property values such that the outstanding principal balances
of the mortgage loans in a particular trust fund and any secondary financing on
the related mortgaged properties become equal to or greater than the value of
the mortgaged properties, the rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced by institutional lenders.
In addition, adverse economic conditions, which may or may not affect real
property values, may affect the timely payment by mortgagors of scheduled
payments of principal and interest on the mortgage loans and, accordingly, the
rates of delinquencies, foreclosures and losses with respect to any trust fund.
To the extent that such losses are not covered by credit support, such losses
will be borne, at least in part, by the holders of one or more classes of the
certificates of the related series. See "Description of Credit Support" and
"Rating".
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 certificate, and accordingly, there
can be no assurance to you that the ratings assigned to any certificate on the
date on which such certificate is originally issued will not be lowered or
withdrawn by a rating agency at any time thereafter. The rating(s) of any series
of certificates 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 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 certificates. In the event any rating is revised or
withdrawn, the liquidity or the market value of the related certificate may be
adversely affected.
THE PAYMENT PERFORMANCE OF THE CERTIFICATES WILL BE DIRECTLY RELATED TO THE
PAYMENT PERFORMANCE OF THE MORTGAGE ASSETS IN THE RELATED TRUST FUNDS
The certificates will be directly or indirectly backed by mortgage
loans. Certain mortgage loans may have a greater likelihood of delinquency and
foreclosure, and a greater likelihood of loss in the event thereof. In the event
that the mortgaged properties fail to provide adequate security for the mortgage
loans included in a trust fund, any resulting losses, to the extent not covered
by credit support, will be allocated to the related certificates in the manner
described in the related prospectus supplement and consequently would adversely
affect the yield to maturity on such securities. The depositor cannot assure you
that the values of the mortgaged properties have remained or will remain at the
appraised values on the dates of origination of the related mortgage loans. You
should consider the following risks associated with certain mortgage loans which
may be included in the trust fund related to your certificate.
INVESTORS SHOULD BE AWARE OF VARIOUS RISKS ASSOCIATED WITH CERTAIN MORTGAGE
LOANS AND MORTGAGED PROPERTIES
MULTIFAMILY AND COMMERCIAL LOANS. Mortgage loans made with respect to
multifamily or commercial property may entail risks of delinquency and
foreclosure, and risks of loss in the event thereof, that are greater than
similar risks associated with single-family property. The ability of a
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mortgagor to repay a loan secured by an income-producing property typically is
dependent primarily upon the successful operation of such property rather than
any independent income or assets of the mortgagor. Thus, the value of an
income-producing property is directly related to the net operating income
derived from such property. In contrast, the ability of a mortgagor to repay a
single-family loan typically is dependent primarily upon the mortgagor's
household income, rather than the capacity of the related property to produce
income. Thus, other than in geographical areas where employment is dependent
upon a particular employer or an industry, the mortgagor's income tends not to
reflect directly the value of a single-family property. A decline in the net
operating income of an income-producing property will likely affect both the
performance of the related loan as well as the liquidation value of such
property, whereas a decline in the income of a mortgagor on a single-family
property will likely affect the performance of the related loan but may not
affect the liquidation value of such property.
The performance of a mortgage loan secured by an income-producing
property leased by the mortgagor to tenants, as well as the liquidation value of
such property, may be dependent upon the business operated by such tenants in
connection with such property, the creditworthiness of such tenants or both. The
risks associated with such loans may be offset by the number of tenants or, if
applicable, a diversity of types of business operated by such tenants. A number
of the mortgage loans included in a trust fund may be secured by liens on
owner-occupied mortgaged properties or on mortgaged properties leased to a
single tenant. Accordingly, a decline in the financial condition of the borrower
or single tenant, as applicable, may have a disproportionately greater effect on
the net operating income from such mortgaged properties than would be the case
with respect to mortgaged properties with multiple tenants. Furthermore, the
value of any mortgaged property may be adversely affected by risks generally
incident to interests in real property, including:
o changes in general or local economic conditions and/or
specific industry segments;
o declines in real estate values;
o declines in rental or occupancy rates;
o increases in interest rates, real estate tax rates and other
operating expenses;
o changes in governmental rules, regulations and fiscal
policies, including environmental legislation;
o acts of God; and
o other factors beyond the control of the master servicer.
NONRECOURSE LOANS. It is anticipated that a substantial portion of the
mortgage loans included in any trust fund will be nonrecourse loans or loans for
which recourse may be restricted or unenforceable, as to which, in the event of
mortgagor default, recourse may be had only against the specific multifamily or
commercial property and such other assets, if any, as have been pledged to
secure the mortgage loan. With respect to those mortgage loans that provide for
recourse against the mortgagor and its assets generally, there can be no
assurance that such recourse will ensure a recovery in respect of a defaulted
mortgage loan greater than the liquidation value of the related mortgaged
property.
DELINQUENT AND NON-PERFORMING MORTGAGE LOANS. If so provided in the
related prospectus supplement, the trust fund for a particular series of
certificates may include mortgage loans that are past due or are non-performing.
If so specified in the related prospectus supplement, the servicing of such
mortgage loans will be performed by a special servicer. Credit support provided
with respect to a particular series of certificates may not cover all losses
related to such delinquent or non-performing mortgage loans, and you should
consider the risk that the inclusion of such mortgage loans in the trust fund
may adversely affect the rate of defaults and prepayments on mortgage assets and
the yield on the certificates of such series. See "Description of the Trust
Funds -- Mortgage Loans -- General".
JUNIOR MORTGAGE LOANS. Certain of the mortgage loans included in a
trust fund may be junior mortgage loans. The primary risk to holders of mortgage
loans secured by junior liens is the possibility that adequate funds will not be
received in connection with a foreclosure of a related senior lien to satisfy
the junior mortgage loan after satisfaction of all related senior liens. See
"Certain Legal Aspects of Mortgage Loans -- Foreclosure".
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BALLOON LOANS. Certain of the mortgage loans included in a trust fund
may not be fully amortizing over their terms to maturity and, thus, will require
substantial principal payments, or "balloon payments", at their stated maturity.
Mortgage loans with balloon payments involve a greater degree of risk because
the ability of a mortgagor to make a balloon payment typically will depend upon
its ability either to timely refinance the loan or to timely sell the related
mortgaged property. The ability of a mortgagor to accomplish either of these
goals will be affected by a number of factors, including:
o the level of available mortgage rates at the time of sale or
refinancing,
o the mortgagor's equity in the related mortgaged property,
o the financial condition and operating history of the mortgagor
and the related mortgaged property,
o tax laws,
o rent control laws, in the case of certain multifamily
properties and mobile home parks,
o reimbursement rates, in the case of certain hospitals, nursing
homes and convalescent homes,
o renewability of operating licenses,
o prevailing general economic conditions, and
o the availability of credit for commercial or multifamily, as
the case may be, real properties generally.
See "Description of the Trust Funds-Mortgage Loans" and also "Certain
Legal Aspects of Mortgage Loans" herein.
AN INVESTMENT IN THE CERTIFICATES REPRESENTS AN INTEREST IN MULTIFAMILY AND/OR
COMMERCIAL LOANS WHICH MAY PRESENT A GREATER RISK OF LOSS THAN AN INTEREST IN A
POOL OF SINGLE-FAMILY LOANS
The concentration of default, foreclosure and loss risks in individual
mortgagors or mortgage loans in a particular trust fund or the related mortgaged
properties will generally be greater for pools of multifamily and/or commercial
loans such as those to be included in a trust fund with respect to a series of
certificates than for pools of single-family loans because such pools of
multifamily and/or commercial mortgage loans will generally consist of a smaller
number of loans with higher principal balances individually than would a pool of
single-family loans of comparable aggregate unpaid principal balance. The trust
fund for a series of certificates may consist of a single mortgage loan.
THE TYPE OF MORTGAGOR MAY PRESENT A GREATER RISK OF LOSS
Mortgage Loans made to partnerships, corporations or other entities may
entail risks of loss from delinquency and foreclosure that are greater than
those of mortgage loans made to individuals. The Mortgagor's sophistication and
form of organization may increase the likelihood of protracted litigation or
bankruptcy in default situations.
THE TYPE OF MORTGAGED PROPERTY MAY PRESENT A GREATER RISK OF LOSS
Additional risk may be presented because of the type and use of a
particular mortgaged property. For instance, mortgaged properties that operate
as hospitals and nursing homes may present special risks to lenders due to the
significant governmental regulation of the ownership, operation, maintenance and
financing of health care institutions. Hotel and motel properties are often
operated pursuant to franchise, management or operating agreements which may be
terminable by the franchisor or operator. Moreover, the transferability of a
hotel's operating, liquor and other licenses upon a transfer of the hotel,
whether through purchase or foreclosure, is subject to local law requirements.
THE DISCRETION OF THE MASTER SERVICER TO EXTEND RELIEF TO DELINQUENT MORTGAGORS
MAY NOT RESULT IN HIGHER REPAYMENTS
If so specified in the related prospectus supplement, in order to
maximize recoveries on defaulted mortgage loans, a master servicer will be
permitted (within prescribed parameters) to extend and
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modify mortgage loans that are in default or as to which a payment default is
imminent, including in particular with respect to balloon payments. In addition,
a master servicer or a special servicer may receive workout fees, management
fees, liquidation fees or other similar fees based on receipts from or proceeds
of such mortgage loans. While a master servicer generally will be required to
determine that any such extension or modification is reasonably likely to
produce a greater recovery on a present value basis than liquidation, there can
be no assurance that such flexibility with respect to extensions or
modifications or payment of a workout fee will increase the present value of
receipts from or proceeds of mortgage loans that are in default or as to which a
payment default is imminent. Such relief instead may result in a lower
liquidation or foreclosure price to the master servicer, which would affect the
yield of the related certificates. The recent foreclosure and delinquency
experience with respect to loans serviced by a master servicer or, if
applicable, any special servicer or significant sub-servicer will be provided in
the related prospectus supplement.
CREDIT SUPPORT WILL BE LIMITED AND THE FAILURE OF CREDIT SUPPORT TO COVER LOSSES
ON THE MORTGAGE ASSETS MAY RESULT IN LOSSES ALLOCATED TO THE CERTIFICATES
Credit support is intended to reduce the effect of delinquent payments
or losses on the underlying assets of the trust fund on those classes of
certificates that have the benefit of the credit support. The prospectus
supplement for a series of certificates will describe any credit support in the
related trust fund, which may include letters of credit, insurance policies,
surety bonds, guarantees, reserve funds or other types of credit support, or
combinations thereof. Use of credit support will be subject to the conditions
and limitations described herein and in the related prospectus supplement.
Moreover, such credit support may not cover all potential losses or risks. For
example, credit support may or may not cover fraud or negligence by a mortgage
loan originator or other parties.
A series of certificates may include one or more classes of subordinate
certificates, which may include offered certificates, if so provided in the
related prospectus supplement. Although subordination is intended to reduce the
risk to holders of senior certificates of delinquent distributions or ultimate
losses, the amount of subordination will be limited and may decline under
certain circumstances. In addition, if principal payments on one or more classes
of certificates of a series are made in a specified order of priority, any
limits with respect to the aggregate amount of claims under any related credit
support may be exhausted before the principal of the lower priority classes of
certificates of such series has been repaid. As a result, the impact of
significant losses and shortfalls on the mortgage assets may fall primarily upon
those classes of certificates having a lower priority of payment. Moreover, if a
form of credit support covers more than one series of certificates, holders of
certificates of one series will be subject to the risk that such credit support
will be exhausted by the claims of the holders of certificates of one or more
other series.
The amount of any applicable credit support supporting one or more
classes of offered certificates, including the subordination of one or more
classes of certificates, will be determined on the basis of criteria established
by each rating agency rating such classes of certificates based on an assumed
level of defaults, delinquencies, other losses or other factors. There can,
however, be no assurance that the loss experience on the related mortgage assets
will not exceed such assumed levels. See " -- Limited Nature of Ratings" above
and "Description of the Certificates" and "Description of Credit Support".
DUE-ON-SALE CLAUSES AND ASSIGNMENTS OF LEASES AND RENTS MAY NOT PROVIDE ADEQUATE
SECURITY FOR A MORTGAGE LOAN
Mortgages may contain a due-on-sale clause, which permits the lender to
accelerate the maturity of the mortgage loan if the mortgagor sells, transfers
or conveys the related mortgaged property or its interest in the mortgaged
property. Mortgages may also include a debt-acceleration clause, which permits
the lender to accelerate the debt upon a monetary or non-monetary default of the
mortgagor. Such clauses are generally enforceable subject to certain exceptions.
The courts of all states will enforce clauses providing for acceleration in the
event of a material payment default. The equity courts of any state, however,
may refuse to permit the foreclosure of a mortgage or deed of trust when an
acceleration of the indebtedness would be inequitable or unjust or the
circumstances would render the acceleration unconscionable.
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If so specified in the related prospectus supplement, the mortgage
loans will be secured by an assignment of leases and rents pursuant to which the
mortgagor typically assigns its right, title and interest as landlord under the
leases on the related mortgaged property and the income derived therefrom to the
lender as further security for the related mortgage loan, while retaining a
license to collect rents for so long as there is no default. In the event the
mortgagor defaults, the license terminates and the lender is entitled to collect
rents. Such assignments are typically not perfected as security interests prior
to actual possession of the cash flows. Some state laws may require that the
lender take possession of the mortgaged property and obtain a judicial
appointment of a receiver before becoming entitled to collect the rents. In
addition, if bankruptcy or similar proceedings are commenced by or in respect of
the mortgagor, the lender's ability to collect the rents may be adversely
affected. See "Certain Legal Aspects of Mortgage Loans -- Leases and Rents".
REAL PROPERTY PLEDGED AS SECURITY FOR A MORTGAGE LOAN IS SUBJECT TO CERTAIN
ENVIRONMENTAL RISKS AND THE COST OF ENVIRONMENTAL CLEAN-UP MAY INCREASE LOSSES
ON THE RELATED MORTGAGE LOANS
Under the laws of certain states, contamination of a property may give
rise to a lien on the property to assure the costs of cleanup. In several
states, such a lien has priority over the lien of an existing mortgage against
such property. In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
commonly known as "CERCLA", a lender may be liable, as an "owner" or "operator",
for costs of addressing releases or threatened releases of hazardous substances
that require remedy at a property, if agents or employees of the lender have
become sufficiently involved in the operations of the mortgagor, regardless of
whether or not the environmental damage or threat was caused by a prior owner. A
lender also risks such liability on foreclosure of the mortgage. Unless
otherwise specified in the related prospectus supplement, each agreement will
provide that the master servicer, acting on behalf of the trust fund, may not
acquire title to a mortgaged property securing a mortgage loan or take over its
operation unless the master servicer has previously determined, based upon a
report prepared by a person who regularly conducts environmental audits, that:
(i) the mortgaged property is in compliance with applicable environmental laws,
and there are no circumstances present at the mortgaged property relating to the
use, management or disposal of any hazardous substances, hazardous materials,
wastes, or petroleum based materials for which investigation, testing,
monitoring, containment, clean-up or remediation could be required under any
federal, state or local law or regulation; or (ii) if the mortgaged property is
not so in compliance or such circumstances are so present, then it would be in
the best economic interest of the trust fund to acquire title to the mortgaged
property and further to take such actions as would be necessary and appropriate
to effect such compliance and/or respond to such circumstances. See "Certain
Legal Aspects of Mortgage Loans -- Environmental Legislation".
ERISA CONSIDERATIONS
If you are buying the offered certificates on behalf of an individual
retirement account, Keogh plan or employee benefit plan, special rules may apply
to you. These rules are generally described in this prospectus under the caption
"ERISA Considerations". However, due to the complexity of regulations which
govern such plans, if you are subject to the Employment Retirement Income
Security Act of 1974, as amended, commonly referred to as "ERISA", you are urged
to consult your own counsel regarding consequences under ERISA of acquisition,
ownership and disposition of the offered certificates of any series.
FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of certificates evidencing a class of "residual interests" in a
"real estate mortgage investment conduit", commonly referred to as a "REMIC",
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 possible receipt of cash payments, if any, from
the REMIC, as described in "Federal Income Tax Consequences -- REMICs". REMIC
residual certificates may have "phantom income" associated with them. That is,
taxable income may be reportable with respect to a REMIC residual certificate
early in the term of the related REMIC with a corresponding amount of tax
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losses reportable in later years of that REMIC's term. Under these
circumstances, the present value of the tax detriments with respect to the
related REMIC residual certificate may significantly exceed the present value of
the related tax benefits accruing later. 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, and
certain REMIC residual certificates may have a negative "value." The requirement
that holders of REMIC residual certificates report their pro rata share of the
taxable income and net loss of the REMIC will continue until the certificate
balances of all classes of certificates of the related series have been reduced
to zero. All or a portion of such certificateholder's share of the related
REMIC's 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. In addition, REMIC residual certificates are subject to
certain restrictions on transfer, including, but not limited to prohibition on
transfers to investors that are not U.S. persons. See "Federal Income Tax
Consequences" and "REMICs -- Taxation of Owners of REMIC Residual Certificates."
CONTROL OF THE TRUST FUND MAY BE VESTED IN LESS THAN ALL THE RELATED
CERTIFICATEHOLDERS
Under certain circumstances, the consent or approval of less than all
the holders of outstanding certificates of a series will be required to direct,
and will be sufficient to bind all certificateholders of such series to, certain
actions, including amending the related agreement governing the trust fund in
certain circumstances. See "Description of the Agreements -- Events of Default",
" -- Rights Upon Event of Default", " -- Amendment" and " -- List of
Certificateholders".
BOOK-ENTRY REGISTRATION MAY AFFECT LIQUIDITY OF THE CERTIFICATES
Some offered certificates will be issued through the book-entry
facilities of The Depository Trust Company, commonly known as DTC. Because
transfers and pledges of certificates registered in the name of a nominee of DTC
can be effected only through book entries at DTC through participants, the
liquidity of the secondary market for DTC registered certificates 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 certificates
may be limited due to the lack of a physical certificate. Beneficial owners of
DTC registered certificates may, in certain cases, experience delay in the
receipt of payments of principal and interest since 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 certificates are
recorded, the ability of beneficial 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 certificates may be
impaired.
ADDITIONAL RISK FACTORS WILL BE SET FORTH IN THE PROSPECTUS SUPPLEMENT RELATED
TO A SERIES OF CERTIFICATES
The prospectus supplement relating to a series of offered certificates
will set forth additional risk factors pertaining to the characteristics or
behavior of the mortgage assets to be included in a particular trust fund, and,
if applicable, certain legal aspects of such mortgage assets, as well as any
risk factors pertaining to the investment in a particular class of offered
certificates.
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DESCRIPTION OF THE TRUST FUNDS
The Certificates offered hereby and by supplements to this Prospectus
(the "Offered Certificates") will be offered from time to time in series. Each
series of Certificates will represent in the aggregate the entire beneficial
ownership interest in a trust fund (with respect to any series, the "Trust
Fund").
MORTGAGE ASSETS
The primary assets of each Trust Fund (the "Mortgage Assets") will
include (i) one or more various types of multifamily and/or commercial mortgage
loans (the "Mortgage Loans"), (ii) mortgage participation certificates,
pass-through certificates or other mortgage-backed securities ("MBS") evidencing
interests in, or secured by pledges of one or more of various types of
multifamily and/or commercial mortgage loans, (iii) participation certificates,
pass-through certificates or other securities evidencing interests in, or
secured by pledges of one or more MBS ("Tiered MBS") or (iv) a combination of
Mortgage Loans, MBS or Tiered MBS. As used herein, "Mortgage Loans" refers to
both whole Mortgage Loans and Mortgage Loans underlying MBS or Tiered MBS.
Mortgage Loans that secure, or interests in which are evidenced by, MBS are
herein sometimes referred to as "Underlying Mortgage Loans". Mortgage Loans that
are not Underlying Mortgage Loans are sometimes referred to as "Whole Loans".
The Mortgage Assets will not be guaranteed or insured by Salomon Brothers
Mortgage Securities VII, Inc (the "Depositor") or any of its affiliates or,
unless otherwise provided in the Prospectus Supplement, by any governmental
agency or instrumentality or by any other person. Each Mortgage Asset will be
selected by the Depositor for inclusion in a Trust Fund from among those (i)
originated by the Depositor or (ii) purchased, either directly or indirectly,
from a prior holder thereof (a "Mortgage Asset Seller"), which prior holder may
or may not be the originator of such Mortgage Loan or the issuer of such MBS or
Tiered MBS and may be an affiliate of the Depositor. All Mortgage Assets will
have been purchased by the Depositor on or before the date of initial issuance
of the related series of Certificates.
MORTGAGE LOANS
GENERAL. The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or similar security
instruments (the "Mortgages") creating a lien on the properties (the "Mortgaged
Properties") consisting of (i) residential properties consisting of three or
more rental or cooperatively-owned dwelling units in high-rise, mid-rise or
garden apartment buildings or other residential structures ("Multifamily
Properties" and the related loans, "Multifamily Loans") or (ii) office
buildings, retail stores, hotels or motels, nursing homes, hospitals or other
health care-related facilities, mobile home parks, warehouse facilities,
mini-warehouse facilities or self-storage facilities, industrial plants, mixed
use or other types of commercial properties or unimproved land ("Commercial
Properties" and the related loans, "Commercial Loans") located, unless otherwise
specified in the related Prospectus Supplement, in any one of the fifty states
or the District of Columbia. Unless otherwise specified in the related
Prospectus Supplement, each of the Mortgage Loans will be secured by a first
mortgage or deed of trust or other similar security instrument creating a first
lien on a Mortgaged Property. Multifamily Property may include mixed commercial
and residential structures and may include apartment buildings owned by private
cooperative housing corporations ("Cooperatives"). The Mortgaged Properties may
include leasehold interests in properties, the title to which is held by third
party lessors; however, unless otherwise specified in the related Prospectus
Supplement, the term of any such leasehold will exceed the term of the mortgage
note by at least two years. Each Mortgage Loan will have been originated by a
person (the "Originator") other than the Depositor. Mortgage Loans will
generally also be secured by an assignment of leases and rents and/or operating
or other cash flow guarantees relating to the Mortgage Loan.
If so specified in the related Prospectus Supplement, Mortgage Assets
for a series of Certificates may include Mortgage Loans made on the security of
real estate projects under construction. In that case, the related Prospectus
Supplement will describe the procedures and timing for making disbursements from
construction reserve funds as portions of the related real estate project are
completed. In addition, the Mortgage Assets for a particular series of
Certificates may include Mortgage Loans that are delinquent or non-performing as
of the date such Certificates are issued. In that case, the
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related Prospectus Supplement will set forth, as to each such Mortgage Loan,
available information as to the period of such delinquency or non-performance,
any forbearance arrangement then in effect, the condition of the related
Mortgaged Property and the ability of the Mortgaged Property to generate income
to service the mortgage debt.
DEFAULT AND LOSS CONSIDERATIONS WITH RESPECT TO THE MORTGAGE LOANS.
Mortgage loans secured by commercial and multifamily properties are markedly
different from owner-occupied single-family home mortgage loans. The repayment
of loans secured by commercial or multifamily properties is typically dependent
upon the successful operation of such property rather than upon the liquidation
value of the real estate. Unless otherwise specified in the Prospectus
Supplement, the Mortgage Loans will be non-recourse loans, which means that,
absent special facts, the mortgagee may look only to the Net Operating Income
from the property for repayment of the mortgage debt, and not to any other of
the mortgagor's assets, in the event of the mortgagor's default. Lenders
typically look to the Debt Service Coverage Ratio of a loan secured by
income-producing property as an important measure of the risk of default on such
a loan. The "Debt Service Coverage Ratio" of a Mortgage Loan at any given time
is the ratio of the Net Operating Income for a twelve-month period to the
annualized scheduled payments on the Mortgage Loan. "Net Operating Income"
means, for any given period, unless otherwise specified in the related
Prospectus Supplement, the total operating revenues derived from a Mortgaged
Property during such period, minus the total operating expenses incurred in
respect of such Mortgaged Property during such period other than (i) non-cash
items such as depreciation and amortization, (ii) capital expenditures and (iii)
debt service on loans secured by the Mortgaged Property. The Net Operating
Income of a Mortgaged Property will fluctuate over time and may be sufficient or
insufficient to cover debt service on the related Mortgage Loan at any given
time.
As the primary component of Net Operating Income, rental income (and
maintenance payments from tenant-stockholders of a Cooperative) is subject to
the vagaries of the applicable real estate market and/or business climate.
Properties typically leased, occupied or used on a short-term basis, such as
health care-related facilities, hotels and motels, and mini-warehouse and
self-storage facilities, tend to be affected more rapidly by changes in market
or business conditions than do properties leased, occupied or used for longer
periods, such as (typically) warehouses, retail stores, office buildings and
industrial plants. Commercial Loans may be secured by owner-occupied Mortgaged
Properties or Mortgaged Properties leased to a single tenant. Accordingly, a
decline in the financial condition of the mortgagor or single tenant, as
applicable, may have a disproportionately greater effect on the Net Operating
Income from such Mortgaged Properties than would be the case with respect to
Mortgaged Properties with multiple tenants.
Changes in the expense components of Net Operating Income due to the
general economic climate or economic conditions in a locality or industry
segment, such as increases in interest rates, real estate and personal property
tax rates and other operating expenses including energy costs; changes in
governmental rules, regulations and fiscal policies, including environmental
legislation; and acts of God may also affect the risk of default on the related
Mortgage Loan. As may be further described in the related Prospectus Supplement,
in some cases leases of Mortgaged Properties may provide that the lessee, rather
than the mortgagor, is responsible for payment of certain of these expenses
("Net Leases"); however, because leases are subject to default risks as well
when a tenant's income is insufficient to cover its rent and operating expenses,
the existence of such "net of expense" provisions will only temper, not
eliminate, the impact of expense increases on the performance of the related
Mortgage Loan.
While the duration of leases and the existence of any "net of expense"
provisions are often viewed as the primary considerations in evaluating the
credit risk of mortgage loans secured by certain income-producing properties,
such risk may be affected equally or to a greater extent by changes in
government regulation of the operator of the property. Examples of the latter
include mortgage loans secured by health care-related facilities and hospitals,
the income from which and the operating expenses of which are subject to state
and/or federal regulations, such as Medicare and Medicaid, and multifamily
properties and mobile home parks, which may be subject to state or local rent
control regulation and, in certain cases, restrictions on changes in use of the
property. Low- and moderate-income housing may be
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particularly subject to legal limitations and regulations but, because of such
regulations, may also be less sensitive to fluctuations in market rents
generally.
The liquidation value of any Mortgaged Property may be adversely
affected by risks generally incident to interests in real property, including
declines in rental or occupancy rates. Lenders generally use the Loan-to-Value
Ratio of a mortgage loan as a measure of risk of loss if a property must be
liquidated upon a default by the mortgagor. The "Loan-to-Value Ratio" of a
Mortgage Loan at any given time is the ratio (expressed as a percentage) of the
then outstanding principal balance of the Mortgage Loan to the Value of the
related Mortgaged Property. The "Value" of a Mortgaged Property, other than with
respect to Refinance Loans, is generally the lesser of (a) the appraised value
determined in an appraisal obtained by the originator at origination of such
loan and (b) the sales price for such property. Refinance Loans are loans made
to refinance existing loans. The Value of the Mortgaged Property securing a
Refinance Loan is the appraised value thereof determined in an appraisal
obtained at the time of origination of the Refinance Loan. The Value of a
Mortgaged Property as of the date of initial issuance of the related series of
Certificates may be less than the value at origination and will fluctuate from
time to time based upon changes in economic conditions and the real estate
market.
Appraised values of income-producing properties may be based on the
market comparison method (recent resale value of comparable properties at the
date of the appraisal), the cost replacement method (the cost of replacing the
property at such date), the income capitalization method (a projection of value
based upon the property's projected net cash flow), or upon a selection from or
interpolation of the values derived from such methods. Each of these appraisal
methods presents analytical challenges. It is often difficult to find truly
comparable properties that have recently been sold; the replacement cost of a
property may have little to do with its current market value; and income
capitalization is inherently based on inexact projections of income and expense
and the selection of an appropriate capitalization rate. Where more than one of
these appraisal methods are used and create significantly different results, or
where a high Loan-to-Value Ratio accompanies a high Debt Service Coverage Ratio
(or vice versa), the analysis of default and loss risks is even more difficult.
While the Depositor believes that the foregoing considerations are
important factors that generally distinguish the Mortgage Loans from
single-family mortgage loans and provide insight to the risks associated with
income-producing real estate, there is no assurance that such factors will in
fact have been considered by the Originators of the Mortgage Loans, or that, for
a particular Mortgage Loan, they are complete or relevant. See "Risk Factors".
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS. Each Prospectus
Supplement will contain information, as of the date of such Prospectus
Supplement and to the extent then applicable and specifically known to the
Depositor, with respect to the Mortgage Loans constituting related Trust Assets,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Mortgage Loans as of
the applicable Cut-off Date, (ii) the type of property securing the Mortgage
Loans (e.g., Multifamily Property or Commercial Property and the type of
property in each such category), (iii) the original and remaining terms to
maturity of the Mortgage Loans, and the seasoning of the Mortgage Loans, (iv)
the earliest and latest origination date and maturity date and weighted average
original and remaining terms to maturity of the Mortgage Loans, (v) the
Loan-to-Value Ratios at origination of the Mortgage Loans, (vi) the Mortgage
Rates or range of Mortgage Rates and the weighted average Mortgage Rate borne by
the Mortgage Loans, (vii) the geographical distribution of the Mortgaged
Properties on a state-by-state basis, (viii) information with respect to the
prepayment provisions, if any, of the Mortgage Loans, (ix) the weighted average
Retained Interest, if any, (x) with respect to Mortgage Loans with adjustable
Mortgage Rates ("ARM Loans"), the adjustment dates, the highest, lowest and
weighted average margin, and the maximum Mortgage Rate variation at the time of
any adjustment and over the life of the ARM Loan, (xi) the Debt Service Coverage
Ratio either at origination or as of a more recent date (or both) and (xii)
information regarding the payment characteristics of the Mortgage Loans,
including without limitation balloon payment and other amortization provisions.
The related Prospectus Supplement will also contain certain information
available to the Depositor with respect to the provisions of leases and the
nature of tenants of the Mortgaged Properties and other information referred to
in a general manner under "Description of the Trust Funds -- Mortgage Loans --
Default and Loss Considerations with Respect to the Mortgage
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Loans" above. If specific information respecting the Mortgage Loans is not known
to the Depositor at the time Certificates are initially offered, more general
information of the nature described above will be provided in the Prospectus
Supplement, and specific information will be set forth in a report that will be
available to purchasers of the related Certificates at or before the initial
issuance thereof and will be filed as part of a Current Report on Form 8-K with
the Securities and Exchange Commission within fifteen days after such initial
issuance.
PAYMENT PROVISIONS OF THE MORTGAGE LOANS. Unless otherwise specified in
the related Prospectus Supplement, all of the Mortgage Loans will (i) have
individual principal balances at origination of not less than $25,000, (ii) have
original terms to maturity of not more than 40 years and (iii) provide for
payments of principal, interest or both, on due dates that occur monthly,
quarterly, semi-annually or at such other interval as specified in the related
Prospectus Supplement. Each Mortgage Loan may provide for no accrual of interest
or for accrual of interest thereon at an interest rate (a "Mortgage Rate") that
is fixed over its term or that adjusts from time to time, or that may be
converted from an adjustable to a fixed Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, from time to time at the mortgagor's election, in each
case as described in the related Prospectus Supplement. Each Mortgage Loan may
provide for scheduled payments to maturity or payments that adjust from time to
time to accommodate changes in the Mortgage Rate or to reflect the occurrence of
certain events, and may provide for negative amortization or accelerated
amortization, in each case as described in the related Prospectus Supplement.
Each Mortgage Loan may be fully amortizing or require a balloon payment due on
its stated maturity date, in each case as described in the related Prospectus
Supplement. Each Mortgage Loan may contain prohibitions on prepayment (a
"Lock-out Period" and the date of expiration thereof, a "Lock-out Date") or
require payment of a premium or a yield maintenance penalty (a "Prepayment
Premium") in connection with a prepayment, in each case as described in the
related Prospectus Supplement. In the event that holders of any class or classes
of Offered Certificates will be entitled to all or a portion of any Prepayment
Premiums collected in respect of Mortgage Loans, the related Prospectus
Supplement will specify the method or methods by which any such amounts will be
allocated. A Mortgage Loan may also contain provisions entitling the mortgagee
to a share of profits realized from the operation or disposition of the
Mortgaged Property ("Equity Participation"), as described in the related
Prospectus Supplement. In the event that holders of any class or classes of
Offered Certificates will be entitled to all or a portion of an Equity
Participation, the related Prospectus Supplement will specify the terms and
provisions of the Equity Participation and the method or methods by which
distributions in respect thereof will be allocated among such Certificates.
MBS AND TIERED MBS
MBS and Tiered MBS may include (i) private (that is, not guaranteed or
insured by the United States or any agency or instrumentality thereof)
participation certificates, pass-through certificates or other securities or
(ii) certificates insured or guaranteed by Fannie Mae, Freddie Mac or GNMA,
provided that each MBS and Tiered MBS will evidence an interest directly or
indirectly in, or will be secured by a pledge of, mortgage loans that conform to
the descriptions of the Mortgage Loans contained herein.
Any MBS or Tiered MBS will have been issued pursuant to a participation
and servicing agreement, a pooling and servicing agreement, an indenture or
similar agreement (an "MBS Agreement"). A seller (the "MBS Issuer") and/or
servicer (the "MBS Servicer") of the underlying Mortgage Loans in the case of
MBS, or of the underlying MBS, in the case of Tiered MBS will have entered into
the MBS Agreement with a trustee or a custodian under the MBS Agreement (the
"MBS Trustee"), if any, or with the original purchaser of the interest in the
underlying Mortgage Loans evidenced by MBS in the case of MBS, or of the
interest in the underlying MBS evidenced by the Tiered MBS in the case of Tiered
MBS.
Distributions of principal and interest will be made on MBS and Tiered
MBS on the dates specified in the related Prospectus Supplement. MBS and Tiered
MBS may be issued in one or more classes with characteristics similar to the
classes of Certificates described in this Prospectus. Principal and interest
distributions will be made on MBS and Tiered MBS by the MBS Trustee or the MBS
Servicer. The MBS Issuer or the MBS Servicer or another person specified in the
related Prospectus Supplement may
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have the right or obligation to repurchase or substitute assets underlying the
MBS or Tiered MBS after a certain date or under other circumstances specified in
the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other credit
support similar to that described for the Certificates under "Description of
Credit Support" may be provided with respect to MBS and Tiered MBS. The type,
characteristics and amount of such credit support, if any, will be a function of
certain characteristics of the Mortgage Loans evidenced by or securing such MBS
in the case of MBS, and a function of such characteristics and the
characteristics of the related MBS evidenced by or securing such Tiered MBS, in
the case of Tiered MBS and other factors and generally will have been
established for MBS or Tiered MBS on the basis of requirements of either any
Rating Agency that may have assigned a rating to such MBS or Tiered MBS or the
initial purchasers of such MBS or Tiered MBS.
The Prospectus Supplement for a series of Certificates evidencing
interests in Mortgage Assets that include MBS or Tiered MBS will specify, to the
extent available, (i) the aggregate approximate initial and outstanding
principal amount and type of the MBS or Tiered MBS to be included in the Trust
Fund, (ii) the original and remaining term to stated maturity of the MBS or
Tiered MBS, if applicable, (iii) the pass-through or bond rate of the MBS or
Tiered MBS or formula for determining such rates, (iv) the applicable payment
provisions for the MBS or Tiered MBS, (v) the MBS Issuer, MBS Servicer and MBS
Trustee, as applicable, (vi) certain characteristics of the credit support, if
any, such as subordination, reserve funds, insurance policies, letters of credit
or guarantees relating to the related Underlying Mortgage Loans or directly to
such MBS or Tiered MBS, (vii) the terms on which the related Underlying Mortgage
Loans for such MBS, or the MBS or Tiered MBS may, or are required to, be
purchased prior to their maturity, (viii) the terms on which Mortgage Loans may
be substituted for those originally underlying the MBS or Tiered MBS, (ix) the
servicing fees payable under the MBS Agreement, (x) to the extent available to
the Depositor, the type of information in respect of the Underlying Mortgage
Loans described under "Description of the Trust Funds -- Mortgage Loans --
Mortgage Loan Information in Prospectus Supplements" and (xi) the
characteristics of any cash flow agreements that are included as part of the
trust fund evidenced or secured by the MBS or Tiered MBS.
CERTIFICATE ACCOUNTS
Each Trust Fund will include one or more accounts (collectively, the
"Certificate Account") established and maintained on behalf of the
Certificateholders into which the person or persons designated in the related
Prospectus Supplement will, to the extent described herein and in such
Prospectus Supplement deposit all payments and collections received or advanced
with respect to the Mortgage Assets and other assets in the Trust Fund. A
Certificate Account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as described in
the related Prospectus Supplement.
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Mortgage Assets in the
related Trust Fund may be provided to one or more classes of Certificates in the
related series in the form of subordination of one or more other classes of
Certificates in such series or by one or more other types of credit support,
such as a letter of credit, insurance policy, guarantee, reserve fund or another
type of credit support, or a combination thereof (any such coverage with respect
to the Certificates of any series, "Credit Support"). The amount and types of
coverage, the identification of the entity providing the coverage (if
applicable) and related information with respect to each type of Credit Support,
if any, will be described in the Prospectus Supplement for a series of
Certificates. The Prospectus Supplement for any series of Certificates
evidencing an interest in a Trust Fund that includes MBS or Tiered MBS will
describe any similar forms of credit support that are provided by or with
respect to, or are included as part of the trust fund evidenced by or providing
security for, such MBS or Tiered MBS. See "Risk Factors" and "Description of
Credit Support".
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CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include certain other agreements, such
as interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements provided to reduce the
effects of interest rate or currency exchange rate fluctuations on the Mortgage
Assets on one or more classes of Certificates. The principal terms of any such
guaranteed investment contract or other agreement (any such agreement, a "Cash
Flow Agreement"), including, without limitation, provisions relating to the
timing, manner and amount of payments thereunder and provisions relating to the
termination thereof, will be described in the Prospectus Supplement for the
related series. In addition, the related Prospectus Supplement will provide
certain information with respect to the obligor under any such Cash Flow
Agreement. The Prospectus Supplement for any series of Certificates evidencing
an interest in a Trust Fund that includes MBS or Tiered MBS will describe any
cash flow agreements that are included as part of the trust fund evidencing or
providing security for such MBS or Tiered MBS.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will
be applied by the Depositor to the purchase of Trust Assets or will be used by
the Depositor for general corporate purposes. The Depositor expects to sell the
Certificates from time to time, but the timing and amount of offerings of
Certificates will depend on a number of factors, including the volume of
Mortgage Assets acquired by the Depositor, prevailing interest rates,
availability of funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Certificate will depend on the price paid by
the Certificateholder, the Pass-Through Rate of the Certificate, the receipt and
timing of receipt of distributions on the Certificate and the weighted average
life of the Mortgage Assets in the related Trust Fund. See "Risk Factors". The
following discussion contemplates a Trust Fund that consists solely of Mortgage
Loans. While the characteristics and behavior of mortgage loans underlying MBS
and Tiered MBS can generally be expected to have the same effect on the yield to
maturity and/or weighted average life of a Class of Certificates as will the
characteristics and behavior of comparable Mortgage Loans, the effect may differ
due to the payment characteristics of the MBS and Tiered MBS. If a Trust Fund
includes MBS or Tiered MBS, the related Prospectus Supplement will discuss the
effect that the MBS or Tiered MBS payment characteristics may have on the yield
and weighted average lives of the Certificates offered thereby.
PASS-THROUGH RATE
Certificates of any class within a series may have fixed, variable or
adjustable Pass-Through Rates, which may or may not be based upon the interest
rates borne by the Mortgage Loans in the related Trust Fund. The Prospectus
Supplement with respect to any series of Certificates will specify the Pass-
Through Rate for each class of such Certificates or, in the case of a variable
or adjustable Pass-Through Rate, the method of determining the Pass-Through
Rate; the effect, if any, of the prepayment of any Mortgage Loans on the
Pass-Through Rate of one or more classes of Certificates; and whether the
distributions of interest on the Certificates of any class will be dependent, in
whole or in part, on the performance of any obligor under a Cash Flow Agreement.
TIMING OF PAYMENT OF INTEREST AND PRINCIPAL
Each payment of interest on the Certificates (or addition to the
Certificate Balance of a class of Accrual Certificates) on a Distribution Date
will include interest accrued during the Interest Accrual Period for such
Distribution Date. If the Interest Accrual Period ends on a date other than a
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Distribution Date for the related series, the yield realized by the holders of
such Certificates may be lower than the yield that would result if the Interest
Accrual Period ended on such Distribution Date. In addition, if so specified in
the related Prospectus Supplement, interest accrued for an Interest Accrual
Period for one or more classes of Certificates may be calculated on the
assumption that distributions of principal (and additions to the Certificate
Balance of Accrual Certificates) and allocations of losses on the Mortgage
Assets may be made on the first day of the Interest Accrual Period for a
Distribution Date and not on such Distribution Date. Such method would produce a
lower effective yield than if interest were calculated on the basis of the
actual principal amount outstanding during an Interest Accrual Period. The
Interest Accrual Period for any class of Offered Certificates will be described
in the related Prospectus Supplement.
PRINCIPAL PREPAYMENTS
The yield to maturity on the Certificates will be affected by the rate
of principal payments on the Mortgage Loans (including principal prepayments on
Mortgage Loans resulting from both voluntary prepayments by the mortgagors and
involuntary liquidations). The rate at which principal prepayments occur on the
Mortgage Loans will be affected by a variety of factors, including, without
limitation, the terms of the Mortgage Loans, the level of prevailing interest
rates, the availability of mortgage credit and economic, demographic,
geographic, tax, legal and other factors. In general, however, if prevailing
interest rates fall significantly below the Mortgage Rates on the Mortgage Loans
in a particular Trust Fund, such Mortgage Loans are likely to be the subject of
higher principal prepayments than if prevailing rates remain at or above the
rates borne by such Mortgage Loans. In this regard, it should be noted that
certain Mortgage Assets may consist of Mortgage Loans with different Mortgage
Rates and the stated pass-through or pay-through interest rate of certain MBS or
Tiered MBS may be a number of percentage points higher or lower than certain of
the Underlying Mortgage Loans or underlying MBS in the case of Tiered MBS. The
rate of principal payments on some or all of the classes of Certificates of a
series will correspond to the rate of principal payments on the Mortgage Loans
in the related Trust Fund and is likely to be affected by the existence of
Lock-out Periods and Prepayment Premium provisions of the Mortgage Loans, and by
the extent to which the servicer of any such Mortgage Loan is able to enforce
such provisions. Mortgage Loans with a Lock-out Period or a Prepayment Premium
provision, to the extent enforceable, generally would be expected to experience
a lower rate of principal prepayments than otherwise identical Mortgage Loans
without such provisions, with shorter Lock-out Periods or with lower Prepayment
Premiums.
If the purchaser of a Certificate offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Mortgage Loans,
the actual yield to maturity will be lower than that so calculated. Conversely,
if the purchaser of a Certificate offered at a premium calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is slower than that actually experienced on the Mortgage Assets,
the actual yield to maturity will be lower than that so calculated. In either
case, if so provided in the Prospectus Supplement for a series of Certificates,
the effect on yield on one or more classes of the Certificates of such series of
prepayments of the Mortgage Loans in the related Trust Fund may be mitigated or
exacerbated by any provisions for sequential or selective distribution of
principal to such classes.
The timing of changes in the rate of principal payments on the Mortgage
Loans may significantly affect an investor's actual yield to maturity, even if
the average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Mortgage Loans and distributed on a Certificate, the greater the effect on such
investor's yield to maturity. The effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by the
investor during a given period may not be offset by a subsequent like decrease
(or increase) in the rate of principal payments.
PREPAYMENTS -- MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Mortgage
Loans and the rate at which payments are made from any Credit Support or Cash
Flow Agreement for the related series of
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Certificates may affect the ultimate maturity and the weighted average life of
each class of such series. Prepayments on the Mortgage Loans comprising or
underlying the Mortgage Assets in a particular Trust Fund will generally
accelerate the rate at which principal is paid on some or all of the classes of
the Certificates of the related series.
If so provided in the Prospectus Supplement for a series of
Certificates, one or more classes of Certificates may have a final scheduled
Distribution Date, which is the date on or prior to which the Certificate
Balance thereof is scheduled to be reduced to zero, calculated on the basis of
the assumptions applicable to such series set forth therein.
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of a
class of Certificates of a series will be influenced by the rate at which
principal on the Mortgage Loans is paid to such class, which may be in the form
of scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes prepayments, in whole or in part, and liquidations due to
default). Prepayments on loans are also commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment model,
each as described below. CPR represents a constant assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of loans
for the life of such loans. SPA represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of loans, including the
Mortgage Loans underlying or comprising the Mortgage Assets. Moreover, CPR and
SPA were developed based upon historical prepayment experience for single-family
loans. Thus, it is likely that prepayment of any Mortgage Loans comprising or
underlying the Mortgage Assets for any series will not conform to any particular
level of CPR or SPA.
The Depositor is not aware of any meaningful publicly available
prepayment statistics for multifamily or commercial mortgage loans.
The Prospectus Supplement with respect to each series of Certificates
will contain tables, if applicable, setting forth the projected weighted average
life of each class of Offered Certificates of such series and the percentage of
the initial Certificate Balance of each such class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Mortgage Assets are made at rates
corresponding to various percentages of CPR, SPA or at such other rates
specified in such Prospectus Supplement. Such tables and assumptions are
intended to illustrate the sensitivity of weighted average life of the
Certificates to various prepayment rates and will not be intended to predict or
to provide information that will enable investors to predict the actual weighted
average life of the Certificates. It is unlikely that prepayment of any Mortgage
Loans comprising or underlying the Mortgage Assets for any series will conform
to any particular level of CPR, SPA or any other rate specified in the related
Prospectus Supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF MORTGAGE LOAN. Certain Mortgage Loans may have balloon payments
due at maturity, and because the ability of a mortgagor to make a balloon
payment typically will depend upon its ability either to refinance the loan or
to sell the related Mortgaged Property, there is a risk that a Mortgage Loan
having a balloon payment provision may default at maturity, or that the servicer
may extend the maturity of such a Mortgage Loan in connection with a workout. In
the case of defaults, recovery of proceeds may be delayed by, among other
things, bankruptcy of the mortgagor or adverse conditions in the market where
the property is located. In order to minimize losses on defaulted Mortgage
Loans, the servicer may, to the extent and under the circumstances set forth in
the related Prospectus Supplement,
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be permitted to modify Mortgage Loans that are in default or as to which a
payment default is imminent. Any defaulted balloon payment or modification that
extends the maturity of a Mortgage Loan will tend to extend the weighted average
life of the Certificates, thereby lengthening the period of time elapsed from
the date of issuance of a Certificate until it is retired.
FORECLOSURES AND PAYMENT PLANS. The number of foreclosures and the
principal amount of the Mortgage Loans that are foreclosed in relation to the
number and principal amount of Mortgage Loans that are repaid in accordance with
their terms will affect the weighted average life of those Mortgage Loans and
that of the related series of Certificates. Servicing decisions made with
respect to the Mortgage Loans, including the use of payment plans prior to a
demand for acceleration and the restructuring of Mortgage Loans in bankruptcy
proceedings, may also have an effect upon the payment patterns of particular
Mortgage Loans and thus the weighted average life of the Certificates.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE CLAUSES. Acceleration of mortgage
payments as a result of certain transfers of or the creation of encumbrances
upon underlying Mortgaged Property is another factor affecting prepayment rates
that may not be reflected in the prepayment standards or models used in the
relevant Prospectus Supplement. A number of the Mortgage Loans may include
"due-on-sale" clauses or "due-on-encumbrance" clauses that allow the holder of
the Mortgage Loans to demand payment in full of the remaining principal balance
of the Mortgage Loans upon sale or certain other transfers of or the creation of
encumbrances upon the related Mortgaged Property. With respect to any Whole
Loans, unless otherwise provided in the related Prospectus Supplement, the
Master Servicer, on behalf of the Trust Fund, will be required to exercise (or
waive its right to exercise) any such right that the Trustee may have as
mortgagee to accelerate payment of the Whole Loan in a manner consistent with
the servicing standard specified in the related Prospectus Supplement or, if no
such standard is specified, consistent with the Master Servicer's normal
servicing practices. See "Certain Legal Aspects of Mortgage Loans -- Due-on-Sale
and Due-on-Encumbrance" and "Description of the Agreements -- Due-on-Sale and
Due-on-Encumbrance Provisions".
SINGLE MORTGAGE LOAN OR SINGLE MORTGAGOR. The Mortgage Assets in a
particular Trust Fund may consist of a single Mortgage Loan or obligations of a
single mortgagor or related mortgagors as specified in the related Prospectus
Supplement. Assumptions used with respect to the prepayment standards or models
based upon analysis of the behavior of mortgage loans in a larger group will not
necessarily be relevant in determining prepayment experience on a single
Mortgage Loan or with respect to a single mortgagor.
NEGATIVE AMORTIZATION
The weighted average life of a class of Certificates can be affected by
Mortgage Loans that permit negative amortization to occur. To the extent that
deferred interest is added to the principal balance of any of such Mortgage
Loans, future interest accruals are computed on that higher principal balance
and less of the scheduled payment is available to amortize the unpaid principal
over the remaining amortization term of the Mortgage Loan. Accordingly, the
weighted average lives of such Mortgage Loans (and that of the classes of
Certificates to which any such negative amortization is allocated) will
increase. During a period of declining interest rates, the portion of each
scheduled payment in excess of the scheduled interest and principal due will be
applied to reduce the outstanding principal balance of the related Mortgage
Loan, thereby resulting in accelerated amortization of such Mortgage Loan. Any
such acceleration in amortization of its principal balance will shorten the
weighted average life of such Mortgage Loan and, correspondingly, the weighted
average lives of Certificates entitled to principal payments.
THE DEPOSITOR
Salomon Brothers Mortgage Securities VII, Inc. (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 and is an affiliate
of Salomon Smith Barney Inc. The Depositor was organized for the purpose of
serving as a private secondary mortgage market conduit. The Depositor maintains
its principal office at 390 Greenwich Street, New York, New York 10013. Its
telephone number is (212) 816-6000.
The Depositor does not have, nor is it expected in the future to have,
any significant assets.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates of each series (including any class of Certificates
not offered hereby) will represent the entire beneficial ownership interest in
the Trust Fund created pursuant to the related Agreement. Each series of
Certificates will consist of one or more classes of Certificates that may (i)
provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior (collectively, "Senior Certificates") or
subordinate (collectively, "Subordinate Certificates") to one or more other
classes of Certificates in respect of certain distributions on the Certificates;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions (collectively, "Stripped Principal
Certificates"); (iv) be entitled to interest distributions, with
disproportionately low, nominal or no principal distributions (collectively,
"Stripped Interest Certificates"); (v) provide for distributions of accrued
interest thereon commencing only following the occurrence of certain events,
such as the retirement of one or more other classes of Certificates of such
series (collectively, "Accrual Certificates"); (vi) provide for distributions of
principal sequentially, or based on specified payment schedules or other
methodologies, to the extent of available funds; and/or (vii) provide for cash
distributions based on available funds (collectively, "Spread Certificates"), in
each case as described in the related Prospectus Supplement.
Any such classes may include classes of Offered Certificates.
Unless otherwise provided in the related Prospectus Supplement, each
class of Offered Certificates of a series will be issued in minimum
denominations corresponding to the Certificate Balances or, in case of Stripped
Interest Certificates, notional amounts specified in such Prospectus Supplement.
The transfer of any Offered Certificates may be registered and such Certificates
may be exchanged without the payment of any service charge payable in connection
with such registration of transfer or exchange, but the Depositor or the Trustee
or any agent thereof may require payment of a sum sufficient to cover any tax or
other governmental charge. One or more classes of Certificates of a series may
be issued in definitive form ("Definitive Certificates") or in book-entry form
("Book-Entry Certificates"), as provided in the related Prospectus Supplement.
Definitive Certificates will be exchangeable for other Certificates of the same
class and series of a like aggregate Certificate Balance or notional amount but
of different authorized denominations. See "Risk Factors" and "Description of
the Certificates -- Book-Entry Registration and Definitive Certificates".
DISTRIBUTIONS
Distributions on the Certificates of each series will be made by or on
behalf of the Trustee or the Master Servicer on each date as specified in the
related Prospectus Supplement (the "Distribution Date"), which may be monthly,
quarterly, semi-annually or at some other interval, only from the assets of the
related Trust Fund, to the extent of the Available Distribution Amount for such
series and such Distribution Date, except as otherwise provided in the related
Prospectus Supplement. Except as otherwise specified in the related Prospectus
Supplement, distributions (other than the final distribution) will be made to
the persons in whose names the Certificates are registered at the close of
business on the last business day of the month preceding the month in which the
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date"). All
distributions with respect to each class of Certificates on each Distribution
Date will be allocated pro rata among the outstanding Certificates in such
class. Payments will be made either by wire transfer in immediately available
funds to the account of a Certificateholder at a bank or other entity having
appropriate facilities therefor, if such Certificateholder has so notified the
Trustee or other person required to make such payments no later than the date
specified in the related Prospectus Supplement (and, if so provided in the
related Prospectus Supplement, holds Certificates in the requisite amount or
denomination specified therein), or by check mailed to the address of the person
entitled thereto as it appears on the Certificate Register; provided, however,
that the final distribution in retirement of any class of Certificates (whether
Definitive Certificates or Book-Entry Certificates) will be made only upon
presentation and surrender of the Certificates at the location specified in the
notice to Certificateholders of such final distribution.
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AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Certificates of each series on each
Distribution Date will be made from the Available Distribution Amount described
below, in accordance with the terms described in the related Prospectus
Supplement. Unless provided otherwise in the related Prospectus Supplement, the
"Available Distribution Amount" for each Distribution Date will equal the sum of
the following amounts:
(i) the total amount of all cash on deposit in the related
Certificate Account as of the corresponding Determination Date,
exclusive of:
(a) all scheduled payments of principal and interest
collected but due on a date subsequent to the related Due
Period (unless the related Prospectus Supplement provides
otherwise, a "Due Period" with respect to any Distribution
Date will commence on the second day of the month in which the
immediately preceding Distribution Date occurs, or the day
after the Cut-off Date in the case of the first Due Period,
and will end on the first day of the month of the related
Distribution Date),
(b) all prepayments, together with related payments
of the interest thereon and related Prepayment Premiums,
Liquidation Proceeds, Insurance Proceeds and other unscheduled
recoveries received subsequent to the related Prepayment
Period, as defined in the related Prospectus Supplement, and
(c) all amounts in the Certificate Account that are
due or reimbursable to the Depositor, the Trustee, a Mortgage
Asset Seller, a Sub-Servicer or the Master Servicer or that
are payable in respect of certain expenses of the related
Trust Fund;
(ii) if the related Prospectus Supplement so provides,
interest or investment income on amounts on deposit in the Certificate
Account, including any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Master Servicer with respect to
such Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Master Servicer with respect to interest
shortfalls resulting from prepayments during the related Prepayment
Period; and
(v) to the extent not on deposit in the related Certificate
Account as of the corresponding Determination Date, any amounts
collected under, from or in respect of any Credit Support with respect
to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed to the holders of the related Certificates (including any
Certificates not offered hereby) on each Distribution Date, and accordingly will
be released from the Trust Fund and will not be available for any future
distributions.
DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each class of Certificates (other than certain classes of Stripped
Principal Certificates and Spread Certificates that have no Pass-Through Rate)
will accrue interest thereon based on a rate (the "Pass-Through Rate"), which
may be a fixed, variable or adjustable. The related Prospectus Supplement will
specify the Pass-Through Rate for each class or, in the case of a variable or
adjustable Pass-Through Rate, the method for determining the Pass-Through Rate.
Unless otherwise specified in the related Prospectus Supplement, interest on the
Certificates will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
Distributions of interest in respect of the Certificates of any class
will be made on each Distribution Date (other than any class of Accrual
Certificates, which will be entitled to distributions of accrued interest
commencing only on the Distribution Date, or under the circumstances, specified
in the related Prospectus Supplement, and any class of Stripped Principal
Certificates and Spread Certificates that are not entitled to any distributions
of interest) based on the Accrued Certificate Interest for such class and such
Distribution Date, subject to the sufficiency of the portion of the Available
Distribution Amount allocable to such class on such Distribution Date. Prior to
the time interest is distributable on any class
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of Accrual Certificates, the amount of Accrued Certificate Interest otherwise
distributable on such class will be added to the Certificate Balance thereof on
each Distribution Date. With respect to each class of Certificates and each
Distribution Date (other than certain classes of Stripped Interest Certificates
and Spread Certificates), "Accrued Certificate Interest" will be equal to
interest accrued for a specified period on the outstanding Certificate Balance
thereof immediately prior to the Distribution Date, at the applicable
Pass-Through Rate, reduced as described below. Unless otherwise provided in the
Prospectus Supplement, Accrued Certificate Interest on Stripped Interest
Certificates will be equal to interest accrued for a specified period on the
outstanding notional amount thereof immediately prior to each Distribution Date,
at the applicable Pass-Through Rate, reduced as described below. The method of
determining the notional amount for any class of Stripped Interest Certificates
will be described in the related Prospectus Supplement. Reference to the
notional amount is solely for convenience in making certain calculations and
does not represent the right to receive any distributions of principal. Unless
otherwise provided in the related Prospectus Supplement, the Accrued Certificate
Interest on a series of Certificates will be reduced in the event of prepayment
interest shortfalls, which are shortfalls in collections of interest for a full
accrual period resulting from prepayments prior to the due date in such accrual
period on the Mortgage Loans comprising or underlying the Mortgage Assets in the
Trust Fund for such series. The particular manner in which such shortfalls are
to be allocated among some or all of the classes of Certificates of that series
will be specified in the related Prospectus Supplement. The related Prospectus
Supplement will also describe the extent to which the amount of Accrued
Certificate Interest that is otherwise distributable on (or, in the case of
Accrual Certificates, that may otherwise be added to the Certificate Balance of)
a class of Offered Certificates may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on or in
respect of the Mortgage Assets in the related Trust Fund. Unless otherwise
provided in the related Prospectus Supplement, any reduction in the amount of
Accrued Certificate Interest otherwise distributable on a class of Certificates
by reason of the allocation to such class of a portion of any deferred interest
on or in respect of the Mortgage Assets in the related Trust Fund will result in
a corresponding increase in the Certificate Balance of such class. See "Risk
Factors" and "Yield Considerations".
DISTRIBUTIONS OF PRINCIPAL OF THE CERTIFICATES
The Certificates of each series, other than certain classes of Stripped
Interest Certificates and Spread Certificates, will have a stated principal
amount (a "Certificate Balance") which, at any time, will equal the then maximum
amount that the holder will be entitled to receive in respect of principal out
of the future cash flow on the Mortgage Assets and other assets included in the
related Trust Fund. The outstanding Certificate Balance of a Certificate will be
reduced to the extent of distributions of principal thereon from time to time
and, if and to the extent so provided in the related Prospectus Supplement, by
the amount of losses incurred in respect of the related Mortgage Assets, may be
increased in respect of deferred interest on the related Mortgage Loans to the
extent provided in the related Prospectus Supplement and, in the case of Accrual
Certificates prior to the Distribution Date on which distributions of interest
are required to commence, will be increased by the amount of any Accrued
Certificate Interest accrued thereon. The initial aggregate Certificate Balance
of all classes of Certificates of a series will not be greater than the
outstanding aggregate principal balance of the related Mortgage Assets as of,
unless the Prospectus Supplement provides otherwise, the close of business on
the first day of the month of the 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 initial aggregate Certificate Balance of a
series and each class thereof will be specified in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement,
distributions of principal will be made on each Distribution Date to the class
or classes of Certificates entitled thereto in accordance with the provisions
described in such Prospectus Supplement until the Certificate Balance of such
class has been reduced to zero.
DISTRIBUTIONS ON THE CERTIFICATES OF PREPAYMENT PREMIUMS OR IN RESPECT OF EQUITY
PARTICIPATIONS
If so provided in the related Prospectus Supplement, Prepayment
Premiums or payments in respect of Equity Participations that are collected on
the Mortgage Assets in the related Trust Fund will be
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distributed on each Distribution Date to the class or classes of Certificates
entitled thereto in accordance with the provisions described in such Prospectus
Supplement.
DISTRIBUTIONS IN RESPECT OF SPREAD CERTIFICATES
If so provided in the related Prospectus Supplement, a portion of the
Available Distribution Amount for the applicable series of Certificates may be
distributed on such date to one or more classes of Spread Certificates of such
series, in accordance with the provisions described in such Prospectus
Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of
Certificates consisting of one or more classes of Subordinate Certificates, the
amount of any losses or shortfalls in collections on the Mortgage Assets will be
borne first by a class of Subordinate Certificates in the priority and manner,
and subject to the limitations, specified in such Prospectus Supplement. See
"Description of Credit Support" for a description of the types of protection
that may be included in a Trust Fund against losses and shortfalls on Mortgage
Assets comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Certificates evidencing an interest in a
Trust Fund consisting of Mortgage Assets other than MBS or Tiered MBS, unless
otherwise provided in the related Prospectus Supplement, the Master Servicer
will be required as part of its servicing responsibilities to advance, on or
before each Distribution Date, from its own funds and/or funds held in the
Certificate Account that are not included in the Available Distribution Amount
for such Distribution Date, in an amount equal to the aggregate of payments of
principal (other than any balloon payments) and interest (net of related
servicing fees and Retained Interest) that were due on the Whole Loans in such
Trust Fund during the related Due Period and were delinquent on the related
Determination Date, subject to the Master Servicer's good faith determination
that such advances will be reimbursable from Related Proceeds (as defined
below). In the case of a series of Certificates that includes one or more
classes of Subordinate Certificates and if so provided in the related Prospectus
Supplement, the Master Servicer's advance obligation may be limited only to the
portion of such delinquencies necessary to make the required distributions on
one or more classes of Senior Certificates and/or may be subject to the Master
Servicer's good faith determination that such advances will be reimbursable not
only from Related Proceeds but also from collections on other Mortgage Assets
otherwise distributable on one or more classes of such Subordinate Certificates.
See "Description of Credit Support".
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses. Unless
otherwise provided in the related Prospectus Supplement, advances of the Master
Servicer's funds will be reimbursable only out of related recoveries on the
Mortgage Loans (including amounts received under any form of Credit Support)
respecting which such advances were made (as to any Mortgage Loan, "Related
Proceeds") and, if so provided in the Prospectus Supplement, out of any amounts
otherwise distributable on one or more classes of Subordinate Certificates of
such series; provided, however, that any such advance will be reimbursable from
any amounts in the Certificate Account prior to any distributions being made on
the Certificates to the extent that the Master Servicer shall determine in good
faith that such advance (a "Nonrecoverable Advance") will not ultimately be
recoverable from Related Proceeds or, if applicable, from collections on other
Mortgage Assets otherwise distributable on such Subordinate Certificates. If
advances have been made by the Master Servicer from excess funds in the
Certificate Account, the Master Servicer will be required to replace such funds
in the Certificate Account on any future Distribution Date to the extent that
funds in the Certificate Account on such Distribution Date are less than
payments required to be made to Certificateholders on such date. If so specified
in the related Prospectus Supplement, the obligation of the Master Servicer to
make advances may be secured by a cash advance reserve fund or a surety bond.
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If applicable, information regarding the characteristics of, and the identity of
any obligor on, any such surety bond, will be set forth in the related
Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement,
the Master Servicer will be entitled to receive interest at the rate specified
therein on its outstanding advances and will be entitled to pay itself such
interest periodically from general collections on the Mortgage Loans prior to
any payment to Certificateholders or as otherwise provided in the related
Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes MBS or Tiered MBS will describe any
corresponding advancing obligation of any person in connection with such MBS.
REPORTS TO CERTIFICATEHOLDERS
With each distribution to holders of any class of Certificates of a
series, a Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, will forward or cause to be forwarded to each such holder, to the
Depositor and to such other parties as may be specified in the related
Agreement, a statement that, unless otherwise specified in the related
Prospectus Supplement, will set forth, in each case to the extent applicable and
available:
(i) the amount of such distribution to holders of Certificates
of such class applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of
Certificates of such class allocable to Accrued Certificate Interest;
(iii) the amount, if any, of such distribution allocable to
(a) Prepayment Premiums and (b) payments on account of Equity
Participations;
(iv) the amount of related servicing compensation received by
a Master Servicer (and, if payable directly out of the related Trust
Fund, by any Special Servicer and any Sub-Servicer) and such other
customary information as any such Master Servicer or the Trustee deems
necessary or desirable, or that a Certificateholder reasonably
requests, to enable Certificateholders to prepare their tax returns;
(v) the aggregate amount of advances included in such
distribution, and the aggregate amount of unreimbursed advances at the
close of business on such Distribution Date;
(vi) the aggregate principal balance of the Mortgage Assets at
the close of business on such Distribution Date;
(vii) the number and aggregate principal balance of Mortgage
Loans in respect of which (a) one scheduled payment is delinquent, (b)
two scheduled payments are delinquent, (c) three or more scheduled
payments are delinquent and (d) foreclosure proceedings have been
commenced;
(viii) with respect to each Mortgage Loan that is delinquent
two or more months, (a) the loan number thereof, (b) the unpaid balance
thereof, (c) whether the delinquency is in respect of any balloon
payment, (d) the aggregate amount of unreimbursed servicing expenses
and unreimbursed advances in respect thereof, (e) if applicable, the
aggregate amount of any interest accrued and payable on related
servicing expenses and related advances, (f) whether a notice of
acceleration has been sent to the mortgagor and, if so, the date of
such notice, (g) whether foreclosure proceedings have been commenced
and, if so, the date so commenced and (h) if such Mortgage Loan is more
than three months delinquent and foreclosure has not been commenced,
the reason therefor;
(ix) with respect to any Mortgage Loan liquidated during the
related Due Period or Prepayment Period, as applicable (other than by
payment in full), (a) the loan number thereof, (b) the manner in which
it was liquidated, (c) the aggregate amount of Liquidation Proceeds
received, (d) the portion of such Liquidation Proceeds payable or
reimbursable to the Master Servicer in respect of such Mortgage Loan
and (e) the amount of any loss to Certificateholders;
(x) with respect to each REO Property included in the Trust
Fund as of the end of the related Due Period or Prepayment Period, as
applicable, (a) the loan number of the related Mortgage
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Loan, (b) the date of acquisition, (c) the book value, (d) the
principal balance of the related Mortgage Loan immediately following
such Distribution Date (calculated as if such Mortgage Loan were still
outstanding taking into account certain limited modifications to the
terms thereof specified in the Agreement), (e) the aggregate amount of
unreimbursed servicing expenses and unreimbursed advances in respect
thereof and (f) if applicable, the aggregate amount of interest accrued
and payable on related servicing expenses and related advances;
(xi) with respect to any such REO Property sold during the
related Due Period or Prepayment Period, as applicable, (a) the loan
number of the related Mortgage Loan, (b) the aggregate amount of sale
proceeds, (c) the portion of such sales proceeds payable or
reimbursable to the Master Servicer or a Special Servicer in respect of
such REO Property or the related Mortgage Loan and (d) the amount of
any loss to Certificateholders in respect of the related Mortgage Loan;
(xii) the aggregate Certificate Balance or notional amount, as
the case may be, of each class of Certificates (including any class of
Certificates not offered hereby) at the close of business on such
Distribution Date, separately identifying any reduction in such
Certificate Balance due to the allocation of any loss and increase in
the Certificate Balance of a class of Accrual Certificates in the event
that Accrued Certificate Interest has been added to such balance;
(xiii) the aggregate amount of principal prepayments made
during the related Prepayment Period;
(xiv) the amount deposited in the reserve fund, if any, on
such Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of
the close of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Certificate Interest, if
any, on each class of Certificates at the close of business on such
Distribution Date;
(xvii) in the case of Certificates with a variable
Pass-Through Rate, the Pass-Through Rate applicable to such
Distribution Date, as calculated in accordance with the method
specified in the related Prospectus Supplement;
(xviii) in the case of Certificates with an adjustable
Pass-Through Rate, for statements to be distributed in any month in
which an adjustment date occurs, the adjustable Pass-Through Rate
applicable to the next succeeding Distribution Date as calculated in
accordance with the method specified in the related Prospectus
Supplement;
(xix) as to any series which includes Credit Support, the
amount of coverage of each instrument of Credit Support included
therein as of the close of business on such Distribution Date; and
(xx) the aggregate amount of payments by the mortgagors of (a)
default interest, (b) late charges and (c) assumption and modification
fees collected during the related Due Period or Prepayment Period, as
applicable.
In the case of information furnished pursuant to subclauses (i)-(iv)
above, the amounts shall be expressed as a dollar amount per minimum
denomination of Certificates or for such other specified portion thereof. The
Prospectus Supplement for each series of Offered Certificates will describe any
additional information to be included in reports to the holders of such
Certificates.
Within a reasonable period of time after the end of each calendar year,
the Master Servicer, if any, or the Trustee, as provided in the related
Prospectus Supplement, shall furnish to each person who at any time during the
calendar year was a holder of a Certificate a statement containing the
information set forth in subclauses (i)-(iv) above, aggregated for such calendar
year or the applicable portion thereof during which such person was a
Certificateholder. Such obligation of the Master Servicer or the Trustee shall
be deemed to have been satisfied to the extent that substantially comparable
information shall be provided by the Master Servicer or the Trustee pursuant to
any requirements of the Code as are from time to time in force. See "Description
of the Certificates -- Book-Entry Registration and Definitive Certificates".
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If the Trust Fund for a series of Certificates includes MBS or Tiered
MBS, the related Prospectus Supplement will describe the contents of the
statements that will be forwarded to Certificateholders of that series in
connection with distributions made to them.
TERMINATION
The obligations created by the Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Certificate Account or by the Master Servicer,
if any, or the Trustee and required to be paid to them pursuant to such
Agreement following the earlier of (i) the final payment or other liquidation of
the last Mortgage Asset subject thereto or the disposition of all property
acquired upon foreclosure of any Mortgage Loan subject thereto and (ii) the
purchase of all of the assets of the Trust Fund by the party entitled to effect
such termination, under the circumstances and in the manner set forth in the
related Prospectus Supplement. In no event, however, will the trust created by
the Agreement continue beyond the date specified in such Agreement. Written
notice of termination of the Agreement will be given to each Certificateholder,
and the final distribution will be made only upon presentation and surrender of
the Certificates at the location to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Certificate Balance of
a specified class or classes of Certificates by a specified percentage or
amount, the party specified therein will solicit bids for the purchase of all
assets of the Trust Fund, or of a sufficient portion of such assets to retire
such class or classes under the circumstances and in the manner set forth
therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
If so provided in the related Prospectus Supplement, one or more
classes of the Offered Certificates of any series will be issued as Book-Entry
Certificates, and each such class will be represented by one or more single
Certificates registered in the name of the depository, The Depository Trust
Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations ("Participants") and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants include
Salomon Smith Barney Inc., securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other organizations.
Indirect access to the DTC system also is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Unless otherwise provided in the related Prospectus Supplement,
investors that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or other interests in,
Book-Entry Certificates may do so only through Participants and Indirect
Participants. In addition, such investors ("Certificate Owners") will receive
all distributions on the Book-Entry Certificates through DTC and its
Participants. Under a book-entry format, Certificate Owners will receive
payments after the related Distribution Date because, while payments are
required to be forwarded to DTC's nominee, on each such date, DTC will forward
such payments to its Participants which thereafter will be required to forward
them to Indirect Participants or Certificate Owners. Unless otherwise provided
in the related Prospectus Supplement, the only "Certificateholder"(as such term
is used in the Agreement) will be the nominee of DTC, and the Certificate Owners
will not be recognized by the Trustee as Certificateholders under the Agreement.
Certificate Owners will be permitted to exercise the rights of
Certificateholders under the related Agreement only indirectly through the
Participants who in turn will exercise their rights through DTC.
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Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Book-Entry Certificates
and is required to receive and transmit distributions of principal of and
interest on the Book-Entry Certificates. Participants and Indirect Participants
with which Certificate Owners have accounts with respect to the Book-Entry
Certificates similarly are required to make book-entry transfers and receive and
transmit such payments on behalf of their respective Certificate Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Certificate
Owner to pledge its interest in the Book-Entry Certificates to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of its interest in the Book-Entry Certificates, may be limited due to
the lack of a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to
be taken by a Certificateholder under an Agreement only at the direction of one
or more Participants to whose account with DTC interests in the Book-Entry
Certificates are credited.
Unless otherwise specified in the related Prospectus Supplement,
Certificates initially issued in book-entry form will be issued as Definitive
Certificates to Certificate Owners or their nominees, rather than to DTC or its
nominee only if (i) the Depositor advises the Trustee in writing that DTC is no
longer willing or able to properly discharge its responsibilities as depository
with respect to the Certificates and the Depositor is unable to locate a
qualified successor or (ii) the Depositor, at its option, elects to terminate
the book-entry system through DTC.
Upon the occurrence of either of the events described in the
immediately preceding paragraph, DTC is required to notify all Participants of
the availability through DTC of Definitive Certificates for the Certificate
Owners. Upon surrender by DTC of the certificate or certificates representing
the Book-Entry Certificates, together with instructions for re-registration, the
Trustee will issue (or cause to be issued) to the Certificate Owners identified
in such instructions the Definitive Certificates to which they are entitled, and
thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Agreement.
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DESCRIPTION OF THE AGREEMENTS
The Certificates of each series evidencing interests in a Trust Fund
consisting of Mortgage Loans will be issued pursuant to a Pooling and Servicing
Agreement among the Depositor, a Master Servicer, any Special Servicer appointed
as of the date of the Pooling and Servicing Agreement and the Trustee. The
Certificates of each series evidencing interests in a Trust Fund consisting
exclusively of MBS and/or Tiered MBS will be issued pursuant to a Trust
Agreement between the Depositor and a Trustee. Each Pooling and Servicing
Agreement and Trust Agreement is an "Agreement". Any Master Servicer, any such
Special Servicer and the Trustee with respect to any series of Certificates will
be named in the related Prospectus Supplement. The provisions of each Agreement
will vary depending upon the nature of the Certificates to be issued thereunder
and the nature of the related Trust Fund. A form of a Pooling and Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The following summaries describe certain provisions
that may appear in each Agreement. The Prospectus Supplement for a series of
Certificates will describe any provision of the Agreement relating to such
series that materially differs from the description thereof contained in this
Prospectus. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Agreement for each Trust Fund and the description of such provisions in the
related Prospectus Supplement. As used herein with respect to any series, the
term "Certificate" refers to all of the Certificates of that series, whether or
not offered hereby and by the related Prospectus Supplement, unless the context
otherwise requires. The Depositor will provide a copy of the Agreement (without
exhibits) relating to any series of Certificates without charge upon written
request of a holder of a Certificate of such series addressed to Salomon
Brothers Mortgage Securities VII, Inc., 390 Greenwich Street, New York, New York
10013. Attention: Secretary.
ASSIGNMENT OF MORTGAGE ASSETS; REPURCHASES
At the time of issuance of any series of Certificates, the Depositor
will assign (or cause to be assigned) to the designated Trustee the Mortgage
Assets to be included in the related Trust Fund, together with all principal and
interest to be received on or with respect to such Mortgage Assets after the
Cut-off Date, other than principal and interest due on or before the Cut-off
Date and other than any Retained Interest. The Trustee will, concurrently with
such assignment, deliver the Certificates to the Depositor in exchange for the
Mortgage Assets and the other assets comprising the Trust Fund for such series.
Each Mortgage Asset will be identified in a schedule appearing as an exhibit to
the related Agreement. Unless otherwise provided in the related Prospectus
Supplement, such schedule will include detailed information (i) in respect of
each Mortgage Loan included in the related Trust Fund, including without
limitation, the address of the related Mortgaged Property and type of such
property, the Mortgage Rate and, if applicable, the applicable index, margin,
adjustment date and any rate cap information, the original and remaining term to
maturity, the original and outstanding principal balance and balloon payment, if
any, and payment and prepayment provisions, if applicable, and (ii) in respect
of each MBS and Tiered MBS included in the related Trust Fund, including without
limitation, the MBS Issuer, MBS Servicer and MBS Trustee, the pass-through or
bond rate or formula for determining such rate, the issue date and original and
remaining term to maturity, if applicable, the original and outstanding
principal amount and payment provisions, if applicable.
With respect to each Whole Loan, the Depositor will deliver or cause to
be delivered to the Trustee (or to the custodian hereinafter referred to)
certain loan documents, which unless otherwise specified in the related
Prospectus Supplement will include the original Mortgage Note endorsed, without
recourse, to the order of the Trustee, the original Mortgage (or a certified
copy thereof) with evidence of recording indicated thereon and an assignment of
the Mortgage to the Trustee in recordable form. Unless otherwise provided in the
related Prospectus Supplement, the related Agreement will require that the
Depositor or other party thereto promptly cause each such assignment of Mortgage
to be recorded in the appropriate public office for real property records,
except in the State of California or in other states where, in the opinion of
counsel acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in the related Whole Loan against the claim of any subsequent
transferee or any successor to or creditor of the Depositor, the Master
Servicer, the relevant Mortgage Asset Seller or any other prior holder of the
Whole Loan.
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The Trustee (or the custodian) will review such Whole Loan documents
within a specified period of days after receipt thereof, and the Trustee (or the
custodian) will hold such documents in trust for the benefit of the
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, if any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) shall immediately notify the
Master Servicer and the Depositor, and the Master Servicer shall immediately
notify the relevant Mortgage Asset Seller. If the Mortgage Asset Seller cannot
cure the omission or defect within a specified number of days after receipt of
such notice, then unless otherwise specified in the related Prospectus
Supplement, the Mortgage Asset Seller will be obligated, within a specified
number of days of receipt of such notice, to repurchase the related Whole Loan
from the Trustee at the Purchase Price or substitute for such Mortgage Loan.
There can be no assurance that a Mortgage Asset Seller will fulfill this
repurchase or substitution obligation, and neither the Master Servicer nor the
Depositor will be obligated to repurchase or substitute for such Mortgage Loan
if the Mortgage Asset Seller defaults on its obligation. Unless otherwise
specified in the related Prospectus Supplement, this repurchase or substitution
obligation constitutes the sole remedy available to the Certificateholders or
the Trustee for omission of, or a material defect in, a constituent document.
With respect to each MBS and Tiered MBS, the Depositor will deliver or
cause to be delivered to the Trustee (or the custodian) the original certificate
or other definitive evidence of the MBS or Tiered MBS, together with bond power
or other instruments, certifications or documents required to transfer fully the
MBS or Tiered MBS to the Trustee for the benefit of the Certificateholders in
accordance with the related MBS Agreement. Unless otherwise provided in the
related Prospectus Supplement, the related Agreement will require that either
the Depositor or the Trustee promptly cause the MBS or Tiered MBS to be
re-registered, with the applicable persons, in the name of the Trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the related Prospectus Supplement, the
Depositor (or a Mortgage Asset Seller or affiliate as described below) will,
with respect to each Whole Loan constituting a Mortgage Asset in the related
Trust Fund, make or assign certain representations and warranties, as of a
specified date (the person making such representations and warranties, the
"Warranting Party") covering, by way of example, the following types of matters:
(i) the accuracy of the information set forth for such Whole Loan on the
schedule of Mortgage Assets appearing as an exhibit to the related Agreement;
(ii) the existence of title insurance insuring the lien priority of the Whole
Loan; (iii) the authority of the Warranting Party to sell the Whole Loan; (iv)
the payment status of the Whole Loan and the status of payments of taxes,
assessments and other charges affecting the related Mortgaged Property; (v) the
existence of customary provisions in the related Mortgage Note and Mortgage to
permit realization against the Mortgaged Property of the benefit of the security
of the Mortgage; and (vi) the existence of hazard and extended perils insurance
coverage on the Mortgaged Property.
Any Warranting Party, if other than the Depositor, shall be a Mortgage
Asset Seller or an affiliate thereof or such other person acceptable to the
Depositor and shall be identified in the related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan may have
been made as of a date prior to the applicable Cut-off Date. A substantial
period of time may have elapsed between such date and the date of initial
issuance of the related series of Certificates evidencing an interest in such
Whole Loan. Unless otherwise specified in the related Prospectus Supplement, in
the event of a breach of any such representation or warranty, the Warranting
Party will be obligated to cure such breach or repurchase or replace the
affected Whole Loan as described below. Since the representations and warranties
may not address events that may occur following the date as of which they were
made, the Warranting Party will have a cure, repurchase or substitution
obligation in connection with a breach of such a representation and warranty
only if the relevant event that causes such breach occurs prior to such date.
Such party would have no such obligations if the relevant event that causes such
breach occurs after such date. However, the Depositor will not include any Whole
Loan in the Trust Fund for any series of Certificates if anything has come to
the Depositor's attention that would cause it to believe that the
representations and warranties made in respect of such Whole Loan will not be
accurate and complete in all material respects as of the date of initial
issuance of the related series of Certificates.
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Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Trustee will be required
to notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of a Whole Loan that materially
and adversely affects the value of such Mortgage Loan or the interests therein
of the Certificateholders. If such Warranting Party cannot cure such breach
within a specified period following the date on which such party was notified of
such breach, then such Warranting Party will be obligated to repurchase such
Mortgage Loan from the Trustee within a specified period from the date on which
the Warranting Party was notified of such breach, at the Purchase Price
therefor. As to any Whole Loan, unless otherwise specified in the related
Prospectus Supplement, the "Purchase Price" is equal to the sum of the unpaid
principal balance thereof, plus unpaid accrued interest thereon at the Mortgage
Rate from the date as to which interest was last paid to the due date in the
Prepayment Period in which the relevant purchase is to occur, plus certain
servicing expenses that are reimbursable to the Master Servicer. If so provided
in the Prospectus Supplement for a series, a Warranting Party, rather than
repurchase a Mortgage Loan as to which a breach has occurred, will have the
option, within a specified period after initial issuance of such series of
Certificates, to cause the removal of such Mortgage Loan from the Trust Fund and
substitute in its place one or more other Whole Loans, in accordance with the
standards described in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, this repurchase or substitution
obligation will constitute the sole remedy available to holders of Certificates
or the Trustee for a breach of representation by a Warranting Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute for a
Whole Loan if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that Warranting Parties will carry out such obligations
with respect to Whole Loans.
With respect to a Trust Fund that includes MBS or Tiered MBS, the
related Prospectus Supplement will describe any representations or warranties
made or assigned by the Depositor with respect to such MBS or Tiered MBS, the
person making them and the remedies for breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. Unless otherwise provided in the
related Prospectus Supplement, a breach of any such representation of the Master
Servicer which materially and adversely affects the interests of the
Certificateholders and which continues unremedied for sixty days after the
giving of written notice of such breach to the Master Servicer by the Trustee or
the Depositor, or to the Master Servicer, the Depositor and the Trustee by the
holders of Certificates evidencing not less than 25% of the Voting Rights, will
constitute an Event of Default. See " -- Events of Default" and " -- Rights Upon
Event of Default".
CERTIFICATE ACCOUNT
GENERAL. The Master Servicer, if any, and/or the Trustee will, as to
each Trust Fund, establish and maintain or cause to be established and
maintained one or more separate accounts for the collection of payments on the
related Mortgage Assets (collectively, the "Certificate Account"), which must be
either (i) an account or accounts the deposits in which are insured by the Bank
Insurance Fund or the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation ("FDIC") (to the limits established by the FDIC) and the
uninsured deposits in which are otherwise secured such that the
Certificateholders have a claim with respect to the funds in the Certificate
Account or a perfected first priority security interest against any collateral
securing such funds that is superior to the claims of any other depositors or
general creditors of the institution with which the Certificate Account is
maintained or (ii) otherwise maintained with a bank or trust company, and in a
manner, satisfactory to the Rating Agency or Agencies rating any class of
Certificates of such series. The collateral eligible to secure amounts in the
Certificate Account is limited to United States government securities and other
investment grade obligations specified in the Agreement ("Permitted
Investments"). A Certificate Account may be maintained as an interest bearing or
a non-interest bearing account and the funds held therein may be invested
pending each succeeding Distribution Date in certain short-term Permitted
Investments. Unless otherwise provided in the related Prospectus Supplement, any
interest or other income earned on funds in the Certificate Account will be paid
to a Master Servicer or its designee as
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additional servicing compensation. The Certificate Account may be maintained
with an institution that is an affiliate of the Master Servicer, if applicable,
provided that such institution meets the standards imposed by the Rating Agency
or Agencies. If permitted by the Rating Agency or Agencies and so specified in
the related Prospectus Supplement, a Certificate Account may contain funds
relating to more than one series of mortgage pass-through certificates and may
contain other funds respecting payments on mortgage loans belonging to the
Master Servicer or serviced or master serviced by it on behalf of others.
DEPOSITS. A Master Servicer or the Trustee will deposit or cause to be
deposited in the Certificate Account for each Trust Fund on a daily basis,
unless otherwise provided in the related Agreement and described in the related
Prospectus Supplement, the following payments and collections received, or
advances made, by the Master Servicer or the Trustee or on its behalf subsequent
to the Cut-off Date (other than payments due on or before the Cut-off Date, and
exclusive of any amounts representing a Retained Interest):
(i) all payments on account of principal, including principal
prepayments, on the Mortgage Assets;
(ii) all payments on account of interest on the Mortgage
Assets, including any default interest collected, in each case net of
any portion thereof retained by a Master Servicer or a Sub-Servicer as
its servicing compensation and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies to be
maintained in respect of each Mortgaged Property securing a Mortgage
Loan in the Trust Fund (to the extent such proceeds are not applied to
the restoration of the property or released to the mortgagor in
accordance with the normal servicing procedures of a Master Servicer or
the related Sub-Servicer, subject to the terms and conditions of the
related Mortgage and Mortgage Note) (collectively, "Insurance
Proceeds") and all other amounts received and retained in connection
with the liquidation of defaulted Mortgage Loans in the Trust Fund, by
foreclosure or otherwise ("Liquidation Proceeds"), together with the
net proceeds on a monthly basis with respect to any Mortgaged
Properties acquired for the benefit of Certificateholders by
foreclosure or by deed in lieu of foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any
fund that constitutes Credit Support for the related series of
Certificates as described under "Description of Credit Support";
(v) any advances made as described under "Description of the
Certificates -- Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as
described under "Description of the Trust Funds -- Cash Flow
Agreements";
(vii) all proceeds of any Mortgage Loan or property acquired
in respect thereof purchased by the Depositor, any Mortgage Asset
Seller or any other specified person as described under " -- Assignment
of Mortgage Assets; Repurchases" and " -- Representations and
Warranties; Repurchases", all proceeds of any defaulted Mortgage Loan
purchased as described under " -- Realization Upon Defaulted Whole
Loans", and all proceeds of any Mortgage Asset purchased as described
under "Description of the Certificates -- Termination" (also,
"Liquidation Proceeds");
(viii) any amounts paid by a Master Servicer to cover certain
interest shortfalls arising out of the prepayment of Mortgage Loans in
the Trust Fund as described under "Description of the Agreements --
Retained Interest; Servicing Compensation and Payment of Expenses";
(ix) to the extent that any such item does not constitute
additional servicing compensation to a Master Servicer, any payments on
account of modification or assumption fees, late payment charges,
Prepayment Premiums or Equity Participations on the Mortgage Assets;
(x) all payments required to be deposited in the Certificate
Account with respect to any deductible clause in any blanket insurance
policy described under " -- Hazard Insurance Policies";
(xi) any amount required to be deposited by a Master Servicer
or the Trustee in connection with losses realized on investments for
the benefit of the Master Servicer or the Trustee, as the case may be,
of funds held in the Certificate Account; and
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(xii) any other amounts required to be deposited in the
Certificate Account as provided in the related Agreement and described
in the related Prospectus Supplement.
WITHDRAWALS. A Master Servicer or the Trustee may, from time to time,
unless otherwise provided in the related Agreement and described in the related
Prospectus Supplement, make withdrawals from the Certificate Account for each
Trust Fund for any of the following purposes:
(i) to make distributions to the Certificateholders on each
Distribution Date;
(ii) to reimburse a Master Servicer for unreimbursed amounts
advanced as described under "Description of the Certificates --
Advances in Respect of Delinquencies", such reimbursement to be made
out of amounts received which were identified and applied by the Master
Servicer as late collections of interest (net of related servicing fees
and Retained Interest) on and principal of the particular Mortgage
Loans with respect to which the advances were made or out of amounts
drawn under any form of Credit Support with respect to such Mortgage
Loans;
(iii) to reimburse a Master Servicer for unpaid servicing fees
earned and certain unreimbursed servicing expenses incurred with
respect to Mortgage Loans in the Trust Fund and properties acquired in
respect thereof, such reimbursement to be made out of amounts that
represent Liquidation Proceeds and Insurance Proceeds collected on the
particular Mortgage Loans and properties, and net income collected on
the particular properties, with respect to which such fees were earned
or such expenses were incurred or out of amounts drawn under any form
of Credit Support with respect to such Mortgage Loans and properties;
(iv) to reimburse a Master Servicer for any advances described
in clause (ii) above and any servicing expenses described in clause
(iii) above which, in the Master Servicer's good faith judgment, will
not be recoverable from the amounts described in clauses (ii) and
(iii), respectively, such reimbursement to be made from amounts
collected on other Mortgage Assets or, if and to the extent so provided
by the related Agreement and described in the related Prospectus
Supplement, just from that portion of amounts collected on other
Mortgage Assets that is otherwise distributable on one or more classes
of Subordinate Certificates of the related series;
(v) if and to the extent described in the related Prospectus
Supplement, to pay a Master Servicer interest accrued on the advances
described in clause (ii) above and the servicing expenses described in
clause (iii) above while such remain outstanding and unreimbursed;
(vi) to pay for costs and expenses incurred by the Trust Fund
for environmental site assessments with respect to, and for
containment, clean-up or remediation of hazardous wastes and materials
on, Mortgaged Properties securing defaulted Mortgage Loans in the Trust
Fund as described under " -- Realization Upon Defaulted Whole Loans";
(vii) to reimburse a Master Servicer, the Depositor, or any of
their respective directors, officers, employees and agents, as the case
may be, for certain expenses, costs and liabilities incurred thereby,
as and to the extent described under " -- Certain Matters Regarding a
Master Servicer and the Depositor";
(viii) if and to the extent described in the related
Prospectus Supplement, to pay (or to transfer to a separate account for
purposes of escrowing for the payment of) the Trustee's fees;
(ix) to reimburse the Trustee or any of its directors,
officers, employees and agents, as the case may be, for certain
expenses, costs and liabilities incurred thereby, as and to the extent
described under " -- Certain Matters Regarding the Trustee";
(x) to pay a Master Servicer, as additional servicing
compensation, interest and investment income earned in respect of
amounts held in the Certificate Account;
(xi) to pay the person entitled thereto any amounts deposited
in the Certificate Account that were identified and applied by the
Master Servicer as recoveries of Retained Interest;
(xii) to pay for costs reasonably incurred in connection with
the proper operation, management and maintenance of any Mortgaged
Property acquired for the benefit of Certificateholders by foreclosure
or by deed in lieu of foreclosure or otherwise, such payments to be
made out of income received on such property;
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(xiii) if one or more elections have been made to treat the
Trust Fund or designated portions thereof as a REMIC, to pay any
federal, state or local taxes imposed on the Trust Fund or its assets
or transactions, as and to the extent described under "Federal Income
Tax Consequences -- REMICS -- Prohibited Transactions Tax and Other
Taxes";
(xiv) to pay for the cost of an independent appraiser or other
expert in real estate matters retained to determine a fair sale price
for a defaulted Mortgage Loan in the Trust Fund or a property acquired
in respect thereof in connection with the liquidation of such Mortgage
Loan or property;
(xv) to pay for the cost of various opinions of counsel
obtained pursuant to the related Agreement for the benefit of
Certificateholders;
(xvi) to pay for the costs of recording the related Agreement
if such recordation materially and beneficially affects the interests
of Certificateholders;
(xvii) to pay the person entitled thereto any amounts
deposited in the Certificate Account in error, including amounts
received on any Mortgage Asset after its removal from the Trust Fund
whether by reason of purchase or substitution as contemplated by " --
Assignment of Mortgage Assets; Repurchase" and " -- Representations and
Warranties; Repurchases" or otherwise;
(xviii) to make any other withdrawals permitted by the related
Agreement and described in the related Prospectus Supplement; and
(xix) to clear and terminate the Certificate Account at the
termination of the Trust Fund.
COLLECTION AND OTHER SERVICING PROCEDURES
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer, directly or through Sub-Servicers, is required to make
reasonable efforts to collect all scheduled payments under the Whole Loans and
will follow or cause to be followed such collection procedures as it would
follow with respect to mortgage loans that are comparable to the Whole Loans and
held for its own account, provided such procedures are consistent with (i) the
terms of the related Agreement and any related hazard insurance policy or
instrument of Credit Support included in the related Trust Fund described herein
or under "Description of Credit Support", (ii) applicable law and (iii) the
general servicing standard specified in the related Prospectus Supplement or, if
no such standard is so specified, its normal servicing practices (in either
case, the "Servicing Standard"). In connection therewith, the Master Servicer
will be permitted in its discretion to waive any late payment charge or penalty
interest in respect of a late Whole Loan payment.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus Supplement,
and filing and settling claims thereunder; maintaining escrow or impoundment
accounts of mortgagors for payment of taxes, insurance and other items required
to be paid by any mortgagor pursuant to the Whole Loan; processing assumptions
or substitutions in those cases where the Master Servicer has determined not to
enforce any applicable due-on-sale clause; attempting to cure delinquencies;
supervising foreclosures; inspecting and managing Mortgaged Properties acquired
on behalf of the Trust Fund through foreclosure, deed-in-lieu of foreclosure or
otherwise (each, an "REO Property"); and maintaining accounting records relating
to the Whole Loans. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer will be responsible for filing and settling
claims in respect of particular Whole Loans under any applicable instrument of
Credit Support. See "Description of Credit Support".
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer may agree to modify, waive or amend any term of any Whole Loan
in a manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (i) affect the amount or timing of any scheduled
payments of principal or interest on the Whole Loan or (ii) in its judgment,
materially impair the security for the Whole Loan or reduce the likelihood of
timely payment of amounts due thereon. The Master Servicer also may agree to any
modification, waiver or amendment that would so affect or impair the payments
on, or the security for, a Whole Loan if, unless otherwise provided in the
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related Prospectus Supplement, (i) in its judgment, a material default on the
Whole Loan has occurred or a payment default is imminent and (ii) in its
judgment, such modification, waiver or amendment is reasonably likely to produce
a greater recovery with respect to the Whole Loan on a present value basis than
would liquidation. The Master Servicer is required to notify the Trustee in the
event of any modification, waiver or amendment of any Whole Loan.
SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in respect of
the Whole Loans to third-party servicers (each, a "Sub-Servicer"), but such
Master Servicer will remain obligated under the related Agreement. Each
sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") must be consistent with the terms of the related
Agreement and must provide that, if for any reason the Master Servicer for the
related series of Certificates is no longer acting in such capacity, the Trustee
or any successor Master Servicer may assume the Master Servicer's rights and
obligations under such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of whether the Master Servicer's compensation
pursuant to the related Agreement is sufficient to pay such fees. However, a
Sub-Servicer may be entitled to a Retained Interest in certain Whole Loans. Each
Sub-Servicer will be reimbursed by the Master Servicer for certain expenditures
which it makes, generally to the same extent the Master Servicer would be
reimbursed under an Agreement. See " -- Retained Interest, Servicing
Compensation and Payment of Expenses".
SPECIAL SERVICERS
To the extent so specified in the related Prospectus Supplement, one or
more special servicers (each, a "Special Servicer") may be a party to the
related Agreement or may be appointed by the Master Servicer or another
specified party. A Special Servicer for any series of Certificates may be an
affiliate of the Depositor or the Master Servicer and may hold, or be affiliated
with the holder of, Subordinate Certificates of such series. A Special Servicer
may be entitled to any of the rights, and subject to any of the obligations,
described herein in respect of a Master Servicer. In general, a Special
Servicer's duties will relate to defaulted Mortgage Loans, including instituting
foreclosures and negotiating work-outs. The related Prospectus Supplement will
describe the rights, obligations and compensation of any Special Servicer for a
particular series of Certificates. The Master Servicer will be liable for the
performance of a Special Servicer only if, and to the extent, set forth in the
related Prospectus Supplement. In certain cases, the Master Servicer may appoint
a Special Servicer.
REALIZATION UPON DEFAULTED WHOLE LOANS
A mortgagor's failure to make required payments may reflect inadequate
operating income or the diversion of that income from the service of payments
due under the Mortgage Loan, and may call into question such mortgagor's ability
to make timely payment of taxes and to pay for necessary maintenance of the
related Mortgaged Property. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer is required to monitor any Whole Loan which is
in default, contact the mortgagor concerning the default, evaluate whether the
causes of the default can be cured over a reasonable period without significant
impairment of the value of the Mortgaged Property, initiate corrective action in
cooperation with the mortgagor if cure is likely, inspect the Mortgaged Property
and take such other actions as are consistent with the Servicing Standard. A
significant period of time may elapse before the Master Servicer is able to
assess the success of such corrective action or the need for additional
initiatives.
The time within which the Master Servicer makes the initial
determination of appropriate action, evaluates the success of corrective action,
develops additional initiatives, institutes foreclosure proceedings and actually
forecloses (or takes a deed to a Mortgaged Property in lieu of foreclosure) on
behalf of the Certificateholders, may vary considerably depending on the
particular Whole Loan, the Mortgaged Property, the mortgagor, the presence of an
acceptable party to assume the Mortgage Loan
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and the laws of the jurisdiction in which the Mortgaged Property is located.
Under federal bankruptcy law, the Master Servicer in certain cases may not be
permitted to accelerate a Whole Loan or to foreclose on a Mortgaged Property for
a considerable period of time. See "Certain Legal Aspects of Mortgage Loans".
Any Agreement relating to a Trust Fund that includes Whole Loans may
grant to the Master Servicer and/or the holder or holders of certain classes of
Certificates a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Whole Loan as to which a specified number
of scheduled payments thereunder are delinquent. Any such right granted to the
holder of an Offered Certificate will be described in the related Prospectus
Supplement. The related Prospectus Supplement will also describe any such right
granted to any person if the predetermined purchase price is less than the
Purchase Price described under " -- Representations and Warranties;
Repurchases".
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer may offer to sell any defaulted Whole Loan described in the
preceding paragraph and not otherwise purchased by any person having a right of
first refusal with respect thereto, if and when the Master Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a greater
recovery on a present value basis than would liquidation through foreclosure or
similar proceeding. The related Agreement will provide that any such offering be
made in a commercially reasonable manner for a specified period and that the
Master Servicer accept the highest cash bid received from any person (including
itself, an affiliate of the Master Servicer or any Certificateholder) that
constitutes a fair price for such defaulted Whole Loan. In the absence of any
bid determined in accordance with the related Agreement to be fair, the Master
Servicer shall proceed with respect to such defaulted Mortgage Loan as described
below. Any bid in an amount at least equal to the Purchase Price described under
" -- Representations and Warranties; Repurchases" will in all cases be deemed
fair.
The Master Servicer, on behalf of the Trustee, may at any time
institute foreclosure proceedings, exercise any power of sale contained in any
mortgage, obtain a deed in lieu of foreclosure, or otherwise acquire title to a
Mortgaged Property securing a Whole Loan by operation of law or otherwise, if
such action is consistent with the Servicing Standard and a default on the
related Mortgage Loan has occurred or, in the Master Servicer's judgment, is
imminent. Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer may not, however, acquire title to any Mortgaged Property or
take any other action that would cause the Trustee, for the benefit of
Certificateholders, or any other specified person to be considered to hold title
to, to be a "mortgagee-in-possession" of, or to be an "owner" or an "operator"
of such Mortgaged Property within the meaning of certain federal environmental
laws, unless the Master Servicer has previously determined, based on a report
prepared by a person who regularly conducts environmental audits (which report
will be an expense of the Trust Fund), that either:
(i) the Mortgaged Property is in compliance with applicable
environmental laws, and there are no circumstances present at the
Mortgaged Property relating to the use, management or disposal of any
hazardous substances, hazardous materials, wastes, or petroleum-based
materials for which investigation, testing, monitoring, containment,
clean-up or remediation could be required under any federal, state or
local law or regulation; or
(ii) if the Mortgaged Property is not so in compliance or such
circumstances are so present, then it would be in the best economic
interest of the Trust Fund to acquire title to the Mortgaged Property
and further to take such actions as would be necessary and appropriate
to effect such compliance and/or respond to such circumstances (the
cost of which actions will be an expense of the Trust Fund).
Unless otherwise provided in the related Prospectus Supplement, if
title to any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Master Servicer, on behalf of the Trust Fund, will
be required to sell the Mortgaged Property prior to the end of the third taxable
year following the taxable year in which the Trust Fund acquires such Mortgaged
Property, unless (i) the Internal Revenue Service grants an extension of time to
sell such property or (ii) the Trustee receives an opinion of independent
counsel to the effect that the holding of the property by the Trust Fund
thereafter will not result in the imposition of a tax on the Trust Fund or cause
the Trust Fund to fail to qualify as a REMIC under the Code at any time that any
Certificate is outstanding.
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Subject to the foregoing, the Master Servicer will be required to (i) solicit
bids for any Mortgaged Property so acquired in such a manner as will be
reasonably likely to realize a fair price for such property and (ii) accept the
first (and, if multiple bids are contemporaneously received, the highest) cash
bid received from any person that constitutes a fair price.
Unless otherwise provided in the related Prospectus Supplement, if
title to any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Master Servicer will also be required to assure that
the Mortgaged Property is administered so that it constitutes "foreclosure
property" within the meaning of Section 860G(a)(8) of the Code at all times.
If the Trust Fund acquires title to any Mortgaged Property, the Master
Servicer, on behalf of the Trust Fund, may retain an independent contractor to
manage and operate such property. The retention of an independent contractor,
however, will not relieve the Master Servicer of any of its obligations with
respect to the management and operation of such Mortgaged Property. Unless
otherwise specified in the related Prospectus Supplement, any such property
acquired by the Trust Fund will be managed in a manner consistent with the
management and operation of similar property by a prudent lending institution.
In general, the Master Servicer will be obligated to operate and manage
any Mortgaged Property acquired as REO Property in a manner that would, to the
extent commercially feasible, maximize the Trust Fund's net after-tax proceeds
from such property. After the Master Servicer reviews the operation of such
property and consults with the Trustee to determine the Trustee's federal income
tax reporting position with respect to the income it is anticipated that the
Trust Fund would derive from such property, the Master Servicer could determine
(particularly in the case of REO Properties that are hotels) that it would not
be commercially feasible to manage and operate such property in a manner that
would avoid the imposition of a tax on "net income from foreclosure property"
within the meaning of Section 857(b)(4)(B) of the Code or a tax on "prohibited
transactions" under Section 860F of the Code (either such tax referred to herein
as an "REO Tax"). To the extent that income the Trust Fund receives from an REO
Property is subject to a tax on (i) "net income from foreclosure property", such
income would be subject to federal tax at the highest marginal corporate tax
rate (currently 35%) or (ii) "prohibited transactions", such income would be
subject to federal tax at a 100% rate. The determination as to whether income
from an REO Property would be subject to an REO Tax will depend on the specific
facts and circumstances relating to the management and operation of each REO
Property. Generally, income from an REO Property that is directly operated by
the Master Servicer would be apportioned and classified as "service" or
"non-service" income. The "service" portion of such income could be subject to
federal tax either at the highest marginal corporate tax rate or at the 100%
rate on "prohibited transactions", and the "non-service" portion of such income
could be subject to federal tax at the highest marginal corporate tax rate or,
although it appears unlikely, at the 100% rate applicable to "prohibited
transactions". Any REO Tax imposed on the Trust Fund's income from an REO
Property would reduce the amount available for distribution to
Certificateholders. Certificateholders are advised to consult their tax advisors
regarding the possible imposition of REO Taxes in connection with the operation
of commercial REO Properties by REMICs. See "Federal Income Tax Consequences"
herein.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made with respect to the
related Trust Fund) on the operations and ownership of any Mortgaged Property
acquired on behalf of the Trust Fund may result in the recovery of an amount
less than the amount that would otherwise be recovered. See "Certain Legal
Aspects of Mortgage Loans -- Foreclosure".
If recovery on a defaulted Whole Loan under any related instrument of
Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and procedures
as it deems necessary or advisable to realize upon the defaulted Whole Loan. If
the proceeds of any liquidation of the property securing the defaulted Whole
Loan are less than the outstanding principal balance of the defaulted Whole Loan
plus interest accrued thereon at the Mortgage Rate plus the aggregate amount of
expenses incurred by the Master Servicer in connection with such proceedings and
which are reimbursable under the Agreement, the Trust Fund will realize a loss
in the amount of such difference. The Master Servicer will be entitled to
withdraw or cause to be
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withdrawn from the Certificate Account out of the Liquidation Proceeds recovered
on any defaulted Whole Loan, prior to the distribution of such Liquidation
Proceeds to Certificateholders, amounts representing its normal servicing
compensation on the Whole Loan, unreimbursed servicing expenses incurred with
respect to the Whole Loan and any unreimbursed advances of delinquent payments
made with respect to the Whole Loan.
Unless otherwise provided in the related Agreement and described in the
related Prospectus Supplement, if any property securing a defaulted Whole Loan
is damaged and proceeds, if any, from the related hazard insurance policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under the related instrument of Credit Support, if any, the Master
Servicer is not required to expend its own funds to restore the damaged property
unless it determines (i) that such restoration will increase the proceeds to
Certificateholders on liquidation of the Whole Loan after reimbursement of the
Master Servicer for its expenses and (ii) that such expenses will be recoverable
by it from related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Whole Loans, a Master Servicer, on behalf of itself,
the Trustee and the Certificateholders, will present claims to the obligor under
each instrument of Credit Support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Whole Loans.
If a Master Servicer or its designee recovers payments under any
instrument of Credit Support with respect to any defaulted Whole Loan, the
Master Servicer will be entitled to withdraw or cause to be withdrawn from the
Certificate Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Whole Loan, unreimbursed servicing expenses incurred with respect to the
Whole Loan and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan. See " -- Hazard Insurance Policies" and "Description
of Credit Support".
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for a Trust Fund that includes Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage or, if any Mortgage permits the holder thereof to dictate to the
mortgagor the insurance coverage to be maintained on the related Mortgaged
Property, then such coverage as is consistent with the Servicing Standard.
Unless otherwise specified in the related Agreement and described in the related
Prospectus Supplement, such coverage will be in general in an amount equal to
the lesser of the principal balance owing on such Whole Loan and the amount
necessary to fully compensate for any damage or loss to the improvements on the
Mortgaged Property on a replacement cost basis, but in either case not less than
the amount necessary to avoid the application of any co-insurance clause
contained in the hazard insurance policy. The ability of the Master Servicer to
assure that hazard insurance proceeds are appropriately applied may be dependent
upon its being named as an additional insured under any hazard insurance policy
and under any other insurance policy referred to below, or upon the extent to
which information in this regard is furnished by mortgagors. All amounts
collected by the Master Servicer under any such policy (except for amounts to be
applied to the restoration or repair of the Mortgaged Property or released to
the mortgagor in accordance with the Master Servicer's normal servicing
procedures, subject to the terms and conditions of the related Mortgage and
Mortgage Note) will be deposited in the Certificate Account. The Agreement will
provide that the Master Servicer may satisfy its obligation to cause each
mortgagor to maintain such a hazard insurance policy by the Master Servicer's
maintaining a blanket policy or a master single interest policy insuring against
hazard losses on the Whole Loans. Unless otherwise provided in the related
Prospectus Supplement, if such policy contains a deductible clause, the Master
Servicer will be required to deposit in the Certificate Account all sums that
would have been deposited therein but for such clause. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer will also be
required to maintain a fidelity bond and errors and omissions policy with
respect to its officers and employees that provides coverage against losses that
may be sustained as a result of an officer's or employee's
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misappropriation of funds, errors and omissions or negligence, subject to
certain limitations as to amount of coverage, deductible amounts, conditions,
exclusions and exceptions.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Whole Loans will be underwritten
by different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties
securing the Whole Loans will typically contain a co-insurance clause that in
effect requires the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
improvements on the property in order to recover the full amount of any partial
loss. If the insured's coverage falls below this specified percentage, such
clause generally provides that the insurer's liability in the event of partial
loss does not exceed the lesser of (i) the replacement cost of the improvements
less physical depreciation and (ii) such proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement cost
of such improvements.
Unless otherwise provided in the related Agreement and described in the
related Prospectus Supplement, a Trust Fund that includes Whole Loans will
require the Master Servicer to cause the mortgagor on each Whole Loan to
maintain all such other insurance coverage with respect to the related Mortgaged
Property as is consistent with the terms of the related Mortgage and the
Servicing Standard, which insurance may typically include flood insurance (if
the related Mortgaged Property was located at the time of origination in a
federally designated flood area) and business interruption or loss of rents
insurance.
Under the terms of the Whole Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Master Servicer, on behalf
of the Trustee and Certificateholders, is obligated to present or cause to be
presented claims under any blanket insurance policy insuring against hazard
losses on Mortgaged Properties securing the Whole Loans. However, the ability of
the Master Servicer to present or cause to be presented such claims is dependent
upon the extent to which information in this regard is furnished to the Master
Servicer by mortgagors.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Whole Loans may contain clauses requiring the consent of
the mortgagee to any sale or other transfer of the related Mortgaged Property,
or due-on-sale clauses entitling the mortgagee to accelerate payment of the
Whole Loan upon any sale or other transfer of the related Mortgaged Property.
Certain of the Whole Loans may contain clauses requiring the consent of the
mortgagee to the creation of any other lien or encumbrance on the Mortgaged
Property or due-on-encumbrance clauses entitling the mortgagee to accelerate
payment of the Whole Loan upon the creation of any other lien or encumbrance
upon the Mortgaged Property. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer, on behalf of the Trust Fund, will determine
whether to exercise any right the Trustee may have as mortgagee to accelerate
payment of any such Whole Loan or to withhold its consent to any transfer or
further encumbrance in a manner consistent with the Servicing Standard. Unless
otherwise specified in the related Prospectus Supplement, any fee collected by
or on behalf of the Master Servicer for entering into an assumption agreement
will be retained by or on behalf of the Master Servicer as additional servicing
compensation. See "Certain Legal Aspects of Mortgage Loans -- Due-on-Sale and
Due-on-Encumbrance".
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RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a series of Certificates will specify
whether there will be any Retained Interest in the Mortgage Assets, and, if so,
the owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related Agreement.
A "Retained Interest" in a Mortgage Asset represents a specified portion of the
interest payable thereon. The Retained Interest will be deducted from mortgagor
payments as received and will not be part of the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, a
Master Servicer's primary servicing compensation with respect to a series of
Certificates will come from the periodic payment to it of a portion of the
interest payment on each Whole Loan. Since any Retained Interest and a Master
Servicer's primary compensation are percentages of the principal balance of each
Mortgage Asset, such amounts will decrease in accordance with the amortization
of the Mortgage Loans underlying or comprising such Mortgage Asset. The
Prospectus Supplement with respect to a series of Certificates evidencing
interests in a Trust Fund that includes Whole Loans may provide that, as
additional compensation, the Master Servicer or the Sub-Servicers may retain all
or a portion of assumption fees, modification fees, late payment charges or
Prepayment Premiums collected from mortgagors and any interest or other income
which may be earned on funds held in the Certificate Account or any
Sub-Servicing Account. Any Sub-Servicer will receive a portion of the Master
Servicer's compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, a Master Servicer
may, to the extent provided in the related Prospectus Supplement, pay from its
servicing compensation certain expenses incurred in connection with its
servicing of the Mortgage Loans, including, without limitation, payment of the
fees and disbursements of the Trustee and independent accountants, payment of
expenses incurred in connection with distributions and reports to
Certificateholders, and payment of any other expenses described in the related
Prospectus Supplement. Certain other expenses, including certain expenses
relating to defaults and liquidations on the Mortgage Loans and, to the extent
so provided in the related Prospectus Supplement, interest thereon at the rate
specified therein, and the fees of any Special Servicer, may be borne by the
Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period or Prepayment Period, as
applicable, to certain interest shortfalls resulting from the voluntary
prepayment of any Whole Loans in the related Trust Fund during such period prior
to their respective due dates therein.
EVIDENCE AS TO COMPLIANCE
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will provide that on or before a specified date in each year,
beginning on the first such date that is at least a specified number of months
after the Cut-off Date, there will be furnished to the related Trustee a report
of a firm of independent certified public accountants stating that (i) it has
obtained a letter of representation regarding certain matters from the
management of the Master Servicer which includes an assertion that the Master
Servicer has complied with certain minimum mortgage loan servicing standards (to
the extent applicable to commercial and multifamily mortgage loans), identified
in the Uniform Single Attestation Program for Mortgage Bankers established by
the Mortgage Bankers Association of America, with respect to the servicing of
commercial and multifamily mortgage loans by the Master Servicer during the most
recently completed fiscal year and (ii) on the basis of an examination conducted
by such firm in accordance with standards established by the American Institute
of Certified Public Accountants, such representation is fairly stated in all
material respects, subject to such exceptions and other qualifications as may be
appropriate. In rendering its report such firm may rely, as to matters relating
to the direct servicing of commercial and multifamily mortgage loans by
Sub-Servicers, upon comparable reports of firms of independent public
accountants rendered on the basis of examinations conducted in accordance the
same standards (rendered within one year of such report) with respect to those
Sub-Servicers. The Prospectus Supplement may provide that additional or
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alternative reports of independent certified public accountants relating to the
servicing of mortgage loans may be required to be delivered to the Trustee.
Each such Agreement will also provide for delivery to the Trustee, on
or before a specified date in each year, of an annual statement signed by an
officer of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding calendar
year or other specified twelve month period.
Unless otherwise provided in the related Prospectus Supplement, copies
of the annual accountants' statement and the statement of an officer of a Master
Servicer will be obtainable by Certificateholders without charge upon written
request to the Master Servicer at the address set forth in the related
Prospectus Supplement.
CERTAIN MATTERS REGARDING A MASTER SERVICER AND THE DEPOSITOR
The master servicer (the "Master Servicer"), if any, under each
Agreement for a series of Certificates will be named in the related Prospectus
Supplement. The entity serving as Master Servicer may be an affiliate of the
Depositor and may have other normal business relationships with the Depositor or
the Depositor's affiliates.
Unless otherwise specified in the related Prospectus Supplement, the
related Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Master Servicer so causing such a conflict
being of a type and nature carried on by the Master Servicer at the date of the
Agreement. Unless applicable law requires the Master Servicer's immediate
resignation, no such resignation will become effective until the Trustee or a
successor servicer has assumed the Master Servicer's obligations and duties
under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the Depositor
nor any director, officer, employee, or agent of a Master Servicer or the
Depositor will be under any liability to the related Trust Fund or
Certificateholders for any action taken, or for refraining from the taking of
any action, in good faith pursuant to the Agreement; provided, however, that
neither a Master Servicer, the Depositor nor any such person will be protected
against any breach of a representation or warranty made in such Agreement, or
against any liability specifically imposed thereby, or against any liability
which would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of obligations or duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. Unless
otherwise specified in the related Prospectus Supplement, each Agreement will
further provide that any Master Servicer, the Depositor and any director,
officer, employee or agent of a Master Servicer or the Depositor will be
entitled to indemnification by the related Trust Fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the Agreement or the Certificates; provided, however, that
such indemnification will not extend to any loss, liability or expense (i)
specifically imposed by such Agreement or otherwise incidental to the
performance of obligations and duties thereunder, including, in the case of a
Master Servicer, the prosecution of an enforcement action in respect of any
specific Whole Loan or Whole Loans (except as any such loss, liability or
expense shall be otherwise reimbursable pursuant to such Agreement); (ii)
incurred in connection with any breach of a representation or warranty made in
such Agreement; or (iii) incurred by reason of misfeasance, bad faith or gross
negligence in the performance of obligations or duties thereunder, or by reason
of reckless disregard of such obligations or duties. In addition, each Agreement
will provide that neither any Master Servicer nor the Depositor will be under
any obligation to appear in, prosecute or defend any legal action which is not
incidental to its respective responsibilities under the Agreement and which in
its opinion may involve it in any ultimate expense or liability. Any such Master
Servicer or the Depositor may, however, in its discretion undertake any such
action which it may deem necessary or desirable with respect to the Agreement
and the rights and duties of the parties thereto and the interests of the
Certificateholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
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liabilities of the Certificateholders, and the Master Servicer or the Depositor,
as the case may be, will be entitled to be reimbursed therefor and to charge the
Certificate Account.
Any person into which the Master Servicer or the Depositor may be
merged or consolidated, or any person resulting from any merger or consolidation
to which the Master Servicer or the Depositor is a party, or any person
succeeding to the business of the Master Servicer or the Depositor, will be the
successor of the Master Servicer or the Depositor, as the case may be, under the
related Agreement.
EVENTS OF DEFAULT
Unless otherwise provided in the related Prospectus Supplement for a
Trust Fund that includes Whole Loans, Events of Default under the related
Agreement will include (i) any failure by the Master Servicer to distribute or
cause to be distributed to Certificateholders, or to remit to the Trustee for
distribution to Certificateholders, any required payment that continues
unremedied for five days after written notice of such failure has been given to
the Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Certificates evidencing not less
than 25% of the Voting Rights; (ii) any failure by the Master Servicer duly to
observe or perform in any material respect any of its other covenants or
obligations under the Agreement which continues unremedied for sixty days after
written notice of such failure has been given to the Master Servicer by the
Trustee or the Depositor, or to the Master Servicer, the Depositor and the
Trustee by the holders of Certificates evidencing not less than 25% of the
Voting Rights; (iii) any breach of a representation or warranty made by the
Master Servicer under the Agreement which materially and adversely affects the
interests of Certificateholders and which continues unremedied for sixty days
after written notice of such breach has been given to the Master Servicer by the
Trustee or the Depositor, or to the Master Servicer, the Depositor and the
Trustee by the holders of Certificates evidencing not less than 25% of the
Voting Rights; and (iv) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings and certain actions
by or on behalf of the Master Servicer indicating its insolvency or inability to
pay its obligations. Material variations to the foregoing Events of Default
(other than to shorten cure periods or eliminate notice requirements) will be
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the Trustee shall, not later than the later
of 60 days after the occurrence of any event which constitutes or, with notice
or lapse of time or both, would constitute an Event of Default and five days
after certain officers of the Trustee become aware of the occurrence of such an
event, transmit by mail to the Depositor and all Certificateholders of the
applicable series notice of such occurrence, unless such default shall have been
cured or waived.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of
Certificates evidencing not less than 51% of the Voting Rights, the Trustee
shall, terminate all of the rights and obligations of the Master Servicer under
the Agreement and in and to the Mortgage Loans (other than as a
Certificateholder or as the owner of any Retained Interest), whereupon the
Trustee will succeed to all of the responsibilities, duties and liabilities of
the Master Servicer under the Agreement (except that if the Trustee is
prohibited by law from obligating itself to make advances regarding delinquent
mortgage loans, or if the related Prospectus Supplement so specifies, then the
Trustee will not be obligated to make such advances) and will be entitled to
similar compensation arrangements. Unless otherwise specified in the related
Prospectus Supplement, in the event that the Trustee is unwilling or unable so
to act, it may or, at the written request of the holders of Certificates
entitled to at least 51% of the Voting Rights, it shall appoint, or petition a
court of competent jurisdiction for the appointment of, a loan servicing
institution acceptable to the Rating Agency with a net worth at the time of such
appointment of at least $10,000,000 to act as successor to the Master Servicer
under the Agreement. Pending such appointment, the Trustee is obligated to act
in such capacity. The Trustee and any such successor may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the Master Servicer under the Agreement.
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Unless otherwise described in the related Prospectus Supplement, the
holders of Certificates representing at least 66 2/3% of the Voting Rights
allocated to the respective classes of Certificates affected by any Event of
Default will be entitled to waive such Event of Default; provided, however, that
an Event of Default described in clause (i) under " -- Events of Default" may be
waived only by all of the Certificateholders. Upon any such waiver of an Event
of Default, such Event of Default shall cease to exist and shall be deemed to
have been remedied for every purpose under the Agreement.
No Certificateholder will have the right under any Agreement to
institute any proceeding with respect thereto unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Certificates evidencing not less than 25% of the Voting Rights have made written
request upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for sixty days has neglected or refused to institute any such proceeding. The
Trustee, however, is under no obligation to exercise any of the trusts or powers
vested in it by any Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the holders of
Certificates covered by such Agreement, unless such Certificateholders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
AMENDMENT
Unless otherwise provided in the related Prospectus Supplement, each
Agreement may be amended by the Depositor, the Master Servicer, if any, and the
Trustee, without the consent of any of the holders of Certificates covered by
the Agreement, (i) to cure any ambiguity, (ii) to correct, modify or supplement
any provision therein which may be inconsistent with any other provision
therein, (iii) to make any other provisions with respect to matters or questions
arising under the Agreement which are not inconsistent with the provisions
thereof, or (iv) to comply with any requirements imposed by the Code; provided
that such amendment (other than an amendment for the purpose specified in clause
(iv) above) will not (as evidenced by an opinion of counsel to such effect)
adversely affect in any material respect the interests of any holder of
Certificates covered by the Agreement. Unless otherwise specified in the related
Prospectus Supplement, each Agreement may also be amended by the Depositor, the
Master Servicer, if any, and the Trustee, with the consent of the holders of
Certificates evidencing not less than 51% of the Voting Rights, for any purpose;
provided, however, that unless otherwise specified in the related Prospectus
Supplement, no such amendment may (i) reduce in any manner the amount of or
delay the timing of, payments received or advanced on Mortgage Loans which are
required to be distributed on any Certificate without the consent of the holder
of such Certificate, (ii) adversely affect in any material respect the interests
of the holders of any class of Certificates in a manner other than as described
in (i), without the consent of the holders of all Certificates of such class or
(iii) modify the provisions of such Agreement described in this paragraph
without the consent of the holders of all Certificates covered by such Agreement
then outstanding. However, with respect to any series of Certificates as to
which a REMIC election is to be made, the Trustee will not consent to any
amendment of the Agreement unless it shall first have received an opinion of
counsel to the effect that such amendment will not result in the imposition of a
tax on the related Trust Fund or cause the related Trust Fund to fail to qualify
as a REMIC at any time that the related Certificates are outstanding.
LIST OF CERTIFICATEHOLDERS
Upon written request of any Certificateholder of record of a series of
Certificates, for purposes of communicating with other Certificateholders with
respect to their rights under the Agreement for such series, the Trustee will
afford such Certificateholder access during business hours to the most recent
list of Certificateholders of that series held by the Trustee.
THE TRUSTEE
The trustee (the "Trustee") under each Agreement for a series of
Certificates will be named in the related Prospectus Supplement. The commercial
bank, national banking association, banking corpora-
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tion or trust company serving as Trustee may have typical banking relationships
with the Depositor and its affiliates and with any Master Servicer and its
affiliates.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or
sufficiency of any Agreement, the Certificates or any Mortgage Loan or related
document and is not accountable for the use or application by or on behalf of
any Master Servicer of any funds paid to the Master Servicer or its designee or
any Special Servicer in respect of the Certificates or the Mortgage Loans, or
deposited into or withdrawn from the Certificate Account or any other account by
or on behalf of the Master Servicer or any Special Servicer. If no Event of
Default has occurred and is continuing, the Trustee is required to perform only
those duties specifically required under the related Agreement. However, upon
receipt of the various certificates, reports or other instruments required to be
furnished to it, the Trustee is required to examine such documents and to
determine whether they conform to the requirements of the Agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
Unless otherwise specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Certificate Account for any loss,
liability or expense incurred in connection with the Trustee's acceptance or
administration of its trusts under the related Agreement; provided, however,
that such indemnification will not extend to any loss, liability or expense that
constitutes a specific liability of the Trustee pursuant to the related
Agreement, or to any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence on the part of the Trustee in the
performance of its obligations and duties thereunder, or by reason of its
reckless disregard of such obligations or duties, or as may arise from a breach
of any representation, warranty or covenant of the Trustee made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties
under an Agreement by giving written notice thereof to the Depositor and the
Master Servicer. Upon receiving such notice of resignation, the Depositor (or
such other person as may be named in the Prospectus Supplement) will be required
promptly to appoint a successor trustee. If no successor trustee shall have been
so appointed and have accepted appointment within 30 days after the giving of
such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as
such under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, then the Depositor
may remove the Trustee and appoint a successor trustee. Holders of the
Certificates of any series entitled to at least 51% of the Voting Rights for
such series may at any time remove the Trustee without cause and appoint a
successor trustee.
Any resignation or removal of the Trustee and appointment of a
successor trustee shall not become effective until acceptance of appointment by
the successor trustee.
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DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Certificates, Credit Support may be provided with
respect to one or more classes thereof or the related Mortgage Assets. Credit
Support may be in the form of the subordination of one or more classes of
Certificates, letters of credit, insurance policies, surety bonds, guarantees,
the establishment of one or more reserve funds or another method of Credit
Support described in the related Prospectus Supplement, or any combination of
the foregoing. If so provided in the related Prospectus Supplement, any form of
Credit Support may be structured so as to be drawn upon by more than one series
to the extent described therein.
Unless otherwise provided in the related Prospectus Supplement for a
series of Certificates, the Credit Support will not provide protection against
all risks of loss and will not guarantee repayment of the entire Certificate
Balance of the Certificates and interest thereon. If losses or shortfalls occur
that exceed the amount covered by Credit Support or that are not covered by
Credit Support, Certificateholders will bear their allocable share of
deficiencies. Moreover, if a form of Credit Support covers more than one series
of Certificates, holders of Certificates of one series will be subject to the
risk that such Credit Support will be exhausted by the claims of the holders of
Certificates of one or more other series before the former receive their
intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or the related Mortgage Assets, the related Prospectus
Supplement will include a description of (a) the nature and amount of coverage
under such Credit Support, (b) any conditions to payment thereunder not
otherwise described herein, (c) the conditions (if any) under which the amount
of coverage under such Credit Support may be reduced and under which such Credit
Support may be terminated or replaced and (d) the material provisions relating
to such Credit Support. Additionally, the related Prospectus Supplement will set
forth certain information with respect to the obligor under any instrument of
Credit Support, including (i) a brief description of its principal business
activities, (ii) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business, (iii) if
applicable, the identity of regulatory agencies that exercise primary
jurisdiction over the conduct of its business and (iv) its total assets, and its
stockholders' equity or policyholders' surplus, if applicable, as of the date
specified in the Prospectus Supplement. See "Risk Factors".
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more
classes of Certificates of a series may be Subordinate Certificates. To the
extent specified in the related Prospectus Supplement, the rights of the holders
of Subordinate Certificates to receive distributions of principal and interest
from the Certificate Account on any Distribution Date will be subordinated to
such rights of the holders of Senior Certificates. If so provided in the related
Prospectus Supplement, the subordination of a class may apply only in the event
of (or may be limited to) certain types of losses or shortfalls. The related
Prospectus Supplement will set forth information concerning the amount of
subordination provided by a class or classes of Subordinate Certificates in a
series, the circumstances under which such subordination will be available and
the manner in which the amount of subordination will be made available.
CROSS-SUPPORT PROVISIONS
If the Mortgage Assets for a series are divided into separate groups,
each supporting a separate class or classes of Certificates of a series, credit
support may be provided by cross-support provisions requiring that distributions
be made on Senior Certificates evidencing interests in one group of Mortgage
Assets prior to distributions on Subordinate Certificates evidencing interests
in a different group of Mortgage Assets within the Trust Fund. The Prospectus
Supplement for a series that includes a cross-support provision will describe
the manner and conditions for applying such provisions.
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INSURANCE OR GUARANTEES WITH RESPECT TO MORTGAGE LOANS
If so provided in the Prospectus Supplement for a series of
Certificates, Mortgage Loans included in the related Trust Fund will be covered
for various default risks by insurance policies or guarantees. A copy of any
such material instrument for a series will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed within 15 days of issuance
of the Certificates of the related series.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by one or more letters of credit, issued
by a bank or financial institution specified in such Prospectus Supplement (the
"L/C Bank"). Under a letter of credit, the L/C Bank will be obligated to honor
draws thereunder in an aggregate fixed dollar amount, net of unreimbursed
payments thereunder, generally equal to a percentage specified in the related
Prospectus Supplement of the aggregate principal balance of the Mortgage Assets
on the related Cut-off Date or of the initial aggregate Certificate Balance of
one or more classes of Certificates. If so specified in the related Prospectus
Supplement, the letter of credit may permit draws only in the event of certain
types of losses and shortfalls. The amount available under the letter of credit
will, in all cases, be reduced to the extent of the unreimbursed payments
thereunder and may otherwise be reduced as described in the related Prospectus
Supplement. The obligations of the L/C Bank under the letter of credit for each
series of Certificates will expire at the earlier of the date specified in the
related Prospectus Supplement or the termination of the Trust Fund. A copy of
any such letter of credit for a series will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed within 15 days of issuance
of the Certificates of the related series.
INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by insurance policies and/or surety
bonds provided by one or more insurance companies or sureties. Such instruments
may cover, with respect to one or more classes of Certificates of the related
series, timely distributions of interest and/or full distributions of principal
on the basis of a schedule of principal distributions set forth in or determined
in the manner specified in the related Prospectus Supplement. A copy of any such
instrument for a series will be filed with the Commission as an exhibit to a
Current Report on Form 8-K to be filed with the Commission within 15 days of
issuance of the Certificates of the related series.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by one or more reserve funds in which
cash, a letter of credit, Permitted Investments, a demand note or a combination
thereof will be deposited, in the amounts so specified in such Prospectus
Supplement. The reserve funds for a series may also be funded over time by
depositing therein a specified amount of the distributions received on the
related Mortgage Assets as specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Certificates. If so specified in the related
Prospectus Supplement, reserve funds may be established to provide limited
protection against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required to
be maintained therein may be released from the reserve fund under the conditions
and to the extent specified in the related Prospectus Supplement and will not be
available for further application to the Certificates.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus Supplement.
Unless otherwise specified in the related
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Prospectus Supplement, any reinvestment income or other gain from such
investments will be credited to the related Reserve Fund for such series, and
any loss resulting from such investments will be charged to such Reserve Fund.
However, such income may be payable to any related Master Servicer or another
service provider as additional compensation. The Reserve Fund, if any, for a
series will not be a part of the Trust Fund unless otherwise specified in the
related Prospectus Supplement.
Additional information concerning any Reserve Fund will be set forth in
the related Prospectus Supplement, including the initial balance of such Reserve
Fund, the balance required to be maintained in the Reserve Fund, the manner in
which such required balance will decrease over time, the manner of funding such
Reserve Fund, the purposes for which funds in the Reserve Fund may be applied to
make distributions to Certificateholders and use of investment earnings from the
Reserve Fund, if any.
CREDIT SUPPORT WITH RESPECT TO MBS AND TIERED MBS
If so provided in the Prospectus Supplement for a series of
Certificates, the MBS and/or Tiered MBS included in the related Trust Fund
and/or the mortgage loans directly or indirectly underlying such MBS and/or
Tiered MBS may be covered by one or more of the types of Credit Support
described herein. The related Prospectus Supplement will specify as to each such
form of Credit Support the information indicated above with respect thereto, to
the extent such information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of mortgage loans secured by commercial and multifamily residential
properties in the United States. Because such legal aspects are governed by
applicable state law (which laws may differ substantially), the summaries do not
purport to be complete, to reflect the laws of any particular state, or to
encompass the laws of all jurisdictions in which the security for the Whole
Loans (or mortgage loans underlying any MBS) is situated. Accordingly, the
summaries are qualified in their entirety by reference to the applicable laws of
those states. See "Description of the Trust Funds -- Mortgage Loans". For
purposes of the following discussion, "Mortgage Loan" includes a mortgage loan
underlying an MBS.
GENERAL
Each Mortgage Loan will be evidenced by a note or bond and secured by
an instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the prevailing
practice and law in the state in which the related Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are herein
collectively referred to as "mortgages". A mortgage creates a lien upon, or
grants a title interest in, the real property covered thereby, and represents
the security for the repayment of the indebtedness customarily evidenced by a
promissory note. The priority of the lien created or interest granted will
depend on the terms of the mortgage and, in some cases, on the terms of separate
subordination agreements or intercreditor agreements with others that hold
interests in the real property, the knowledge of the parties to the mortgage
and, generally, the order of recordation of the mortgage in the appropriate
public recording office. However, the lien of a recorded mortgage will generally
be subordinate to later-arising liens for real estate taxes and assessments and
other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage: a mortgagor (the borrower and
usually the owner of the subject property) and a mortgagee (the lender). In
contrast, a deed of trust is a three-party instrument, among a trustor (the
equivalent of a borrower), a trustee to whom the real property is conveyed, and
a beneficiary (the lender) for whose benefit the conveyance is made. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust and generally with a power of sale, to the trustee to secure
repayment of the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties, pursuant to which the borrower, or grantor,
conveys title to the real property to the grantee, or lender, generally with a
power of sale, until such time as the debt is repaid. In a case
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where the borrower is a land trust, there would be an additional party because
legal title to the property is held by a land trustee under a land trust
agreement for the benefit of the borrower. At origination of a mortgage loan
involving a land trust, the borrower may execute a separate undertaking to make
payments on the mortgage note. In no event is the land trustee personally liable
for the mortgage note obligation. The mortgagee's authority under a mortgage,
the trustee's authority under a deed of trust and the grantee's authority under
a deed to secure debt are governed by the express provisions of the related
instrument, the law of the state in which the real property is located, certain
federal laws and, in some deed of trust transactions, the directions of the
beneficiary.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while (unless rents are to be paid directly to the
lender) retaining a revocable license to collect the rents for so long as there
is no default. If the borrower defaults, the license terminates and the lender
is entitled to collect the rents. Local law may require that the lender take
possession of the property and/or obtain a court-appointed receiver before
becoming entitled to collect the rents.
In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code ("UCC"); in cases where hotels or
motels constitute loan security, the rates are generally pledged by the borrower
as additional security for the loan. In general, the lender must file financing
statements in order to perfect its security interest in the room rates and must
file continuation statements, generally every five years, to maintain perfection
of such security interest. In certain cases, Mortgage Loans secured by hotels or
motels may be included in a Trust Fund even if the security interest in the room
rates was not perfected or the requisite UCC filings were allowed to lapse. Even
if the lender's security interest in room rates is perfected under applicable
nonbankruptcy law, it will generally be required to commence a foreclosure
action or otherwise take possession of the property in order to enforce its
rights to collect the room rates following a default. In the bankruptcy setting,
however, the lender will be stayed from enforcing its rights to collect room
rates, but those room rates (in light of certain revisions to the Bankruptcy
Code which are effective for all bankruptcy cases commenced on or after October
22, 1994) constitute "cash collateral" and therefore cannot be used by the
bankruptcy debtor without a hearing or lender's consent and unless the lender's
interest in the room rates is given adequate protection (e.g., cash payment for
otherwise encumbered funds or a replacement lien on unencumbered property, in
either case equal in value to the amount of room rates that the debtor proposes
to use, or other similar relief). See " -- Bankruptcy Laws".
PERSONALTY
In the case of certain types of mortgaged properties, such as hotels,
motels and nursing homes, personal property (to the extent owned by the borrower
and not previously pledged) may constitute a significant portion of the
property's value as security. The creation and enforcement of liens on personal
property are governed by the UCC. Accordingly, if a borrower pledges personal
property as security for a mortgage loan, the lender generally must file UCC
financing statements in order to perfect its security interest therein, and must
file continuation statements, generally every five years, to maintain that
perfection. In certain cases, Mortgage Loans secured in part by personal
property may be included in a Trust Fund even if the security interest in such
personal property was not perfected or the requisite UCC filings were allowed to
lapse.
FORECLOSURE
GENERAL. Foreclosure is a legal procedure that allows the lender to
recover its mortgage debt by enforcing its rights and available legal remedies
under the mortgage. If the borrower defaults in payment or performance of its
obligations under the note or mortgage, the lender has the right to institute
foreclosure proceedings to sell the real property at public auction to satisfy
the indebtedness.
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Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and nonjudicial foreclosure pursuant to a power of sale granted in the mortgage
instrument. Other foreclosure procedures are available in some states, but they
are either infrequently used or available only in limited circumstances.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses are raised or counterclaims are interposed, and
sometimes requires several years to complete.
JUDICIAL FORECLOSURE. A judicial foreclosure proceeding is conducted in
a court having jurisdiction over the mortgaged property. Generally, the action
is initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the lender's
right to foreclose is contested, the legal proceedings can be time-consuming.
Upon successful completion of a judicial foreclosure proceeding, the court
generally issues a judgment of foreclosure and appoints a referee or other
officer to conduct a public sale of the mortgaged property, the proceeds of
which are used to satisfy the judgment. Such sales are made in accordance with
procedures that vary from state to state.
EQUITABLE AND OTHER LIMITATIONS ON ENFORCEABILITY OF CERTAIN
PROVISIONS. United States courts have traditionally imposed general equitable
principles to limit the remedies available to lenders in foreclosure actions.
These principles are generally designed to relieve borrowers from the effects of
mortgage defaults perceived as harsh or unfair. Relying on such principles, a
court may alter the specific terms of a loan to the extent it considers
necessary to prevent or remedy an injustice, undue oppression or overreaching,
or may require the lender to undertake affirmative actions to determine the
cause of the borrower's default and the likelihood that the borrower will be
able to reinstate the loan. In some cases, courts have substituted their
judgment for the lender's and have required that lenders reinstate loans or
recast payment schedules in order to accommodate borrowers who are suffering
from a temporary financial disability. In other cases, courts have limited the
right of the lender to foreclose in the case of a nonmonetary default, such as a
failure to adequately maintain the mortgaged property or an impermissible
further encumbrance of the mortgaged property. Finally, some courts have
addressed the issue of whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that a borrower
receive notice in addition to statutorily-prescribed minimum notice. For the
most part, these cases have upheld the reasonableness of the notice provisions
or have found that a public sale under a mortgage providing for a power of sale
does not involve sufficient state action to trigger constitutional protections.
In addition, some states may have statutory protection such as the
right of the borrower to reinstate mortgage loans after commencement of
foreclosure proceedings but prior to a foreclosure sale.
NONJUDICIAL FORECLOSURE/POWER OF SALE. In states permitting nonjudicial
foreclosure proceedings, foreclosure of a deed of trust is generally
accomplished by a nonjudicial trustee's sale pursuant to a power of sale
typically granted in the deed of trust. A power of sale may also be contained in
any other type of mortgage instrument if applicable law so permits. A power of
sale under a deed of trust allows a nonjudicial public sale to be conducted
generally following a request from the beneficiary/lender to the trustee to sell
the property upon default by the borrower and after notice of sale is given in
accordance with the terms of the mortgage and applicable state law. In some
states, prior to such sale, the trustee under the deed of trust must record a
notice of default and notice of sale and send a copy to the borrower and to any
other party who has recorded a request for a copy of a notice of default and
notice of sale. In addition, in some states the trustee must provide notice to
any other party having an interest of record in the real property, including
junior lienholders. A notice of sale must be posted in a public place and, in
most states, published for a specified period of time in one or more newspapers.
The borrower or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying the
entire actual amount in arrears (without regard to the acceleration of the
indebtedness), plus the lender's expenses incurred in enforcing the obligation.
In other states, the borrower or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, state law governs the
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procedure for public sale, the parties entitled to notice, the method of giving
notice and the applicable time periods.
PUBLIC SALE. A third party may be unwilling to purchase a mortgaged
property at a public sale because of the difficulty in determining the exact
status of title to the property (due to, among other things, redemption rights
that may exist) and because of the possibility that physical deterioration of
the property may have occurred during the foreclosure proceedings. Therefore, it
is common for the lender to purchase the mortgaged property for an amount equal
to the secured indebtedness and accrued and unpaid interest plus the expenses of
foreclosure, in which event the borrower's debt will be extinguished, or for a
lesser amount in order to preserve its right to seek a deficiency judgment if
such is available under state law and under the terms of the Mortgage Loan
documents. (The Mortgage Loans, however, may be nonrecourse. See "Risk
Factors".) Thereafter, subject to the borrower's right in some states to remain
in possession during a redemption period, the lender will become the owner of
the property and have both the benefits and burdens of ownership, including the
obligation to pay debt service on any senior mortgages, to pay taxes, to obtain
casualty insurance and to make such repairs as are necessary to render the
property suitable for sale. The costs of operating and maintaining a commercial
or multifamily residential property may be significant and may be greater than
the income derived from that property. The lender also will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale or lease of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Moreover, because of the expenses associated with
acquiring, owning and selling a mortgaged property, a lender could realize an
overall loss on a mortgage loan even if the mortgaged property is sold at
foreclosure, or resold after it is acquired through foreclosure, for an amount
equal to the full outstanding principal amount of the loan plus accrued
interest. The holder of a junior mortgage that forecloses on a mortgaged
property does so subject to senior mortgages and any other prior liens, and may
be obliged to keep senior mortgage loans current in order to avoid foreclosure
of its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
RIGHTS OF REDEMPTION. The purposes of a foreclosure action are to
enable the lender to realize upon its security and to bar the borrower, and all
persons who have interests in the property that are subordinate to that of the
foreclosing lender, from exercise of their "equity of redemption". The doctrine
of equity of redemption provides that, until the property encumbered by a
mortgage has been sold in accordance with a properly conducted foreclosure and
foreclosure sale, those having interests that are subordinate to that of the
foreclosing lender have an equity of redemption and may redeem the property by
paying the entire debt with interest. Those having an equity of redemption must
generally be made parties and joined in the foreclosure proceeding in order for
their equity of redemption to be terminated.
The equity of redemption is a common-law (nonstatutory) right which
should be distinguished from post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the
borrower and foreclosed junior lienors are given a statutory period in which to
redeem the property. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
permitted if the former borrower pays only a portion of the sums due. The effect
of a statutory right of redemption is to diminish the ability of the lender to
sell the foreclosed property because the exercise of a right of redemption would
defeat the title of any purchaser through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
ANTI-DEFICIENCY LEGISLATION. Some or all of the Mortgage Loans may be
nonrecourse loans, as to which recourse in the case of default will be limited
to the Mortgaged Property and such other assets, if any, that were pledged to
secure the Mortgage Loan. However, even if a mortgage loan by its terms provides
for recourse to the borrower's other assets, a lender's ability to realize upon
those assets may be limited by state law. For example, in some states a lender
cannot obtain a deficiency judgment
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against the borrower following foreclosure or sale under a deed of trust. A
deficiency judgment is a personal judgment against the former borrower equal to
the difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Other statutes may require the lender
to exhaust the security afforded under a mortgage before bringing a personal
action against the borrower. In certain other states, the lender has the option
of bringing a personal action against the borrower on the debt without first
exhausting such security; however, in some of those states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and thus may be precluded from foreclosing upon the security.
Consequently, lenders in those states where such an election of remedy provision
exists will usually proceed first against the security. Finally, other statutory
provisions, designed to protect borrowers from exposure to large deficiency
judgments that might result from bidding at below-market values at the
foreclosure sale, limit any deficiency judgment to the excess of the outstanding
debt over the fair market value of the property at the time of the sale.
LEASEHOLD CONSIDERATIONS. Mortgage Loans may be secured by a mortgage
on the borrower's leasehold interest in a ground lease. Leasehold mortgage loans
are subject to certain risks not associated with mortgage loans secured by a
lien on the fee estate of the borrower. The most significant of these risks is
that if the borrower's leasehold were to be terminated upon a lease default, the
leasehold mortgagee would lose its security. This risk may be lessened if the
ground lease requires the lessor to give the leasehold mortgagee notices of
lessee defaults and an opportunity to cure them, permits the leasehold estate to
be assigned to and by the leasehold mortgagee or the purchaser at a foreclosure
sale, and contains certain other protective provisions typically included in a
"mortgageable" ground lease. Certain Mortgage Loans, however, may be secured by
ground leases which do not contain these provisions.
CROSS-COLLATERALIZATION. Certain of the Mortgage Loans may be secured
by more than one mortgage covering properties located in more than one state.
Because of various state laws governing foreclosure or the exercise of a power
of sale and because, in general, foreclosure actions are brought in state court
and the courts of one state cannot exercise jurisdiction over property in
another state, it may be necessary upon a default under a cross-collateralized
Mortgage Loan to foreclose on the related mortgages in a particular order rather
than simultaneously and/or utilize judicial foreclosure even in states that
permit non-judicial foreclosures in order to ensure that the lien of the
mortgages is not impaired or released. In addition, because of the various state
laws governing the ability to obtain a deficiency judgment, it may be necessary
in certain states to foreclose through an action in state court rather than by
exercise of a power of sale, possibly causing a delay in the ultimate recovery
by the Certificateholders and increasing the expense of foreclosing on the
security. Certain other state laws may limit the amount of the recovery on a
particular property located within that state which is being foreclosed after
the foreclosure of one or more properties to the difference between the amount
of the outstanding indebtedness and the value of the property or properties
previously foreclosed, as opposed to the actual amounts recovered in such
foreclosure or foreclosures. Furthermore, due to the effect of "one-action" or
"security first" rules in some states, the remedies that a lender may exercise
upon an event of default as against a property or other collateral or against a
borrower may result in the impairment or loss of the lender's lien on other
properties located in that state or other states or lender's security interest
in other collateral.
BANKRUPTCY LAWS
Operation of the Bankruptcy Code and related state laws may interfere
with or affect the ability of a lender to realize upon collateral and/or to
enforce a deficiency judgment. For example, under the Bankruptcy Code, virtually
all actions (including foreclosure actions and deficiency judgment proceedings)
to collect a debt are automatically stayed upon the filing of the bankruptcy
petition and, often, no interest or principal payments are made during the
course of the bankruptcy case. The delay and the consequences thereof caused by
such automatic stay can be significant. Also, under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lienor may stay
the senior lender from taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a mortgage
loan secured by a lien on property of the
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debtor may be modified under certain circumstances. For example, the outstanding
amount of the loan may be reduced to the then-current value of the property
(with a corresponding partial reduction of the amount of lender's security
interest) pursuant to a confirmed plan or lien avoidance proceeding, thus
leaving the lender a general unsecured creditor for the difference between such
value and the outstanding balance of the loan. Other modifications may include
the reduction in the amount of each scheduled payment, by means of a reduction
in the rate of interest and/or an alteration of the repayment schedule (with or
without affecting the unpaid principal balance of the loan), and/or by an
extension (or shortening) of the term to maturity. Some bankruptcy courts have
approved plans, based on the particular facts of the reorganization case, that
effected the cure of a mortgage loan default by paying arrearages over a number
of years. Also, a bankruptcy court may permit a debtor, through its
rehabilitative plan, to reinstate a mortgage loan payment schedule even if the
lender has obtained a final judgment of foreclosure prior to the filing of the
debtor's petition.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of a secured lender to enforce the borrower's assignment
of rents and leases related to the mortgaged property. Under the Bankruptcy
Code, a lender may be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents. Recent amendments to the
Bankruptcy code, however, may minimize the impairment of the lender's ability to
enforce the borrower's assignment of rents and leases. In addition to the
inclusion of hotel revenues within the definition of "cash collateral" as noted
previously in the section entitled " -- Leases and Rents", the amendments
provide that a pre-petition security interest in rents or hotel revenues is
designed to overcome those cases holding that a security interest in rents is
unperfected under the laws of certain states until the lender has taken some
further action, such as commencing foreclosure or obtaining a receiver prior to
activation of the assignment of rents.
If a borrower's ability to make payment on a mortgage loan is dependent
on its receipt of rent payments under a lease of the related property, that
ability may be impaired by the commencement of a bankruptcy case relating to a
lessee under such lease. Under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a lessee results in a stay in bankruptcy against
the commencement or continuation of any state court proceeding for past due
rent, for accelerated rent, for damages or for a summary eviction order with
respect to a default under the lease that occurred prior to the filing of the
lessee's petition. In addition, the Bankruptcy Code generally provides that a
trustee or debtor-in-possession may, subject to approval of the court, (i)
assume the lease and retain it or assign it to a third party or (ii) reject the
lease. If the lease is assumed, the trustee or debtor-in-possession (or
assignee, if applicable) must cure any defaults under the lease, compensate the
lessor for its losses and provide the lessor with "adequate assurance" of future
performance. Such remedies may be insufficient, and any assurances provided to
the lessor may, in fact, be inadequate. If the lease is rejected, the lessor
will be treated as an unsecured creditor (except potentially to the extent of
any security deposit) with respect to its claim for damages for termination of
the lease. The Bankruptcy Code also limits a lessor's damages for lease
rejection to (a) the rent reserved by the lease (without regard to acceleration)
for the greater of one year, or 15%, not to exceed three years, of the remaining
term of the lease plus (b) unpaid rent to the earlier of the surrender of the
property or the lessee's bankruptcy filing.
ENVIRONMENTAL CONSIDERATIONS
GENERAL. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties that
are or have been used for industrial, manufacturing, military or disposal
activity. Such environmental risks include the possible diminution of the value
of a contaminated property or, as discussed below, potential liability for
clean-up costs or other remedial actions that could exceed the value of the
property or the amount of the lender's loan. In certain circumstances, a lender
may decide to abandon a contaminated mortgaged property as collateral for its
loan rather than foreclosure and risk liability for clean-up costs.
SUPERLIEN LAWS. Under the laws of many states, contamination on a
property may give rise to a lien on the property for clean-up costs. In several
states, such a lien has priority over all existing liens, including those of
existing mortgages. In these states, the lien of a mortgage may lose its
priority to such a "superlien".
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CERCLA. The federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of clean-up. A secured lender may be liable as an "owner" or "operator" of
a contaminated mortgaged property if agents or employees of the lender have
participated in the management of such mortgaged property or the operations of
the borrower. Such liability may exist even if the lender did not cause or
contribute to the contamination and regardless of whether the lender has
actually taken possession of a mortgaged property through foreclosure, deed in
lieu of foreclosure or otherwise. Moreover, such liability is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Excluded from CERCLA's definition of "owner" or
"operator", however, is a person who without participating in the management of
the facility, holds indicia of ownership primarily to protect his security
interest. This is the so called "secured creditor exemption".
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 (the "Lender Liability Act") amended, among other things, the provisions of
CERCLA with respect to lender liability and the secured creditor exemption. The
Lender Liability Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for a lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the property of the borrower. The
Lender Liability Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of operational functions of the mortgaged property. The
Lender Liability Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a mortgaged
property, purchases it at a foreclosure sale or accepts a deed-in-lieu of
foreclosure provided that the lender seeks to sell the mortgaged property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
CERTAIN OTHER FEDERAL AND STATE LAWS. Many states have statutes similar
to CERCLA, and not all those statutes provide for a secured creditor exemption.
In addition, under federal law, there is potential liability relating to
hazardous wastes and underground storage tanks under the federal Resource
Conservation and Recovery Act.
Certain federal, state and local laws, regulations and ordinances
govern the management, removal, encapsulation or disturbance of
asbestos-containing materials ("ACMs"). Such laws, as well as common law
standards, may impose liability for releases of or exposure to ACMs and may
provide for third parties to seek recovery from owners or operators of real
properties for personal injuries associated with such releases.
Recent federal legislation will in the future require owners of
residential housing constructed prior to 1978 to disclose to potential residents
or purchasers any known lead-based paint hazards and will impose treble damages
for any failure to so notify. In addition, the ingestion of lead-based paint
chips or dust particles by children can result in lead poisoning, and the owner
of a property where such circumstances exist may be held liable for such
injuries and for the costs of removal or encapsulation of the lead-based paint.
Testing for lead-based paint or lead in the water was conducted with respect to
certain of the Mortgaged Properties, generally based on the age and/or condition
thereof.
In a few states, transfers of some types of properties are conditioned
upon cleanup of contamination prior to transfer. In these cases, a lender that
becomes the owner of a property through foreclosure, deed in lieu of foreclosure
or otherwise, may be required to clean up the contamination before selling or
otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law
causes of action (for example, actions based on nuisance or on toxic tort
resulting in death, personal injury or damage to property) related to hazardous
environmental conditions on a property. While it may be more difficult to hold a
lender liable in such cases, unanticipated or uninsured liabilities of the
borrower may jeopardize the borrower's ability to meet its loan obligations.
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Federal, state and local environmental regulatory requirements change
often. It is possible that compliance with a new regulatory requirement could
impose significant compliance costs on a borrower. Such costs may jeopardize the
borrower's ability to meet its loan obligations.
ADDITIONAL CONSIDERATIONS. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable, it
can bring an action for contribution against the owner or operator who created
the environmental hazard, but that individual or entity may be without
substantial assets. Accordingly, it is possible that such costs could become a
liability of the Trust Fund and occasion a loss to the Certificateholders.
To reduce the likelihood of such a loss, unless otherwise specified in
the related Prospectus Supplement, the Pooling Agreement will provide that
neither the Master Servicer nor any Special Servicer, acting on behalf of the
Trustee, may acquire title to a Mortgaged Property or take over its operation
unless the Special Servicer, based solely (as to environmental matters) on a
report prepared by a person who regularly conducts environmental audits, has
made the determination that certain conditions relating to environmental
matters, as described under "Description of the Pooling Agreements --
Realization Upon Defaulted Mortgage Loans", have been satisfied.
If a lender forecloses on a mortgage secured by a property, the
operations on which are subject to environmental laws and regulations, the
lender will be required to operate the property in accordance with those laws
and regulations. Such compliance may entail substantial expense, especially in
the case of industrial or manufacturing properties.
In addition, a lender may be obligated to disclose environmental
conditions on a property to government entities and/or to prospective buyers
(including prospective buyers at a foreclosure sale or following foreclosure).
Such disclosure may decrease the amount that prospective buyers are willing to
pay for the affected property, sometimes substantially, and thereby decrease the
ability of the lender to recoup its investment in a loan upon foreclosure.
ENVIRONMENTAL SITE ASSESSMENTS. In most cases, an environmental site
assessment of each Mortgaged Property will have been performed in connection
with the origination of the related Mortgage Loan or at some time prior to the
issuance of the related Certificates. Environmental site assessments, however,
vary considerably in their content, quality and cost. Even when adhering to good
professional practices, environmental consultants will sometimes not detect
significant environmental problems because to do an exhaustive environmental
assessment would be far too costly and time-consuming to be practical.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Mortgage Loans may contain "due-on-sale" and
"due-on-encumbrance" clauses that purport to permit the lender to accelerate the
maturity of the loan if the borrower transfers or encumbers the related
Mortgaged Property. In recent years, court decisions and legislative actions
placed substantial restrictions on the right of lenders to enforce such clauses
in many states. However, the Garn-St Germain Depository Institutions Act of 1982
(the "Garn Act") generally preempts state laws that prohibit the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limitations as set forth in the Garn Act
and the regulations promulgated thereunder. Accordingly, a Master Servicer may
nevertheless have the right to accelerate the maturity of a Mortgage Loan that
contains a "due-on-sale" provision upon transfer of an interest in the property,
without regard to the Master Servicer's ability to demonstrate that a sale
threatens its legitimate security interest.
SUBORDINATE FINANCING
The terms of certain of the Mortgage Loans may not restrict the ability
of the borrower to use the Mortgaged Property as security for one or more
additional loans, or such restrictions may be unenforceable. Where a borrower
encumbers a mortgaged property with one or more junior liens, the senior lender
is subjected to additional risk. First, the borrower may have difficulty
servicing and repaying multiple loans. Moreover, if the subordinate financing
permits recourse to the borrower (as is frequently the case) and the senior loan
does not, a borrower may have more incentive to repay sums
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due on the subordinate loan. Second, acts of the senior lender that prejudice
the junior lender or impair the junior lender's security may create a superior
equity in favor of the junior lender. For example, if the borrower and the
senior lender agree to an increase in the principal amount of or the interest
rate payable on the senior loan, the senior lender may lose its priority to the
extent any existing junior lender is harmed or the borrower is additionally
burdened. Third, if the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken by junior lenders
can impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower
to pay a late charge or additional interest if payments are not timely made, and
in some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 ("Title V") provides that state usury limitations shall not
apply to certain types of residential (including multifamily) first mortgage
loans originated by certain lenders after March 31, 1980. Title V authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a law
or constitutional provision that expressly rejects application of the federal
law. In addition, even where Title V is not so rejected, any state is authorized
by the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other charges.
No Mortgage Loan originated in any state in which application of Title
V has been expressly rejected or a provision limiting discount points or other
charges has been adopted, will (if originated after that rejection or adoption)
be eligible for inclusion in a Trust Fund unless (i) such Mortgage Loan provides
for such interest rate, discount points and charges as are permitted in such
state or (ii) such Mortgage Loan provides that the terms thereof are to be
construed in accordance with the laws of another state under which such interest
rate, discount points and charges would not be usurious and the borrower's
counsel has rendered an opinion that such choice of law provision would be given
effect.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and
rules promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers which are
structural in nature from existing places of public accommodation to the extent
"readily achievable". In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, the ADA
may also impose such requirements on a foreclosing lender who succeeds to the
interest of the borrower as owner or landlord. Furthermore, since the "readily
achievable" standard may vary depending on the financial condition of the owner
or landlord, a foreclosing lender who is financially more capable than the
borrower of complying with the
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requirements of the ADA may be subject to more stringent requirements than those
to which the borrower is subject.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a borrower who enters military service after the
origination of such borrower's mortgage loan (including a borrower who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
individuals who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to
individuals who enter military service (including reservists who are called to
active duty) after origination of the related mortgage loan, no information can
be provided as to the number of loans with individuals as borrowers that may be
affected by the Relief Act. Application of the Relief Act would adversely
affect, for an indeterminate period of time, the ability of a Master Servicer or
Special Servicer to collect full amounts of interest on certain of the Mortgage
Loans. Any shortfalls in interest collections resulting from the application of
the Relief Act would result in a reduction of the amounts distributable to the
holders of the related Series, and would not be covered by advances or, unless
otherwise specified in the related Prospectus Supplement, any form of Credit
Support provided in connection with such Certificates. In addition, the Relief
Act imposes limitations that would impair the ability of the Master Servicer or
Special Servicer to foreclose on an affected Mortgage Loan during the borrower's
period of active duty status, and, under certain circumstances, during an
additional three month period thereafter.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property", including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the material federal income
tax consequences of the purchase, ownership and disposition of Offered
Certificates and does not purport to discuss all federal income tax consequences
that may be applicable to particular categories of investors, some of which
(such as banks, insurance companies and foreign investors) may be subject to
special rules. In addition, the following discussion represents an
interpretation of the law at the time of this Prospectus, and does not represent
an opinion of Thacher Proffitt & Wood or Sidley & Austin, counsel to the
Depositor, except with respect to the first paragraph under " -- REMICs --
Classification of REMICs" and the first paragraph under " -- REMICs -- Tiered
REMIC Structures" herein.
Further, the authorities on which this discussion, and the opinions
referred to below, are based are subject to change or differing interpretations,
which could apply retroactively. Taxpayers and preparers of tax returns
(including those filed by any REMIC or other issuer) should be aware that under
applicable Treasury regulations a provider of advice on specific issues of law
is not considered an
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income tax return preparer unless the advice (i) is given with respect to events
that have occurred at the time the advice is rendered and is not given with
respect to the consequences of contemplated actions, and (ii) is directly
relevant to the determination of an entry on a tax return. Accordingly,
taxpayers should consult their tax advisors and tax return preparers regarding
the preparation of any item on a tax return, even where the anticipated tax
treatment has been discussed herein. In addition to the federal income tax
consequences described herein, potential investors should consider the state and
local tax consequences, if any, of the purchase, ownership and disposition of
Offered Certificates. See "State and Other Tax Consequences". It is recommended
that Certificateholders consult their tax advisors concerning the federal,
state, local or other tax consequences to them of the purchase, ownership and
disposition of Offered Certificates.
The following discussion addresses securities of two general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, that the Master Servicer or the Trustee will elect to have
treated as a real estate mortgage investment conduit ("REMIC") under Sections
860A through 860G (the "REMIC Provisions") of the Internal Revenue Code of 1986
(the "Code"), and (ii) interests ("Grantor Trust Certificates") representing
interests in a Trust Fund ("Grantor Trust Fund") as to which no such election
will be made. The Prospectus Supplement for each series of Certificates will
indicate whether a REMIC election (or elections) will be made for the related
Trust Fund and, if such an election (or elections) is to be made, will identify
all "regular interests" ("REMIC Regular Certificates") and "residual interests"
("REMIC Residual Certificates") in the REMIC. For purposes of this tax
discussion, references to a "Certificateholder" or a "holder" are to the
beneficial owner of a Certificate.
The following discussion is limited in applicability to Offered
Certificates. Moreover, this discussion applies only to the extent that Mortgage
Assets held by a Trust Fund consist solely of Mortgage Loans. To the extent that
other Mortgage Assets, including REMIC certificates and mortgage pass-through
certificates, are to be held by a Trust Fund, the tax consequences associated
with the inclusion of such assets will be disclosed in the related Prospectus
Supplement. In addition, if Cash Flow Agreements, other than guaranteed
investment contracts, are included in a Trust Fund, the tax consequences
associated with such Cash Flow Agreements also will be disclosed in the related
Prospectus Supplement. See "Description of the Trust Funds -- Cash Flow
Agreements".
Furthermore, the following discussion is based in part upon the rules
governing original issue discount that are set forth in Sections 1271-1273 and
1275 of the Code and in the Treasury regulations issued thereunder (the "OID
Regulations"), and in part upon the REMIC Provisions and the Treasury
regulations issued thereunder (the "REMIC Regulations"). The OID Regulations do
not adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Certificates.
REMICS
CLASSIFICATION OF REMICS. Upon the issuance of each series of REMIC
Certificates, Thacher Proffitt & Wood or Sidley & Austin, counsel to the
Depositor will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related Agreement, the related Trust Fund
(or each applicable portion thereof) will qualify as a REMIC and the REMIC
Certificates offered with respect thereto will be considered to evidence
ownership of REMIC Regular Certificates or REMIC Residual Certificates in that
REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for such status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for such year and thereafter. In that event, such entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described below. Although
the Code authorizes the Treasury Department to issue regulations providing
relief in the event of an inadvertent termination of REMIC status, no such
regulations have been issued. Any such relief, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
Trust Fund's income for the period in which the requirements for such status are
not satisfied. The related Agreement with respect to each REMIC will include
provisions designed to maintain the Trust Fund's status as a
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REMIC under the REMIC Provisions. It is not anticipated that the status of any
Trust Fund as a REMIC will be inadvertently terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES. In general,
unless otherwise provided in the related Prospectus Supplement, the REMIC
Certificates will be "real estate assets" within the meaning of Section
856(c)(5)(B) of the Code and assets described in Section 7701(a)(19)(C) of the
Code in the same proportion that the assets of the REMIC underlying such
Certificates would be so treated. However, to the extent that the REMIC assets
constitute mortgages on property not used for residential or certain other
prescribed purposes, the REMIC Certificates will not be treated as assets
qualifying under Section 7701(a)(19)(C). Moreover, if 95% or more of the assets
of the REMIC qualify for any of the foregoing treatments at all times during a
calendar year, the REMIC Certificates will qualify for the corresponding status
in their entirety for that calendar year. Interest (including original issue
discount) on the REMIC Regular Certificates and income allocated to the REMIC
Residual Certificates will be interest described in Section 856(c)(3)(B) of the
Code to the extent that such Certificates are treated as "real estate assets"
within the meaning of Section 856(c)(5)(B) of the Code. In addition, the REMIC
Regular Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code and "permitted assets" under Section 860L(c)(1)(G). The
determination as to the percentage of the REMIC's assets that constitute assets
described in the foregoing sections of the Code will be made with respect to
each calendar quarter based on the average adjusted basis of each category of
the assets held by the REMIC during such calendar quarter. The Master Servicer
or the Trustee will report those determinations to Certificateholders in the
manner and at the times required by applicable Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale, and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale, and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. In
addition, in some instances Mortgage Loans may not be treated entirely as assets
described in the foregoing sections. If so, the related Prospectus Supplement
will describe the Mortgage Loans that may not be so treated. The REMIC
Regulations do provide, however, that payments on Mortgage Loans held pending
distribution are considered part of the Mortgage Loans for purposes of Section
856(c)(5)(B) of the Code. Furthermore, foreclosure property will qualify as
"real estate assets" under Section 856(c)(5)(B) 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 or Sidley & Austin, counsel to the Depositor will deliver its opinion
generally to the effect that, assuming compliance with all provisions of the
related Agreement, the Tiered REMICs will each qualify as a REMIC and the REMIC
Certificates issued by the Tiered REMICs, will be considered to evidence
ownership of REMIC Regular Certificates or REMIC Residual Certificates in the
related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will
be "real estate assets" within the meaning of Section 856(c)(5)(B) of the Code,
and "loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code, and whether the income on such Certificates is interest described
in Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
GENERAL. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
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ORIGINAL ISSUE DISCOUNT. Certain REMIC Regular Certificates may be
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance with the method described below, in advance of the
receipt of the cash attributable to such income. In addition, Section 1272(a)(6)
of the Code provides special rules applicable to REMIC Regular Certificates and
certain other debt instruments issued with original issue discount. Regulations
have not been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986 (the
"Committee Report") indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Depositor nor any other person will
make any representation that the Mortgage Loans will in fact prepay at a rate
conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate
will be the excess of its stated redemption price at maturity over its issue
price. The issue price of a particular class of REMIC Regular Certificates will
be the first cash price at which a substantial amount of REMIC Regular
Certificates of that class is sold (excluding sales to bond houses, brokers and
underwriters). If less than a substantial amount of a particular class of REMIC
Regular Certificates is sold for cash on or prior to the date of their initial
issuance (the "Closing Date"), the issue price for such class will be the fair
market value of such class on the Closing Date. Under the OID Regulations, the
stated redemption price of a REMIC Regular Certificate is equal to the total of
all payments to be made on such Certificate other than "qualified stated
interest". "Qualified stated interest" is interest that is unconditionally
payable at least annually at a single fixed rate, or at a "qualified floating
rate", an "objective rate", a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate", or a
combination of "qualified floating rates" that does not operate in a manner that
accelerates or defers interest payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the Internal Revenue Service
(the "IRS").
Certain classes of the REMIC Regular Certificates may provide for the
first interest payment with respect to such Certificates to be made more than
one month after the date of issuance, a period which is longer than the
subsequent monthly intervals between interest payments. Assuming the "accrual
period" (as defined below) for original issue discount is each monthly period
that ends on a Distribution Date, in some cases, as a consequence of this "long
first accrual period", some or all interest payments may be required to be
included in the stated redemption price of the REMIC Regular Certificate and
accounted for as original issue discount. Because interest on REMIC Regular
Certificates must in any event be accounted for under an accrual method,
applying this analysis would result in only a slight difference in the timing of
the inclusion in income of the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first
Distribution Date is computed with respect to a period that begins prior to the
Closing Date, a portion of the purchase price paid for a REMIC Regular
Certificate will reflect such accrued interest. In such cases, information
returns provided to the 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
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as part of the overall cost of such REMIC Regular Certificate (and not as a
separate asset the cost of which is recovered entirely out of interest received
on the next Distribution Date) and that portion of the interest paid on the
first Distribution Date in excess of interest accrued for a number of days
corresponding to the number of days from the Closing Date to the first
Distribution Date should be included in the stated redemption price of such
REMIC Regular Certificate. However, the OID Regulations state that all or some
portion of such accrued interest may be treated as a separate asset the cost of
which is recovered entirely out of interest paid on the first Distribution Date.
It is unclear how an election to do so would be made under the OID Regulations
and whether such an election could be made unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC Regular Certificate will be considered to be
de minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of such REMIC Regular Certificate. Under the OID Regulations, original
issue discount of only a de minimis amount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each payment of stated principal
is made, based on the product of the total amount of such de minimis original
issue discount and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See " --
Taxation of Owners of REMIC Regular Certificates -- Market Discount" for a
description of such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess
of a de minimis amount, the holder of such Certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for each
day during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period", that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to a Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on the
Closing Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original issue
discount that accrues in any accrual period will equal the excess, if any, of
(i) the sum of (a) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the REMIC Regular Certificate,
if any, in future periods and (b) the distributions made on such REMIC Regular
Certificate during the accrual period of amounts included in the stated
redemption price, over (ii) the adjusted issue price of such REMIC Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
(i) assuming that distributions on the REMIC Regular Certificate will be
received in future periods based on the Mortgage Loans being prepaid at a rate
equal to the Prepayment Assumption, (ii) using a discount rate equal to the
original yield to maturity of the Certificate. For these purposes, the original
yield to maturity of the Certificate will be calculated based on its issue price
and assuming that distributions on the Certificate will be made in all accrual
periods based on the Mortgage Loans being prepaid at a rate equal to the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such
Certificate, increased by the aggregate amount of original issue discount that
accrued with respect to such Certificate in prior accrual periods, and reduced
by the amount of any distributions made on such REMIC Regular Certificate in
prior accrual periods of amounts included in the stated redemption price. The
original issue discount accruing during any
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accrual period, computed as described above, will be allocated ratably to each
day during the accrual period to determine the daily portion of original issue
discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases
such Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price", in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day.
MARKET DISCOUNT. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price will recognize gain upon receipt of each distribution
representing stated redemption price. In particular, under Section 1276 of the
Code such a Certificateholder generally will be required to allocate the portion
of each such distribution representing stated redemption price first to accrued
market discount not previously included in income, and to recognize ordinary
income to that extent. A Certificateholder may elect to include market discount
in income currently as it accrues rather than including it on a deferred basis
in accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the first
day of the first taxable year to which such election applies. In addition, the
OID Regulations permit a Certificateholder to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method. If such an election were
made with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See " -- Taxation of Owners of
REMIC Regular Certificates -- Premium" below. Each of these elections to accrue
interest, discount and premium with respect to a Certificate on a constant yield
method or as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate
will be considered to be DE MINIMIS for purposes of Section 1276 of the Code if
such market discount is less than 0.25% of the remaining stated redemption price
of such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as DE MINIMIS under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a DE MINIMIS amount. See " -- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued
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without original issue discount, in an amount that bears the same ratio to the
total remaining market discount as the stated interest paid in the accrual
period bears to the total amount of stated interest remaining to be paid on the
REMIC Regular Certificate as of the beginning of the accrual period, or (iii) in
the case of a REMIC Regular Certificate issued with original issue discount, in
an amount that bears the same ratio to the total remaining market discount as
the original issue discount accrued in the accrual period bears to the total
original issue discount remaining on the REMIC Regular Certificate at the
beginning of the accrual period. Moreover, the Prepayment Assumption used in
calculating the accrual of original issue discount is also used in calculating
the accrual of market discount. Because the regulations referred to in this
paragraph have not been issued, it is not possible to predict what effect such
regulations might have on the tax treatment of a REMIC Regular Certificate
purchased at a discount in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includible in income at a rate that is
not significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the DE MINIMIS rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
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
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attributable to defaults or delinquencies on the Mortgage Loans or the
underlying certificates until it can be established that any such reduction
ultimately will not be recoverable. As a result, the amount of taxable income
reported in any period by the holder of a REMIC Regular Certificate could exceed
the amount of economic income actually realized by the holder in such period.
Although the holder of a REMIC Regular Certificate eventually will recognize a
loss or reduction in income attributable to previously accrued and included
income that as the result of a realized loss ultimately will not be realized,
the law is unclear with respect to the timing and character of such loss or
reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES.
GENERAL. A REMIC generally is not subject to entity-level taxation
(except as mentioned below). Rather, the taxable income or net loss of a REMIC
is generally taken into account by the holder of the REMIC Residual
Certificates. As residual interests, the REMIC Residual Certificates will be
subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the Mortgage Loans or as debt instruments issued
by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in " -- Taxable Income
of the REMIC" and will be taxable to the REMIC Residual Certificateholders
without regard to the timing or amount of cash distributions by the REMIC.
Ordinary income derived from REMIC Residual Certificates will be "portfolio
income" for purposes of the taxation of taxpayers subject to limitations under
Section 469 of the Code on the deductibility of "passive losses".
A holder of a REMIC Residual Certificate that purchased such
Certificate from a prior holder of such Certificate also will be required to
report on its federal income tax return amounts representing its daily share of
the taxable income (or net loss) of the REMIC for each day that it holds such
REMIC Residual Certificate. Those daily amounts generally will equal the amounts
of taxable income or net loss determined as described above. The Committee
Report indicates that certain modifications of the general rules may be made, by
regulations, legislation or otherwise to reduce (or increase) the income of a
REMIC Residual Certificateholder that purchased such REMIC Residual Certificate
from a prior holder of such Certificate at a price greater than (or less than)
the adjusted basis (as defined below) such REMIC Residual Certificate would have
had in the hands of an original holder of such Certificate. The REMIC
Regulations, however, do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required
to report (or the tax liability associated with such income) may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC Residual Certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC Residual Certificates or unrelated deductions against
which income may be offset, subject to the rules relating to "excess
inclusions", residual interests without "significant value" and
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"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
Certificateholders 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.
REMIC Residual Certificates may in some instances have negative "value". See
"Risk Factors -- Federal Tax Considerations Regarding REMIC Residual
Certificates".
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
Master Servicer or the Trustee may be required to estimate the fair market value
of such interests in order to determine the basis of the REMIC in the Mortgage
Loans and other property held by the REMIC.
Subject to possible application of the DE MINIMIS rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant yield basis. See " -- Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Mortgage Loans
with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described above for accruing original issue
discount on the REMIC Regular Certificates. It is anticipated that each REMIC
will elect under Section 171 of the Code to amortize any premium on the Mortgage
Loans. Premium on any Mortgage Loan to which such election applies may be
amortized under a constant yield method, presumably taking into account a
Prepayment Assumption. Further, such an election would not apply to any Mortgage
Loan originated on or before September 27, 1985. Instead, premium on such a
Mortgage Loan should be allocated among the principal payments thereon and be
deductible by the REMIC as those payments become due or upon the prepayment of
such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original
issue discount) on the REMIC Regular Certificates (including any other class of
REMIC Certificates constituting "regular interests" in the REMIC not offered
hereby) equal to the deductions that would be allowed if the REMIC Regular
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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 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
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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. Although it
has not done so, the Treasury has authority to issue regulations that would
treat the entire amount of income accruing on a REMIC Residual Certificate as an
excess inclusion if the REMIC Residual Certificates are considered not to have
"significant value."
For REMIC Residual Certificateholders, excess inclusions (i) will not
be permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, " -- Foreign
Investors in REMIC Certificates" below. Furthermore, for purposes of the
alternative minimum tax, (i) excess inclusions will not be permitted to be
offset by the alternative tax net operating loss deduction and (ii) alternative
minimum taxable income may not be less than the taxpayer's excess inclusions.
The latter rule has the effect of preventing nonrefundable tax credits from
reducing the taxpayer's income tax to an amount lower than the alternative
minimum tax on excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if
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"a significant purpose of the transfer was to enable the transferor to impede
the assessment or collection of tax". If such transfer is disregarded, the
purported transferor will continue to remain liable for any taxes due with
respect to the income on such "noneconomic" REMIC Residual Certificate. The
REMIC Regulations provide that a REMIC Residual Certificate is noneconomic
unless, based on the Prepayment Assumption and on any required or permitted
clean up calls, or required liquidation provided for in the REMIC's
organizational documents, (1) the present value of the expected future
distributions (discounted using the "applicable Federal rate" for obligations
whose term ends on the close of the last quarter in which excess inclusions are
expected to accrue with respect to the REMIC Residual Certificate, which rate is
computed and published monthly by the IRS) on the REMIC Residual Certificate
equals at least the present value of the expected tax on the anticipated excess
inclusions, and (2) the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC Residual Certificate at or after
the time the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. Accordingly, all transfers of REMIC
Residual Certificates that may constitute noneconomic residual interests will be
subject to certain restrictions under the terms of the related Agreement that
are intended to reduce the possibility of any such transfer being disregarded.
Such restrictions will require each party to a transfer to provide an affidavit
that no purpose of such transfer is to impede the assessment or collection of
tax, including certain representations as to the financial condition of the
prospective transferee, as to which the transferor is also required to make a
reasonable investigation to determine such transferee's historic payment of its
debts and ability to continue to pay its debts as they come due in the future.
Prior to purchasing a REMIC Residual Certificate, prospective purchasers should
consider the possibility that a purported transfer of such REMIC Residual
Certificate by such a purchaser to another purchaser at some future date may be
disregarded in accordance with the above-described rules which would result in
the retention of tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See " -- Foreign Investors in REMIC Certificates -- REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
MARK-TO-MARKET RULES. On December 24, 1996, the IRS released final
regulations (the "Mark-to-Market Regulations") relating to the requirement that
a securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held for
investment. The Mark-to-Market Regulations provide that for purposes of this
mark-to-market requirement, a REMIC Residual Certificate issued after January 4,
1995 is not treated as a security and thus may not be marked to market.
Prospective purchasers of a REMIC Residual Certificate should consult their tax
advisors regarding the possible application of the mark-to-market requirement to
REMIC Residual Certificates.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of such fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Unless otherwise stated in
the related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular
Certificates the holders of which receive an allocation of fees and expenses in
accordance with the preceding discussion, if any holder thereof is an
individual, estate or trust, or a "pass-through entity" beneficially owned by
one or more individuals, estates or trusts, (i) an amount equal to such
individual's, estate's or trust's share of such fees and expenses will be added
to the gross income of such holder and (ii) such individual's, estate's or
trust's share of such fees and expenses will be treated as a miscellaneous
itemized deduction allowable subject to the limitation of Section 67 of the
Code, which permits such deductions only to the extent
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they exceed in the aggregate two percent of a taxpayer's adjusted gross income.
In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by REMIC Certificateholders that
are subject to the limitations of either Section 67 or Section 68 of the Code
may be substantial. Furthermore, in determining the alternative minimum taxable
income of such a holder of a REMIC Certificate that is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should consult with
their tax advisors prior to making an investment in such Certificates.
SALES OF REMIC CERTIFICATES. If a REMIC Certificate is sold, the
selling Certificateholder will recognize gain or loss equal to the difference
between the amount realized on the sale and its adjusted basis in the REMIC
Certificate. The adjusted basis of a REMIC Regular Certificate generally will
equal the cost of such REMIC Regular Certificate to such Certificateholder,
increased by income reported by such Certificateholder with respect to such
REMIC Regular Certificate (including original issue discount and market discount
income) and reduced (but not below zero) by distributions on such REMIC Regular
Certificate received by such Certificateholder and by any amortized premium. The
adjusted basis of a REMIC Residual Certificate will be determined as described
under " -- Taxation of Owners of REMIC Residual Certificates -- Basis Rules, Net
Losses and Distributions". Except as provided in the following four paragraphs,
any such gain or loss will be capital gain or loss, provided such REMIC
Certificate is held as a capital asset (generally, property held for investment)
within the meaning of Section 1221 of the Code.
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
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taxpayer enters into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income items from
the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include such
net capital gain in total net investment income for the taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
Except as may be provided in Treasury regulations yet to be issued, if
the seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead will
be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES. The Code imposes a tax on
REMICs equal to 100% of the net income derived from "prohibited transactions" (a
"Prohibited Transactions Tax"). In general, subject to certain specified
exceptions a prohibited transaction means the disposition of a Mortgage Loan,
the receipt of income from a source other than a Mortgage Loan or certain other
permitted investments, the receipt of compensation for services, or gain from
the disposition of an asset purchased with the payments on the Mortgage Loans
for temporary investment pending distribution on the REMIC Certificates. It is
not anticipated that any REMIC will engage in any prohibited transactions in
which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the day on
which the REMIC issues all of its interests could result in the imposition of a
tax on the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each related Agreement will include provisions designed to
prevent the acceptance of any contributions that would be subject to such tax.
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.
Under certain circumstances, the Master Servicer may be authorized to conduct
activities with respect to a Mortgaged Property acquired by a Trust Fund that
causes the Trust Fund to incur this tax if doing so would, in the reasonable
discretion of the Master Servicer, maximize the net after-tax proceeds to
Certificateholders. However, under no circumstances will the Master Servicer
cause the acquired Mortgage Property to cease to be a "permitted investment"
under Section 860G(a)(5) of the Code.
Unless otherwise disclosed in the related Prospectus Supplement, it is
not anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to
the extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer, Special Servicer, Manager or Trustee in any case
out of its own funds, provided that such person has sufficient assets to do so,
and provided further that such tax arises out of a breach of such person's
obligations under the related Agreement and in respect of compliance with
applicable laws and regulations. Any such tax not borne by a Master Servicer,
Special Servicer, Manager or Trustee will be charged against the related Trust
Fund resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO
CERTAIN ORGANIZATIONS. If a REMIC Residual Certificate is transferred to a
"disqualified organization" (as defined below), a tax would be imposed in an
amount (determined under the REMIC Regulations) equal to the product of (i) the
present value (discounted using the "applicable Federal rate" for obligations
whose term ends on the close of the last quarter in which excess inclusions are
expected to accrue with respect to the REMIC Residual Certificate, which rate is
computed and published monthly by the IRS) of the total
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anticipated excess inclusions with respect to such REMIC Residual Certificate
for periods after the transfer and (ii) the highest marginal federal income tax
rate applicable to corporations. The anticipated excess inclusions must be
determined as of the date that the REMIC Residual Certificate is transferred and
must be based on events that have occurred up to the time of such transfer, the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. Such a tax
generally would be imposed on the transferor of the REMIC Residual Certificate,
except that where such transfer is through an agent for a disqualified
organization, the tax would instead be imposed on such agent. However, a
transferor of a REMIC Residual Certificate would in no event be liable for such
tax with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a disqualified organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. Moreover, an entity will not qualify as a REMIC unless there
are reasonable arrangements designed to ensure that (i) residual interests in
such entity are not held by disqualified organizations and (ii) information
necessary for the application of the tax described herein will be made
available. Restrictions on the transfer of REMIC Residual Certificates and
certain other provisions that are intended to meet this requirement will be
included in each Agreement, and will be discussed in any Prospectus Supplement
relating to the offering of any REMIC Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (ii) a statement under penalties of perjury that such record
holder is not a disqualified organization.
For taxable years beginning on or after January 1, 1998, if an
"electing large partnership" holds a Residual Certificate, all interests in the
electing large partnership are treated as held by disqualified organizations for
purposes of the tax imposed upon a pass-through entity by Section 860E(c) of the
Code. An exception to this tax, otherwise available to a pass-through entity
that is furnished certain affidavits by record holders of interests in the
entity and that does not know such affidavits are false, is not available to an
electing large partnership.
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. For
these purposes, an "electing large partnership" means any partnership having
more than 100 members during the preceding tax year (other than certain service
partnerships and commodity pools), which elects to apply simplified reporting
provisions under the Code.
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
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Certificateholder should (but may not) be treated as realizing a loss equal to
the amount of such difference, and such loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
Unless otherwise stated in the related Prospectus Supplement, the Trustee or the
Master Servicer, which generally will hold at least a nominal amount of REMIC
Residual Certificates, will file REMIC federal income tax returns on behalf of
the related REMIC, and will be designated as and will act as the "tax matters
person" with respect to the REMIC in all respects.
As the tax matters person, the Trustee or the Master Servicer, as the
case may be, subject to certain notice requirements and various restrictions and
limitations, generally will have the authority to act on behalf of the REMIC and
the REMIC Residual Certificateholders in connection with the administrative and
judicial review of items of income, deduction, gain or loss of the REMIC, as
well as the REMIC's classification. REMIC Residual Certificateholders generally
will be required to report such REMIC items consistently with their treatment on
the related REMIC's tax return and may in some circumstances be bound by a
settlement agreement between the Trustee or the Master Servicer, as the case may
be, as tax matters person, and the IRS concerning any such REMIC item.
Adjustments made to the REMIC tax return may require a REMIC Residual
Certificateholder to make corresponding adjustments on its return, and an audit
of the REMIC's tax return, or the adjustments resulting from such an audit,
could result in an audit of a REMIC Residual Certificateholder's return. No
REMIC will be registered as a tax shelter pursuant to Section 6111 of the Code
because it is not anticipated that any REMIC will have a net loss for any of the
first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
to the related REMIC, in a manner to be provided in Treasury regulations, the
name and address of such person and other information.
Reporting of interest income, including any original issue discount,
with respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
generally are required to be sent to individual holders of REMIC Regular
Interests and the IRS; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and certain other non-individuals will
be provided interest and original issue discount income information and the
information set forth in the following paragraph upon request in accordance with
the requirements of the applicable regulations. The information must be provided
by the later of 30 days after the end of the quarter for which the information
was requested, or two weeks after the receipt of the request. The REMIC must
also comply with rules requiring a REMIC Regular Certificate issued with
original issue discount to disclose on its face the amount of original issue
discount and the issue date, and requiring such information to be reported to
the IRS. Reporting with respect to REMIC Residual Certificates, including
income, excess inclusions, investment expenses and relevant information
regarding qualification of the REMIC's assets will be made as required under the
Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See " -- Taxation of Owners of REMIC Regular
Certificates -- Market Discount".
Unless otherwise specified in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
either the Trustee or the Master Servicer.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES. Payments of
interest and principal, as well as payments of proceeds from the sale of REMIC
Certificates, may be subject to the "backup withholding tax" under Section 3406
of the Code at a rate of 31% if recipients of such payments fail to furnish to
the payor certain information, including their taxpayer identification numbers,
or otherwise fail to establish an exemption from such tax. Any amounts deducted
and withheld from a distribution to
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a recipient would be allowed as a credit against such recipient's federal income
tax. Furthermore, certain penalties may be imposed by the IRS on a recipient of
payments that is required to supply information but that does not do so in the
proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES. A REMIC Regular
Certificateholder that is not a "United States Person" (as defined below) and is
not subject to federal income tax as a result of any direct or indirect
connection to the United States in addition to its ownership of a REMIC Regular
Certificate will not, unless otherwise disclosed in the related Prospectus
Supplement, be subject to United States federal income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that the
holder complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the Certificateholder under
penalties of perjury, certifying that such Certificateholder is not a United
States Person and providing the name and address of such Certificateholder). For
these purposes, "United States Person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in, or
under the laws of, the United States or any political subdivision thereof, or an
estate whose income is subject to United States federal income tax regardless of
its source, or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States Persons have the authority to control all substantial decisions of the
trust. It is possible that the IRS may assert that the foregoing tax exemption
should not apply with respect to a REMIC Regular Certificate held by a REMIC
Residual Certificateholder that owns directly or indirectly a 10% or greater
interest in the REMIC Residual Certificates. If the holder does not qualify for
exemption, distributions of interest, including distributions in respect of
accrued original issue discount, to such holder may be subject to a tax rate of
30%, subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on such
United States shareholder's allocable portion of the interest income received by
such controlled foreign corporation. It is possible, under regulations
promulgated under Section 881 of the Code concerning conduit financing
transactions, that the exemption from withholding taxes described above may not
be available to a holder who is not a United States Person and owns 10% or more
of one or more underlying Mortgagors or, if the holder is a controlled foreign
corporation, is related to one or more underlying mortgagors.
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.
In addition, on October 6, 1997, the Treasury Department issued new
regulations (the "New Regulations") which make certain modifications to the
withholding, backup withholding and information reporting rules described above.
As promulgated, the New Regulations will generally be effective for payments
made after December 31, 1999, subject to certain transition rules. However, on
April 30, 1999, the IRS issued Notice 99-25 in which it announced that it
intended that the effective date of the New Regulations be extended to apply to
payments made after December 31, 2000 and to eliminate some of the transition
rules. Prospective investors are urged to consult their own tax advisors
regarding the New Regulations.
Unless otherwise stated in the related Prospectus Supplement, transfers
of REMIC Residual Certificates to investors that: (a) are not United States
Persons; or (b) are United States Persons and classified as partnerships under
the Code, if any of their beneficial owners are not United States Persons, will
be prohibited under the related Agreement.
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS. With respect to each series of
Grantor Trust Certificates, counsel to the Depositor will deliver its opinion to
the effect that, assuming compliance with all provisions of the related
Agreement, the related Grantor Trust Fund will be classified as a grantor trust
under subpart E, part I of subchapter J of the Code and not as a partnership or
an association taxable as
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a corporation. Accordingly, each holder of a Grantor Trust Certificate generally
will be treated as the owner of an interest in the Mortgage Loans included in
the Grantor Trust Fund.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate". A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees) and interest paid to the holders of Grantor Trust
Fractional Interest Certificates issued with respect to such Grantor Trust Fund
will be referred to as a "Grantor Trust Strip Certificate". A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES. In the case of Grantor
Trust Fractional Interest Certificates, unless otherwise disclosed in the
related Prospectus Supplement, counsel to the Depositor will deliver an opinion
that, in general, Grantor Trust Fractional Interest Certificates will represent
interests in (i) "loans . . . secured by an interest in real property" within
the meaning of Section 7701(a)(19)(C)(v) of the Code; (ii) "obligation[s]
(including any participation or Certificate of beneficial ownership therein)
which . . . [are] principally secured by an interest in real property" within
the meaning of Section 860G(a)(3) of the Code; and (iii) "real estate assets"
within the meaning of Section 856(c)(5)(B) of the Code. In addition, counsel to
the Depositor will deliver an opinion that interest on Grantor Trust Fractional
Interest Certificates will to the same extent be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the Code.
GRANTOR TRUST STRIP CERTIFICATES. Even if Grantor Trust Strip
Certificates evidence an interest in a Grantor Trust Fund consisting of Mortgage
Loans that are "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code, and "real estate assets"
within the meaning of Section 856(c)(5)(B) of the Code, and the interest on
which is "interest on obligations secured by mortgages on real property" within
the meaning of Section 856(c)(3)(A) of the Code, it is unclear whether the
Grantor Trust Strip Certificates, and the income therefrom, will be so
characterized. However, the policies underlying such sections (namely, to
encourage or require investments in mortgage loans by thrift institutions and
real estate investment trusts) may suggest that such characterization is
appropriate. Counsel to the Depositor will not deliver any opinion on these
questions. Prospective purchasers to which such characterization of an
investment in Grantor Trust Strip Certificates is material should consult their
tax advisors regarding whether the Grantor Trust Strip Certificates, and the
income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including
any participation or Certificate of beneficial ownership therein) which . . .
[are] principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
GENERAL. Holders of a particular series of Grantor Trust Fractional
Interest Certificates generally will be required to report on their federal
income tax returns their shares of the entire income from the Mortgage Loans
(including amounts used to pay reasonable servicing fees and other expenses) and
will be entitled to deduct their shares of any such reasonable servicing fees
and other expenses. Because of stripped interests, market or original issue
discount, or premium, the amount includible in income on account of a Grantor
Trust Fractional Interest Certificate may differ significantly from the amount
distributable thereon representing interest on the Mortgage Loans. Under Section
67 of the Code, an individual, estate or trust holding a Grantor Trust
Fractional Interest Certificate directly or through certain pass-through
entities will be allowed a deduction for such reasonable servicing fees and
expenses only to the extent that the aggregate of such holder's miscellaneous
itemized deductions exceeds two percent of such holder's adjusted gross income.
In addition, Section 68 of the Code provides that the
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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 a Mortgage Asset. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees for various
types of mortgages the IRS has established certain "safe harbors." The servicing
fees paid with respect to the Mortgage Loans for certain series of Grantor Trust
Certificates may be higher than the "safe harbors" and, accordingly, may not
constitute reasonable servicing compensation. The related Prospectus Supplement
will include information regarding servicing fees paid to a Master Servicer, a
Special Servicer, any Sub-Servicer or their respective affiliates necessary to
determine whether the preceding "safe harbor" rules apply.
IF STRIPPED BOND RULES APPLY. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code, subject, however, to the discussion below regarding the treatment of
certain stripped bonds as market discount bonds and the discussion regarding DE
MINIMIS market discount. See " -- Taxation of Owners of Grantor Trust Fractional
Interest Certificates -- Market Discount" below. Under the stripped bond rules,
the holder of a Grantor Trust Fractional Interest Certificate (whether a cash or
accrual method taxpayer) will be required to report interest income from its
Grantor Trust Fractional Interest Certificate for each month in an amount equal
to the income that accrues on such Certificate in that month calculated under a
constant yield method, in accordance with the rules of the Code relating to
original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser of the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified stated
interest", if any, as well as such Certificate's share of reasonable servicing
fees and other expenses. See " -- Taxation of Owners of Grantor Trust Fractional
Interest Certificates -- If Stripped Bond Rules Do Not Apply" for a definition
of "qualified stated interest". In general, the amount of such income that
accrues in any month would equal the product of such holder's adjusted basis in
such Grantor Trust Fractional Interest Certificate at the beginning of such
month (see " -- Sales of Grantor Trust Certificates" below) and the yield of
such Grantor Trust Fractional Interest Certificate to such holder. Such yield
would be computed as the rate (compounded based on the regular interval between
payment dates) that, if used to discount the holder's share of future payments
on the Mortgage Loans, would cause the present value of those future payments to
equal the price at which the holder purchased such Certificate. In computing
yield under the stripped bond rules, a Certificateholder's share
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of future payments on the Mortgage Loans will not include any payments made in
respect of any ownership interest in the Mortgage Loans retained by the
Depositor, a Master Servicer, a Special Servicer, any Sub-Servicer or their
respective affiliates, but will include such Certificateholder's share of any
reasonable servicing fees and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption, with respect to certain categories of debt instruments.
Recent legislation extends the scope of that section to any pool of debt
instruments the yield on which may be affected by reason of prepayment. The
precise application of the new legislation is unclear in certain respects. For
example, it is uncertain whether a prepayment assumption will be applied
collectively to all of a taxpayer's investments in pools of debt instruments or
will be applied on an investment-by-investment basis. Similarly, as to
investments in Grantor Trust Fractional Interest Certificates, it is uncertain
whether the assumed prepayment rate would be determined based on conditions at
the time of the first sale of the Grantor Trust Fractional Interest Certificate
or, with respect to any holder, at the time of purchase of the Grantor Trust
Fractional Interest Certificate by that holder. Certificateholders are advised
to consult their tax advisors concerning reporting original issue discount with
respect to Grantor Trust Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired
at a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders on a prepayment assumption (the "Prepayment Assumption") that
will be disclosed in the related Prospectus Supplement and on a constant yield
computed using a representative initial offering price for each class of
Certificates. However, neither the Depositor nor any other person will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to such Prepayment Assumption or any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series who bought at that price.
Under Treasury regulation Section 1.1286-1, certain stripped bonds are
to be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a DE MINIMIS amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the Mortgage Loans, the related Prospectus Supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the Mortgage Loans, then such original issue discount or market discount will be
considered to be DE MINIMIS. Original issue discount or market discount of only
a DE MINIMIS amount will be included in income in the same manner as DE MINIMIS
original issue and market discount described in " -- Taxation of Owners of
Grantor Trust Fractional Interest Certificates -- If Stripped Bond Rules Do Not
Apply" and " -- Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the Certificateholder will be required to
report its share of the interest income on the Mortgage Loans in
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accordance with such Certificateholder's normal method of accounting. The
original issue discount rules will apply, even if the stripped bond rules do not
apply, to a Grantor Trust Fractional Interest Certificate to the extent it
evidences an interest in Mortgage Loans issued with original issue discount.
The original issue discount, if any, on the Mortgage Loans will equal
the difference between the stated redemption price of such Mortgage Loans and
their issue price. For a definition of "stated redemption price," see " --
Taxation of Owners of REMIC Regular Certificates -- Original Issue Discount"
above. In general, the issue price of a Mortgage Loan will be the amount
received by the borrower from the lender under the terms of the Mortgage Loan,
less any "points" paid by the borrower, and the stated redemption price of a
Mortgage Loan will equal its principal amount, unless the Mortgage Loan provides
for an initial "teaser," or below-market interest rate. The determination as to
whether original issue discount will be considered to be DE MINIMIS will be
calculated using the same test as in the REMIC discussion. See " -- Taxation of
Owners of REMIC Regular Certificates -- Original Issue Discount" above.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Mortgage Loans by the Trustee or
Master Servicer, as applicable, in preparing information returns to the
Certificateholders and the IRS.
If original issue discount is in excess of a DE MINIMIS amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. Under
recent legislation, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing yield with respect to any pool of debt
instruments, the yield on which may be affected by prepayments. The precise
application of the new legislation is unclear in certain respects. For example,
it is uncertain whether a prepayment assumption will be applied collectively to
all of a taxpayer's investments in pools of debt instruments or will be applied
on an investment-by-investment basis. Similarly, as to investments in Grantor
Trust Fractional Interest Certificates, it is not clear whether the assumed
prepayment rate is to be determined at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any holder, at the
time of that holder's purchase of the Grantor Trust Fractional Interest
Certificate. It is recommended that Certificateholders consult their own tax
advisors concerning reporting original issue discount with respect to Grantor
Trust Fractional Interest Certificates and 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 the absence of statutory or administrative clarification, it is
currently intended that information reports or returns to the IRS and
Certificateholders will be based on a prepayment assumption (the "Prepayment
Assumption") determined when Certificates are offered and sold hereunder and
disclosed in the related Prospectus Supplement, and on a constant yield computed
using a representative initial
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offering price for each Class of Certificates. However, neither the Depositor
nor any other person will make any representation that the Mortgage Loans will
in fact prepay at a rate conforming to such Prepayment Assumption or any other
rate or that the Prepayment Assumption will not be challenged by the IRS on
audit. Certificateholders also 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 Serries who bought at
that price.
Unless otherwise provided in the related Prospectus Supplement, the
Trustee or Master Servicer, as applicable, will provide to any holder of a
Grantor Trust Fractional Interest Certificate such information as such holder
may reasonably request from time to time with respect to original issue discount
accruing on Grantor Trust Fractional Interest Certificates. See " -- Grantor
Trust Reporting" below.
MARKET DISCOUNT. If the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, a Certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a Mortgage Loan is considered to have been purchased at a "market
discount", that is, in the case of a Mortgage Loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price
(as defined above), or in the case of a Mortgage Loan issued with original issue
discount, at a purchase price less than its adjusted issue price (as defined
above). If market discount is in excess of a DE MINIMIS amount (as described
below), the holder generally will be required to include in income in each month
the amount of such discount that has accrued (under the rules described in the
next paragraph) through such month that has not previously been included in
income, but limited, in the case of the portion of such discount that is
allocable to any Mortgage Loan, to the payment of stated redemption price on
such Mortgage Loan that is received by (or, in the case of accrual basis
Certificateholders, due to) the Trust Fund in that month. A Certificateholder
may elect to include market discount in income currently as it accrues (under a
constant yield method based on the yield of the Certificate to such holder)
rather than including it on a deferred basis in accordance with the foregoing
under rules similar to those described in " -- Taxation of Owners of REMIC
Regular Interests -- Market Discount" above.
Section 1276(b)(3) of the Code authorized the Treasury Department to
issue regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
holder's option: (i) on the basis of a constant yield method, (ii) in the case
of a Mortgage Loan issued without original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the Mortgage Loan as of the beginning of the accrual period, or
(iii) in the case of a Mortgage Loan issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
original issue discount accrued in the accrual period bears to the total
original issue discount remaining at the beginning of the accrual period.
Under recent legislation, 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 any pool of debt instruments, the yield on which may be
affected by prepayments. Because the Mortgage Loans will be such a pool, it
appears that the prepayment assumption used (or that would be used) in
calculating the accrual of original issue discount, if any, is also to be used
in calculating the accrual of market discount. However, the precise application
of the new legislation is unclear in certain respects. For example, it is
uncertain whether a prepayment assumption will be applied collectively to all of
a taxpayer's investments in pools of debt instruments or will be applied on an
investment-by-investment basis. Similarly, it is not clear whether the assumed
prepayment rate is to be determined at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any holder, at the
time of that holder's purchase of the Grantor Trust Fractional Interest
Certificate. Moreover, because the regulations referred to in the preceding
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. It is recommended that Certificateholders
consult their own tax advisors concerning accrual of market
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discount with respect to Grantor Trust Fractional Interest Certificates and
should refer to the related Prospectus Supplement with respect to each Series to
determine whether and in what manner the market discount will apply to Mortgage
Loans purchased at a market discount in such Series.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans may be considered to be
DE MINIMIS and, if so, will be includible in income under DE MINIMIS rules
similar to those described in " -- REMICs -- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount" above within the exception that it is
less like that a prepayment assumption will be used for purposes of such rules
with respect to the Mortgage Loans.
Further, under the rules described in " -- REMICs -- Taxation of Owners
of REMIC Regular Certificates -- Market Discount", any discount that is not
original issue discount and exceeds a DE MINIMIS amount may require the deferral
of interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues.
PREMIUM. If a Certificateholder is treated as acquiring the underlying
Mortgage Loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Mortgage Loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to Mortgage Loans originated before September 28, 1985 or to Mortgage
Loans for which an amortization election is not made, should be allocated among
the payments of stated redemption price on the Mortgage Loan and be allowed as a
deduction as such payments are made (or, for a Certificateholder using the
accrual method of accounting, when such payments of stated redemption price are
due).
It appears that a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code similar to that
described for calculating the accrual of market discount of Grantor Trust
Fractional Interest Certificates. See " -- Taxation of Owners of Grantor Trust
Fractional Interest Certificates -- Market Discount", above.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES. The "stripped
coupon" rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in " -- Taxation of Owners of Grantor
Trust Fractional Interest certificates -- If Stripped Bond Rules Apply", no
regulations or published rulings under Section 1286 of the Code have been issued
and some uncertainty exists as to how it will be applied to securities such as
the Grantor Trust Strip Certificates. Accordingly, holders of Grantor Trust
Strip Certificates should consult their tax advisors concerning the method to be
used in reporting income or loss with respect to such Certificates.
The OID Regulations do not apply to "stripped coupons", although they
provide general guidance as to how the original issue discount sections of the
Code will be applied.
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. It appears that those
provisions would apply to Grantor
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Trust Strip Certificates. It is uncertain whether the assumed prepayment rate
would be determined based on conditions at the time of the first sale of the
Grantor Trust Strip Certificate or, with respect to any subsequent holder, at
the time of purchase of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. However, neither the Depositor nor any other person will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series who bought at that price. Prospective
purchasers of the Grantor Trust Strip Certificates should consult their tax
advisors regarding the use of the Prepayment Assumption.
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 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.
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. Unless otherwise provided in the related
Prospectus Supplement, the Trustee or Master Servicer, as applicable, will
furnish to each holder of a Grantor Trust Certificate with each distribution a
statement setting forth the amount of such distribution allocable to principal
on the underlying Mortgage Loans and to interest thereon at the related
Pass-Through Rate. In addition, the Trustee or Master Servicer, as applicable,
will furnish, within a reasonable time after the end of each calendar year, to
each holder of a Grantor Trust Certificate who was such a holder at any time
during such year, information regarding the amount of servicing compensation
received by the Master Servicer, the Special Servicer or any Sub-Servicer, and
such other customary factual information as the Depositor or the reporting party
deems necessary or desirable to enable holders of Grantor Trust Certificates to
prepare their tax returns and will furnish comparable information to the IRS as
and when required by law to do so. Because the rules for accruing discount and
amortizing premium with respect to the Grantor Trust Certificates are uncertain
in various respects, there is no assurance the IRS will agree with the Trustee's
or Master Servicer's, as the case may be, information reports of such items of
income and expense. Moreover, such information reports, even if otherwise
accepted as accurate by the IRS, will in any event be accurate only as to the
initial Certificateholders that bought their Certificates at the representative
initial offering price used in preparing such reports.
On August 13, 1998, the Service published proposed regulations, which
will, when effective, establish reporting rules for interests in "widely held
fixed investment trusts" similar to those applicable to regular interests in
REMICs. A widely-held fixed investment trust is defined as any entity classified
as a "trust" under Treasury Regulation Section 301.7701-4(c) in which any
interest is held by a middleman (which includes, but is not limited to, a
custodian of a person's account, a nominee, and a broker holding an interest for
a customer in street name). These regulations are proposed to be effective for
calendar years beginning on or after the date that the final regulations are
published in the Federal Register.
BACKUP WITHHOLDING. In general, the rules described in " -- REMICs --
Backup Withholding with Respect to REMIC Certificates" will also apply to
Grantor Trust Certificates.
FOREIGN INVESTORS. In general, the discussion with respect to REMIC
Regular Certificates in " -- REMICs -- Foreign Investors in REMIC Certificates"
applies to Grantor Trust Certificates except that Grantor Trust Certificates
will, unless otherwise disclosed in the related Prospectus Supplement, be
eligible for exemption from U.S. withholding tax, subject to the conditions
described in such discussion, only to the extent the related Mortgage Loans were
originated after July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be
exempt under Sections 871(h)(1) and 881(c) of the Code from United States
withholding tax, and the Grantor Trust Certificate is not held in connection
with a Certificateholder's trade or business in the United States, such Grantor
Trust Certificate will not be subject to United States estate taxes in the
estate of a non-resident alien individual.
STATE AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences", potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Offered Certificates. State tax law may differ substantially from the
corresponding federal law, and the discussion above does not purport to describe
any aspect of the income tax laws of any state or other jurisdiction. Therefore,
potential investors should consult their own tax advisors with respect to the
various tax consequences of investments in the Offered Certificates.
ERISA CONSIDERATIONS
GENERAL
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974 ("ERISA") and Section 4975 of the Code impose certain requirements on
employee benefit plans, and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans and
collective investment funds and separate accounts (and as applicable, insurance
company general
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accounts) in which such plans, accounts or arrangements are invested that are
subject to the fiduciary responsibility provisions of ERISA and Section 4975 of
the Code ("Plans"), and on persons who are fiduciaries with respect to such
Plans, in connection with the investment of Plan assets.
Certain employee benefit plans, such as governmental plans (as defined
in ERISA Section 3(32)), 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
Offered Certificates without regard to the ERISA considerations described below,
subject to the provisions of other applicable federal and state 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.
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. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of a Plan and
persons ("parties in interest" within the meaning of ERISA and "disqualified
persons" within the meaning of the Code; collectively, "Parties in Interest")
who have certain specified relationships to the Plan, unless a statutory or
administrative exemption is available. The types of transactions between Plans
and Parties in Interest that are prohibited include: (a) sales, exchanges or
leases of property, (b) loans or other extensions of credit and (c) the
furnishing of goods and services. Certain Parties in Interest that participate
in a prohibited transaction may be subject to an excise tax imposed pursuant to
Section 4975 of the Code or a penalty imposed pursuant to Section 502(i) of
ERISA, unless a statutory or administrative exemption is available. In addition,
the persons involved in the prohibited transaction may have to rescind the
transaction and pay an amount to the Plan for any losses realized by the Plan or
profits realized by such persons, individual retirement accounts involved in the
transaction may be disqualified resulting in adverse tax consequences to the
owner of such account and certain other liabilities could result that would have
a significant adverse effect on such person.
PLAN ASSET REGULATIONS
A Plan's investment in Offered Certificates may cause the underlying
Mortgage Assets and other assets included in a related Trust Fund to be deemed
assets of such Plan. Section 2510.3-101 of the regulations (the "Plan Asset
Regulations") of the United States Department of Labor (the "DOL") provides that
when a Plan acquires an equity interest in an entity, the Plan's assets include
both such equity interest and an undivided interest in each of the underlying
assets of the entity, unless certain exceptions apply, including that the equity
participation in the entity by "benefit plan investors" (i.e., Plans and certain
employee benefit plans not subject to ERISA) is not "significant", both as
defined therein. For this purpose, in general, equity participation by benefit
plan investors will be "significant" on any date if 25% or more of the value of
any class of equity interests in the entity is held by benefit plan investors
(determined by not including the investments of persons with discretionary
authority or control over the assets of such entity, of any person who provides
investment advice for a fee (direct or indirect) with respect to such assets,
and "affiliates" (as defined in the DOL regulations relating to Plan assets) of
such persons). Equity participation in a Trust Fund will be significant on any
date if immediately after the most recent acquisition of any Certificate, 25% or
more of any Class of Certificates is held by benefit plan investors (determined
by not including the investments of the Depositor, the Trustee, the Master
Servicer, the Special Servicer, any other parties with discretionary authority
over the assets of a Trust Fund and their respective affiliates).
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Mortgage Assets and other assets included in a Trust Fund
constitute Plan assets, then any party exercising management or discretionary
control regarding those assets, such as a master servicer, a special servicer,
any sub-servicer, a trustee, the obligor under any related credit enhancement
mechanism, or certain affiliates thereof may be deemed to be a Plan "fiduciary"
with respect to the investing Plan and thus subject to the fiduciary
responsibility provisions of ERISA. In addition, if the underlying assets of a
Trust Fund constitute Plan assets, the Depositor, any
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related REMIC Administrator, any related Manager, any mortgagor with respect to
a related Mortgage Loan or a mortgage loan underlying a related MBS, as well as
each of the parties described in the preceding sentence, may become Parties in
Interest with respect to an investing Plan (or of a Plan holding an interest in
an investing entity). Thus, if the Mortgage Assets and other assets included in
a Trust Fund constitute Plan assets, the operation of the Trust Fund, may
involve a prohibited transaction under ERISA or the Code. For example, if a
person who is a Party in lnterest with respect to an investing Plan is a
mortgagor with respect to a Mortgage Loan included in a Trust Fund, the purchase
of Certificates by the Plan could constitute a prohibited loan between a Plan
and a Party in Interest.
The Plan Asset Regulations provide that where a Plan acquires a
"guaranteed governmental mortgage pool certificate", the Plan's assets include
such certificate but do not solely by reason of the Plan's holdings of such
certificate include any of the mortgages underlying such certificate. The Plan
Asset Regulations include in the definition of a "guaranteed governmental
mortgage pool certificate" certain FHLMC Certifcates, GNMA Certificates and FNMA
Certificates, but do not include FAMC Certificates. Accordingly, even if such
types of MBS (other than FAMC Certificates) included in a Trust Fund were deemed
to be assets of Plan investors, the mortgages underlying such MBS (other than
FAMC Certificates) would not be treated as assets of such Plans. Thus, the
prohibited transaction described in the preceding paragraph (regarding a
prohibited loan) would not occur with respect to such types of MBS (other than
FAMC Certificates) held in a Trust Fund, even if such MBS were treated as assets
of Plans. Private label mortgage participations, mortgage pass-through
certificates, FAMC Certificates or other mortgage-backed securities are not
"guaranteed governmental mortgage pool certificates" within the meaning of the
Plan Asset Regulations.
In addition, and without regard to whether the Mortgage Assets and
other assets included in a Trust Fund constitute Plan assets, the acquisition or
holding of Offered Certificates by or on behalf of a Plan could give rise to a
prohibited transaction if the Depositor, the related Trustee or any related
Underwriter, Master Servicer, Special Servicer, Sub-Servicer, REMIC
Administrator, Manager, mortgagor or obligor under any credit enhancement
mechanism, or any of certain affiliates thereof, is or becomes a Party in
Interest with respect to an investing Plan. Accordingly, potential Plan
investors should consult their counsel and review the ERISA discussion in the
related Prospectus Supplement before purchasing any such Certificates.
PROHIBITED TRANSACTION EXEMPTION 91-23
The DOL has issued an individual exemption, Prohibited Transaction
Exemption 91-23 (56 Fed. Reg. 15936, April 18, 1991) (the "Exemption"), to
Salomon Smith Barney Inc. (formerly known as Smith Barney Inc.), which generally
exempts from the application of the prohibited transaction provisions of Section
406 of ERISA, and the excise taxes imposed on such prohibited transactions
pursuant to Section 4975(a) and (b) of the Code, certain transactions, among
others, relating to the servicing and operation of mortgage pools and the
initial purchase, holding and subsequent resale of mortgage pass-through
certificates underwritten by an Underwriter (as hereinafter defined), provided
that certain conditions set forth in the Exemption are satisfied. For purposes
of this Section "ERISA Considerations", the term "Underwriter" shall include (a)
Salomon Smith Barney Inc., (b) any person directly or indirectly, through one or
more intermediaries, controlling, controlled by or under common control with
Salomon Smith Barney Inc. and (c) any member of the underwriting syndicate or
selling group of which a person described in (a) or (b) is a manager or
co-manager with respect to a class of Certificates.
The Exemption sets forth six general conditions which must be satisfied
for the Exemption to apply. First, the acquisition of Certificates by a Plan or
with assets of a Plan must be on terms that are at least as favorable to the
Plan as they would be in an arm's-length transaction with an unrelated party.
Second, the 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 assets of a Plan must be rated in one of the three
highest generic rating categories by Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc., 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
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"Restricted Group" which consists of any Underwriter, the Depositor, the
Trustee, the Master Servicer, any Special Servicer, any Sub-Servicer and any
obligor with respect to assets included in the Trust Fund constituting more than
5% of the aggregate unamortized principal balance of the assets in the Trust
Fund as of the date of initial issuance of the Certificates. Fifth, the sum of
all payments made to and retained by the Underwriter(s) must represent not more
than reasonable compensation for underwriting the Certificates; the sum of all
payments made to and retained by the Depositor pursuant to the assignment of the
assets to the related Trust Fund must represent not more than the fair market
value of such obligations; and the sum of all payments made to and retained by
the Master Servicer, any Special 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
investor using Plan assets must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the Commission under the Securities Act of 1933, as
amended.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) certificates evidencing
interests in such other investment pools must have been rated in one of the
three highest categories of one of the Exemption Rating Agencies for at least
one year prior to the acquisition of Certificates by or on behalf of a Plan or
with assets of a Plan; and (iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than Plans for at
least one year prior to any acquisition of Certificates by or on behalf of a
Plan or with assets of a Plan.
A fiduciary of a Plan or any person investing assets of a Plan 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, transfer, holding or the direct or
indirect acquisition or disposition in the secondary market of Certificates by a
Plan or with assets of a Plan. 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 assets of a Plan in
the Certificates is (a) a mortgagor with respect to 5% or less of the fair
market value of the Trust Fund Assets or (b) an affiliate of such a person, (2)
the direct or indirect acquisition or disposition in the secondary market of
Certificates by a Plan and (3) the holding of Certificates by a Plan or with
Plan Assets.
Further, if certain specific conditions of the Exemption are also
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
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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.
PROHIBITED TRANSACTION CLASS EXEMPTIONS
In considering an investment in the Offered Certificates, a Plan
fiduciary should consider the availability of prohibited transaction exemptions
promulgated by the DOL including, among others, Prohibited Transaction Class
Exemption ("PTCE") 75-1, which exempts certain transactions involving Plans and
certain broker-dealers, reporting dealers and banks; PTCE 90-1, which exempts
certain transactions between insurance company separate accounts and Parties in
Interest; PTCE 91-38, which exempts certain transactions between bank collective
investment funds and Parties in Interest; PTCE 84-14, which exempts certain
transactions effected on behalf of a Plan by a "qualified professional asset
manager"; PTCE 95-60, which exempts certain transactions between insurance
company general accounts and Parties in Interest; and PTCE 96-23, which exempts
certain transactions effected on behalf of a Plan by an "in-house asset
manager". There can be no assurance that any of these class exemptions will
apply with respect to any particular Plan investment in the Certificates or,
even if it were deemed to apply, that any exemption would apply to all
transactions that may occur in connection with such investment. The Prospectus
Supplement with respect to the Offered Certificates of any Series may contain
additional information regarding the availability of other exemptions with
respect to such Offered Certificates.
INSURANCE COMPANY GENERAL ACCOUNTS
In addition to any exemption that may be available under PTCE 95-60 for
the purchase and holding of Offered Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by the Code, for transactions involving an insurance company
general account. Pursuant to Section 401(c) of ERISA, the DOL is required to
issue final regulations ("401(c) Regulations") no later than December 31, 1997,
which are to provide guidance for the purpose of determining, in cases where
insurance policies supported by an insurer's general account are issued to or
for the benefit of a Plan on or before December 31, 1998, which general account
assets constitute Plan assets. Section 401(c) of ERISA generally provides that,
until the date which is 18 months after the 401(c) Regulations become final, no
person shall be subject to liability under Part 4 of Title I of ERISA and
Section 4975 of the Code on the basis of a claim that the assets of an insurance
company general account constitute Plan assets, unless (i) as otherwise provided
by the Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal or
state criminal law. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued to
Plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) Regulations may be treated as Plan assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan assets of any Plan invested in
such separate account. Insurance companies contemplating the investment of
general account assets in Offered Certificates should consult with their legal
counsel with respect to the applicability of Section 401(c) of ERISA, including
the general account's ability to continue to hold such Certificates after the
date which is 18 months after the date the 401(c) Regulations become final.
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CONSULTATION WITH COUNSEL
Any Plan fiduciary which proposes to purchase Offered Certificates on
behalf of or with assets of a Plan should consider its general fiduciary
obligations under ERISA and should consult with its counsel with respect to the
potential applicability of ERISA and the Code to such investment and the
availability of any prohibited transaction exemption in connection with the
purchase of any Offered Certificates.
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
inclusions" of a REMIC allocated to a REMIC Residual Certificate held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to federal
income tax. See "Federal Income Tax Consequences -- REMICs -- Taxation of Owners
of REMIC Residual Certificates -- Excess Inclusions".
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Offered Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
In general, "mortgage related securities" are 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 (including the District of Columbia and Puerto Rico), and
whose authorized investments are subject to state regulation, 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 such entities. The appropriate characterization
of those Offered Certificates not qualifying as "mortgage related securities"
("Non-SMMEA Certificates") under various legal investment restrictions, and thus
the ability of investors subject to these restrictions to purchase such Offered
Certificates, may be subject to significant interpretive uncertainties.
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Non-SMMEA Certificates constitute legal investments for them.
Prior to December 31, 1996, only Classes of Offered Certificates that
(i) were rated in one of the two highest rating categories by one or more Rating
Agencies and (ii) were part of a Series evidencing interests in a Trust Fund
consisting of loans directly secured by a first lien on a single parcel of real
estate upon which is located a dwelling or mixed residential and commercial
structure, and originated by the types of originators specified in SMMEA, would
be "mortgage related securities" for purposes of SMMEA. Furthermore, under SMMEA
as originally enacted, if a state enacted legislation on or before October 3,
1991 that specifically limited the legal investment authority of any of the
entities referred to in the preceding paragraph with respect to "mortgage
related securities" under such definition, Offered Certificates would constitute
legal investments for entities subject to such legislation only to the extent
provided in such legislation.
Effective December 31, 1996, the definition of "mortgage related
securities" was modified to include among the types of loans to which such
securities may relate, loans secured by "one or more parcels of real estate upon
which is located one or more commercial structures". In addition, the related
legislative history states that this expanded definition includes multifamily
loans secured by more than one parcel of real estate upon which is located more
than one structure. Until September 23, 2001, any state may enact legislation
limiting the extent to which "mortgage related securities" under this expanded
definition would constitute legal investments under that state's laws. However,
enactment by a state of any such legislative restrictions will not affect the
validity of any contractual commitment to purchase, hold or invest in securities
qualifying as "mortgage related securities" that was made, and will
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not require the sale or disposition of any securities that were acquired, prior
to enactment of such state 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 in
"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. ss.24 (Seventh), subject in each case to such regulations as
the applicable federal regulatory authority may prescribe. In this connection,
the Office of the Comptroller of the Currency (the "OCC") has amended 12 C.F.R.
Part 1 to authorize national banks to purchase and sell for their own account,
without limitation as to a percentage of the bank's capital and surplus (but
subject to compliance with certain general standards in 12 C.F.R. ss.1.5
concerning "safety and soundness" and retention of credit information), certain
"Type IV securities", defined in 12 C.F.R. ss.1.2(1) to include certain
"commercial mortgage-related securities" and "residential mortgage-related
securities". As so defined, "commercial mortgage-related security" and
"residential mortgage-related security" mean, in relevant part, "mortgage
related security" within the meaning of SMMEA, provided that, in the case of a
"commercial mortgage-related security", it "represents ownership of a promissory
note or certificate of interest or participation that is directly secured by a
first lien on one or more parcels of real estate upon which one or more
commercial structures are located and that is fully secured by interests in a
pool of loans to numerous obligors". In the absence of any rule or
administrative interpretation by the OCC defining the term "numerous obligors",
no representation is made as to whether any Class of Offered Certificates will
qualify as "commercial mortgage-related securities", and thus as "Type IV
securities", for investment by national banks. The National Credit Union
Administration (the "NCUA") has adopted rules, codified at 12 C.F.R. Part 703,
which permit federal credit unions to invest in "mortgage related securities"
under certain limited circumstances, other than stripped mortgage related
securities, residual interests in mortgage related securities, and commercial
mortgage related securities, unless the credit union has obtained written
approval from the NCUA to participate in the "investment pilot program"
described in 12 C.F.R. ss.703.140. The Office of Thrift Supervision (the "OTS")
has issued Thrift Bulletin 13a (December 1, 1998), "Management of Interest Rate
Risk, Investment Securities, and Derivatives Activities", which thrift
institutions subject to the jurisdiction of the OTS should consider before
investing in any of the Offered Certificates.
All depository institutions considering an investment in the Offered
Certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "1998 Policy Statement") of
the Federal Financial Institutions Examination Council, which has been adopted
by the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation (the "FDIC"), the OCC and the OTS effective May 26, 1998,
and by the NCUA effective October 1, 1998. The 1998 Policy Statement sets forth
general guidelines which depository institutions must follow in managing risks
(including market, credit, liquidity, operational (transaction), and legal
risks) applicable to all securities (including mortgage pass-through securities
and mortgage-derivative products) used for investment purposes.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any Offered
Certificates, as certain Series or Classes of Offered Certificates may be deemed
unsuitable investments, or may otherwise be restricted, under such rules,
policies or guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not
"interest-bearing" or "income paying" and, with regard to any Offered
Certificates issued in book-entry form, provisions which may restrict or
prohibit investments in securities which are issued in book-entry form.
Except as to the status of certain Classes of Offered Certificates as
"mortgage related securities", no representations are made as to the proper
characterization of the Offered Certificates for legal
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investment purposes, financial institution regulatory purposes, or other
purposes, or as to the ability of particular investors to purchase Offered
Certificates under applicable legal investment restrictions. Theuncertainties
described above (and any unfavorable future determinations concerning legal
investment of financial institution regulatory characteristics of the Offered
Certificates) may adversely affect the liquidity of the Offered Certificates.
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Offered Certificates of any Class and
Series constitute legal investments or are subject to investment, capital or
other restrictions and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
METHOD OF DISTRIBUTION
The Offered Certificates offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Certificates may
be effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Offered Certificates will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Salomon Smith Barney Inc. ("Salomon
Smith Barney") acting as underwriter with other underwriters, if any, named
therein. In such event, the Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Offered Certificates agreed to
be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of Offered
Certificates in the form of discounts, concessions or commissions. The
Prospectus Supplement will describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that Offered
Certificates will be distributed by Salomon Smith Barney acting as agent or in
some cases as principal with respect to Offered Certificates that it has
previously purchased or agreed to purchase. If Salomon Smith Barney acts as
agent in the sale of Offered Certificates, Salomon Smith Barney will receive a
selling commission with respect to such Offered Certificates, depending on
market conditions, expressed as a percentage of the aggregate Certificate
Balance or notional amount of such Offered Certificates as of the Cut-off Date.
The exact percentage for each series of Certificates will be disclosed in the
related Prospectus Supplement. To the extent that Salomon Smith Barney elects to
purchase Offered Certificates as principal, Salomon Smith Barney may realize
losses or profits based upon the difference between its purchase price and the
sales price. The Prospectus Supplement with respect to any series offered other
than through underwriters will contain information regarding the nature of such
offering and any agreements to be entered into between the Depositor and
purchasers of Offered Certificates of such series.
The Depositor will indemnify Salomon Smith Barney and any underwriters
against certain civil liabilities, including liabilities under the Securities
Act of 1933, or will contribute to payments Salomon Smith Barney and any
underwriters may be required to make in respect thereof.
In the ordinary course of business, Salomon Smith Barney and the
Depositor may engage in various securities and financing transactions, including
repurchase agreements to provide interim financing of the Depositor's mortgage
loans pending the sale of such mortgage loans or interests therein, including
the Certificates.
The Depositor anticipates that the Offered Certificates will be sold
primarily to institutional investors. Purchasers of Offered Certificates,
including dealers, may, depending on the facts and circumstances of such
purchases, be deemed to be "underwriters" within the meaning of the Securities
Act of 1933 in connection with reoffers and sales by them of Offered
Certificates. Certificateholders should consult with their legal advisors in
this regard prior to any such reoffer or sale.
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As to each series of Certificates, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any unrated class may be initially retained by the Depositor, and may be sold by
the Depositor at any time to one or more institutional investors.
LEGAL MATTERS
Certain legal matters in connection with the Certificates, including
certain federal income tax consequences, will be passed upon for the Depositor
by Thacher Proffitt & Wood, New York, New York, or Sidley & Austin, New York,
New York.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Certificates and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any class of Offered Certificates
that they shall have been rated not lower than investment grade, that is, in one
of the four highest rating categories, by a Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped interest certificates in extreme cases might fail to recoup their
initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the "Commission"). Such reports and other information filed
by the Depositor can be inspected and copied at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and its Regional Offices located as follows:
Chicago Regional Office, 500 West Madison, 14th Floor, Chicago, Illinois 60661;
New York Regional Office, Seven World Trade Center, New York, New York 10048.
Copies of such material can also be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Depositor does not intend to send any financial reports to
Certificateholders.
This Prospectus does not contain all of the information set forth in
the Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Depositor has filed with the Commission under the Securities
Act of 1933 and to which reference is hereby made.
REPORTS TO CERTIFICATEHOLDERS
The Master Servicer or the Trustee will be required to mail to holders
of Offered Certificates of each series periodic unaudited reports concerning the
related Trust Fund. Unless and until definitive Certificates are issued, or
unless otherwise provided in the related Prospectus Supplement, such reports
88
<PAGE>
will be sent on behalf of the related Trust Fund to a nominee of The Depository
Trust Company ("DTC") and registered holder of the Offered Certificates,
pursuant to the applicable Agreement. Such reports may be available to holders
of interests in the Certificates (the "Certificateholders") upon request to
their respective DTC participants. See "Description of the Certificates --
Reports to Certificateholders" and "Description of the Agreements -- Evidence as
to Compliance". The Depositor will file or cause to be filed with the Commission
such periodic reports with respect to each Trust Fund as are required under the
Exchange Act, and the rules and regulations of the Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the
termination of the offering of Offered Certificates evidencing interests
therein. The Depositor will provide or cause to be provided without charge to
each person to whom this Prospectus is delivered in connection with the offering
of one or more classes of Offered Certificates, a copy of any or all documents
or reports incorporated herein by reference, in each case to the extent such
documents or reports relate to one or more of such classes of such Offered
Certificates, other than the exhibits to such documents (unless such exhibits
are specifically incorporated by reference in such documents). Requests to the
Depositor should be directed in writing to its principal executive office at
Seven World Trade Center, New York, New York 10048, Attention: Secretary, or by
telephone at (212) 783-5635. The Depositor has determined that its financial
statements are not material to the offering of any Offered Certificates.
89
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
PAGE
----
401(c) Regulations....................................................... 92
Accrual Certificates..................................................... 23
Accrued Certificate Interest............................................. 25
ARM Loans................................................................ 16
Available Distribution Amount............................................ 24
Book-Entry Certificates.................................................. 23
Cash Flow Agreement...................................................... 18
CERCLA................................................................... 10, 58
Certificate Account...................................................... 18, 35
Certificate Balance...................................................... 25
Certificate Owners....................................................... 30
Certificateholders....................................................... 97
Class Exemptions......................................................... 92
Closing Date............................................................. 64
Code..................................................................... 62
Commercial Loans......................................................... 13
Commission............................................................... 97
Committee Report......................................................... 64
Contingent Payment Regulations........................................... 87
Contributions Tax........................................................ 76
Cooperatives............................................................. 13
CPR...................................................................... 20
Credit Support........................................................... 18
Crime Control Act........................................................ 61
Cut-off Date............................................................. 26
Debt Service Coverage Ratio.............................................. 14
Definitive Certificates.................................................. 23
Depositor................................................................ 13, 22
Determination Date....................................................... 23
Distribution Date........................................................ 23
DOL...................................................................... 89
DOL Regulations.......................................................... 89
DTC...................................................................... 30, 97
Due Period............................................................... 24
Equity Participation..................................................... 17
ERISA.................................................................... 11, 89
ERISA Plans.............................................................. 89
Exchange Act............................................................. 97
Excluded Plan............................................................ 91
Exemption................................................................ 90
Exemption Rating Agencies................................................ 91
FDIC..................................................................... 35
Garn Act................................................................. 60
Grantor Trust Certificates............................................... 62
Grantor Trust Fractional Interest Certificate............................ 79
Grantor Trust Fund....................................................... 62
Grantor Trust Strip Certificate.......................................... 79
Indirect Participants.................................................... 30
Insurance Proceeds....................................................... 35
IRS...................................................................... 65
Issue Premium............................................................ 71
(TABLE CONTINUED ON NEXT PAGE)
90
<PAGE>
(TABLE CONTINUED FROM PREVIOUS PAGE)
PAGE
----
L/C Bank............................................................. 50
Liquidation Proceeds................................................. 35, 36
Loan-to-Value Ratio.................................................. 15
Lock-out Date........................................................ 16
Lock-out Period...................................................... 16
Mark-to-Market Regulations........................................... 74
Master Servicer...................................................... 45
MBS.................................................................. 1, 13
MBS Agreement........................................................ 17
MBS Issuer........................................................... 17
MBS Servicer......................................................... 17
MBS Trustee.......................................................... 17
Mortgage Asset Seller................................................ 13
Mortgage Assets...................................................... 13
Mortgage Loans....................................................... 13
Mortgage Notes....................................................... 13
Mortgage Rate........................................................ 16
Mortgaged Properties................................................. 13
Mortgages............................................................ 13, 52
Multifamily Loans.................................................... 13
Net Leases........................................................... 14
Net Operating Income................................................. 14
Nonrecoverable Advance............................................... 27
Offered Certificates................................................. 13
OID Regulations...................................................... 62
Originator........................................................... 13
Participants......................................................... 30
Parties in Interest.................................................. 89
Pass-Through Rate.................................................... 24
Permitted Investments................................................ 35
Plan Assets.......................................................... 89
Plans................................................................ 89
Prepayment Assumption................................................ 64, 82
Prepayment Premium................................................... 16
Prohibited Transactions Tax.......................................... 76
PTCE................................................................. 92
PTCE 83-1............................................................ 92
Purchase Price....................................................... 34
Record Date.......................................................... 23
Related Proceeds..................................................... 27
Relief Act........................................................... 61
REMIC................................................................ 62
REMIC Certificates................................................... 62
REMIC Provisions..................................................... 62
REMIC Regular Certificates........................................... 62
REMIC Regulations.................................................... 62
REMIC Residual Certificates.......................................... 62
REO Property......................................................... 38
REO Tax.............................................................. 39
Residual Owner....................................................... 69
(TABLE CONTINUED ON NEXT PAGE)
91
<PAGE>
(TABLE CONTINUED FROM PREVIOUS PAGE)
PAGE
----
Retained Interest........................................................... 44
RICO........................................................................ 61
Salomon Smith Barney........................................................ 96
Senior Certificates......................................................... 23
Servicing Standard.......................................................... 38
SMMEA....................................................................... 94
SPA......................................................................... 20
Special Servicer............................................................ 39
Spread Certificates......................................................... 23
Stripped Interest Certificates.............................................. 23
Stripped Principal Certificates............................................. 23
Sub-Servicer................................................................ 39
Sub-Servicing Agreement..................................................... 39
Subordinate Certificates.................................................... 23
Superlien................................................................... 58
Tax Favored Plans........................................................... 89
Tiered MBS.................................................................. 13
Tiered REMICs............................................................... 63
Title V..................................................................... 60
Trust Fund.................................................................. 13
Trustee..................................................................... 48
UCC......................................................................... 53
Underwriter................................................................. 90
United States Person........................................................ 79
Value....................................................................... 15
Warranting Party............................................................ 33
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The expenses expected to be incurred in connection with the issuance
and distribution of the Securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
SEC Registration Fee......................... $1,390,000.00
Printing and Engraving Fees.................. 20,000.00*
Legal Fees and Expenses...................... 150,000.00*
Accounting Fees and Expenses................. 50,000.00*
Trustee Fees and Expenses.................... 20,000.00*
Rating Agency Fees........................... 75,000.00*
Miscellaneous................................ 15,000.00*
Total................................... $1,720,000.00
=============
---------
* Based on the offering of a single series of Securities.
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 8(b) of the proposed form of Underwriting Agreement, the
Underwriters are obligated under certain circumstances to indemnify certain
controlling persons of the Depositor against certain liabilities, including
liabilities under the Securities Act of 1933.
Subsection (a) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another cor poration, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no cause to believe his conduct was unlawful.
Subsection (b) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that such person acted in any of the capacities set forth
above, against expenses (including attorneys' fees) actually and reasonably
incurred by him in con nection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification may be made in respect of any claim, issue or matter as to which
<PAGE>
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful on the merits or
otherwise in the defense of any action, suit or proceeding referred to in
subsections (a) and (b), or in the defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith; that
indemnification and advancement of ex penses provided by, or granted pursuant
to, Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and empowers the corporation to purchase and
maintain insurance on behalf of a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
The By-Laws of the Depositor provide, in effect, that to the extent and
under the circumstances permitted by subsections (a) and (b) of Section 145 of
the General Corporation Law of Delaware, the Depositor (i) shall indemnify and
hold harmless each person who was or is a party or is threatened to be made a
party to any action, suit or proceeding described in subsections (a) and (b) by
reason of the fact that he is or was a director or officer, or his testator or
intestate is or was a director or officer of the Depositor against expenses,
judgments, fines and amounts paid in settlement, and (ii) shall indemnify and
hold harmless each person who was or is a party or is threatened to be made a
party to any such action, suit or proceeding if such person is or was serving at
the request of the Depositor as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
Pursuant to Section 145 of the General Corporation Law of Delaware,
liability insurance is maintained covering directors and principal officers of
the Depositor.
The Pooling and Servicing Agreement or Trust Agreement with respect to
each series of Certificates and the Servicing Agreement, Indenture and Owner
Trust Agreement with respect to each series of Notes will provide that no
director, officer, employee or agent of the Depositor is liable to the Trust
Fund or the Securityholders, except for such person's own willful misfeasance,
bad faith or gross negligence in the performance of duties or reckless disregard
of obligations and duties. The Pooling and Servicing Agreement or Trust
Agreement with respect to each series of Certificates and the Servicing
Agreement, Indenture and Owner Trust Agreement with respect to each series of
Notes will further provide that, with the exceptions stated above, a director,
officer, employee or agent of the Depositor is entitled to be indemnified
against any loss, liability or expense incurred in connection with legal action
relating to such Pooling and Servicing Agreement, Trust Agreement, Servicing
Agreement, Indenture or Owner Trust Agreement and related Securities other than
such expenses related to particular Mortgage Loans.
II - 2
<PAGE>
Item 16. EXHIBITS.
1.1 Form of Underwriting Agreement is incorporated by reference from
Registration Statement on Form S-3 (File No. 33-78332).
3.1 Certificate of Incorporation of the Registrant is incorporated
by reference from Registration Statement on Form S-3 (File No.
33-78332).
3.2 By-laws of the Registrant are incorporated by reference from
Registration Statement on Form S-3 (File No. 33-78332).
4.1 Form of Pooling and Servicing Agreement, for a series
consisting of Senior and Subordinate Certificates is
incorporated by reference from Registration Statement
on Form S-3 (File No. 33-78332).
4.2 Form of Pooling and Servicing Agreement, for a series
consisting of a single class of Certificates is
incorporated by reference from Registration Statement
on Form S-3 (File No. 33-78332).
4.3 Form of Trust Agreement, for a resecuritization of
Mortgage Pass-Through Certificates is incorporated by
reference from Registration Statement on Form S-3
(File No. 333-14225).
4.4 Form of Servicing Agreement, for a series consisting
of Mortgage-Backed Notes is incorporated by reference
from Registration Statement on Form S-3 (File No.
333-44593).
4.5 Form of Trust Agreement, for a series consisting of
Mortgage-Backed Notes is incorporated by reference
from Registration Statement on Form S-3 (File No.
333-44593).
4.6 Form of Indenture, for a series consisting of
Mortgage-Backed Notes is incorporated by reference
from Registration Statement on Form S-3 (File No.
333-44593).
5.1 Opinion of Thacher Proffitt & Wood (filed as part of original
filing on August 2, 1999).
5.2 Opinion of Sidley & Austin (filed as part of original filing on
August 2, 1999).
8.1 Opinion of Thacher Proffitt & Wood with respect to
certain tax matters (included as part of Exhibit
5.1).
8.2 Opinion of Sidley & Austin with respect to certain tax matters.
(filed as part of original filing on August 2, 1999).
23.1 Consent of Thacher Proffitt & Wood (included as part of Exhibits
5.1 and 8.1).
23.2 Consent of Sidley & Austin (included as part of Exhibits 5.2 and
8.2.
24.1 Power of Attorney. (filed as part of original filing on
August 2, 1999).
II - 3
<PAGE>
Item 17. UNDERTAKINGS.
A. UNDERTAKING PURSUANT TO RULE 415.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933; (ii) to reflect in the prospectus any facts or
events arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; (iii) to include
any material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material
change of such information in the Registration Statement;
PROVIDED, HOWEVER, that paragraphs (i) and (ii) do not apply if the
information required to be included in the post-effective amendment is
contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
B. UNDERTAKING IN CONNECTION WITH INCORPORATION BY REFERENCE OF CERTAIN
FILINGS UNDER THE SECURITIES EXCHANGE ACT OF 1934.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
C. UNDERTAKING IN RESPECT OF INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item 15 above,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for
II - 4
<PAGE>
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted against the Registrant by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issues.
II - 5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Salomon Brothers Mortgage Securities VII, Inc. certifies that it has reasonable
grounds to believe that it meets all of the requirements for filing on Form S-3
and has duly caused this Amendment No. 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 7th day of September, 1999.
SALOMON BROTHERS MORTGAGE
SECURITIES VII, INC.
By: /s/ Susan Mills
------------------------
Name: Susan Mills
Title: Assistant Vice President
II - 6
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement has been signed below by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Susan Mills * Director and President September 7, 1999
- ------------------------ (Principal Executive Officer)
Thomas G. Maheras
/s/ Mark Kleinman Treasurer (Principal Financial September 7, 1999
- ------------------------ Officer
Mark Kleinman
/s/ Charlie Milone Assistant Vice President September 7, 1999
- ------------------------ (Principal Accounting Officer)
Charlie Milone
/s/ Susan Mills * Director and September 7, 1999
- -------------------------- Vice President
Jeffrey A. Perlowitz
/s/ Susan Mills * Director September 7, 1999
- --------------------------
Mark Tsesarsky
</TABLE>
* By: /s/ Susan Mills
---------------------
Susan Milils
Attorney-in-fact
II - 7
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- ------
1.1 Form of Underwriting Agreement is incorporated
by reference from Registration Statement on
on Form S-3 (File No. 33-78332).
3.1 Certificate of Incorporation of the Registrant
is incorporated by reference from Registration
Statement on Form S-3 (File No. 33-78332).
3.2 By-laws of the Registrant are incorporated by
reference from Registration Statement on Form S-3
(File No. 33-78332).
4.1 Form of Pooling and Servicing Agreement, for
a series consisting of Senior and Subordinate
Certificates is incorporated by reference
from Registration Statement on Form S-3 (File
No. 33-78332).
4.2 Form of Pooling and Servicing Agreement, for
a series consisting of a single class of
Certificates is incorporated by reference
from Registration Statement on Form S-3 (File
No. 33-78332).
4.3 Form of Trust Agreement, for a
resecuritization of Mortgage Pass-Through
Certificates is incorporated by reference
from Registration Statement on Form S-3 (File
No. 333-14225).
4.4 Form of Servicing Agreement, for a series
consisting of Mortgage-Backed Notes is
incorporated by reference from Registration
Statement on Form S-3 (File No. 333-44593).
4.5 Form of Trust Agreement, for a series
consisting of Mortgage-Backed Notes is
incorporated by reference from Registration
Statement on Form S-3 (File No. 333-44593).
4.6 Form of Indenture, for a series consisting of
Mortgage- Backed Notes is incorporated by
reference from Registration Statement on Form
S-3 (File No. 333-44593).
5.1 Opinion of Thacher Proffitt & Wood (filed as
part of original filing on August 2, 1999).
5.2 Opinion of Sidley & Austin (filed as part of original
filing on August 2, 1999).
II - 8
<PAGE>
8.1 Opinion of Thacher Proffitt & Wood
with respect to certain tax matters (included as part of
Exhibit 5.1).
8.2 Opinion of Sidley & Austin with respect to certain tax matters
(filed as part of original filing on August 2, 1999).
23.1 Consent of Thacher Proffitt & Wood (included
as part of Exhibits 5.1 and 8.1).
23.2 Consent of Sidley & Austin (included as part of Exhibits 5.2 and
8.2).
24.1 Power of Attorney (filed as part of original filing on
August 2, 1999).
II - 9
Exhibit 5.1
August 2, 1999
Salomon Brothers Mortgage Securities VII, Inc.
390 Greenwich Street
4th Floor
New York, New York 10013
Re: Salomon Brothers Mortgage Securities VII, Inc.
Mortgage Pass-Through Certificates and
Mortgage-Backed Notes Registration Statement on Form S-3
--------------------------------------------------------
Ladies and Gentlemen:
We are counsel to Salomon Brothers Mortgage Securities VII,
Inc., a Delaware corporation (the "Registrant"), in connection with the
registration under the Securities Act of 1933, as amended (the "Act"), of
Mortgage Pass-Through Certificates (the "Certificates") and Mortgage-Backed
Notes (the "Notes"; and together with the Certificates, the "Securities"), the
related preparation and filing of a Registration Statement on Form S-3 (the
"Registration Statement"). The Certificates are issuable in series, either (i)
under pooling and servicing agreements (each such agreement, a "Pooling and
Servicing Agreement"), among the Registrant, a master servicer to be identified
in the prospectus supplement for such series of Certificates and a trustee also
to be identified in that prospectus supplement or (ii) under trust agreements
(each such agreement, a "Trust Agreement"), between the Registrant and a trustee
to be identified in the prospectus supplement for such series of Certificates.
The Notes are issuable in series under indentures (each such agreement, an
"Indenture"; a Pooling and Servicing Agreement, a Trust Agreement or an
Indenture, an "Agreement" ), between an issuer and an indenture trustee, to be
identified in the prospectus supplement for such series of Notes. Each Agreement
will be substantially in the form filed as an Exhibit to the Registration
Statement. Capitalized terms used by not defined herein shall have the meanings
assigned to them in the Registration Statement.
<PAGE>
Salomon Brothers Mortgage Securities VII, Inc.
August 2, 1999 Page 2.
In connection with rendering this opinion letter, we have
examined the forms of the Agreements incorporated by reference in the
Registration Statement, the Registration Statement and such records and other
documents as we have deemed necessary. As to matters of fact, we have examined
and relied upon representations or certifications of officers of the Registrant
or public officials. We have assumed the authenticity of all documents submitted
to us as originals, the genuineness of all signatures, the legal capacity of
natural persons and the conformity to the originals of all documents. We have
assumed that all parties, other than the Registrant, had the corporate power and
authority to enter into and perform all obligations thereunder and, as to such
parties, we also have assumed the enforceability of such documents.
In rendering this opinion letter, we express no opinion as to
the laws of any jurisdiction other than the laws of the State of New York and
the corporate laws of the State of Delaware, nor do we express any opinion,
either implicitly or otherwise, on any issue not expressly addressed below. In
rendering this opinion letter, we have not passed upon and do not pass upon the
application of "doing business" or the securities laws of any jurisdiction. This
opinion letter is further subject to the qualification that enforceability may
be limited by (i) bankruptcy, insolvency, liquidation, receivership, moratorium,
reorganization or other laws affecting the enforcement of the rights of
creditors generally and (ii) general principles of equity, whether enforcement
is sought in a proceeding in equity or at law.
Based on the foregoing, we are of the opinion that:
1. When a Pooling and Servicing Agreement or a Trust Agreement
for a series of Certificates has been duly authorized by all necessary action
and duly executed and delivered by the parties thereto, such Pooling and
Servicing Agreement or Trust Agreement will be a legal and valid obligation of
the Registrant.
2. When an Indenture for a series of Notes has been duly
authorized by all necessary action and duly executed and delivered by the
parties thereto, such Indenture will be a legal and valid obligation of the
applicable issuer.
3. When a Pooling and Servicing Agreement or a Trust Agreement
for a series of Certificates has been duly authorized by all necessary action
and duly executed and delivered by the parties thereto, and when the
Certificates of such series have been duly executed and authenticated in
accordance with the provisions of that Pooling and Servicing Agreement or Trust
Agreement, and issued and sold as contemplated in the Registration Statement and
the prospectus and prospectus supplement delivered in connection therewith, such
Certificates will be legally and validly issued and outstanding, fully paid and
non-assessable, and the holders of such Certificates will be entitled to the
benefits of that Pooling and Servicing Agreement or Trust Agreement.
<PAGE>
Salomon Brothers Mortgage Securities VII, Inc.
August 2, 1999 Page 3.
4. When an Indenture for a series of Notes has been duly
authorized by all necessary action and duly executed and delivered by the
parties thereto, and when the Notes of such series have been duly executed and
authenticated in accordance with the provisions of that Indenture, and issued
and sold as contemplated in the Registration Statement and the prospectus and
prospectus supplement delivered in connection therewith, such Notes will be
legally and validly issued and outstanding, fully paid and non-assessable, and
the holders of such Notes will be entitled to the benefits of that Indenture.
5. For federal income tax purposes, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the Trust Fund
(or each applicable portion thereof) will qualify as a one of more REMICs and
the REMIC Certificates offered with respect thereto will be considered to
evidence ownership of "regular interests" or "residual interests" in that REMIC
within the meaning of the REMIC Provisions. This opinion confirms and adopts the
opinion set forth in the Prospectuses and Prospectus Supplements which form a
part of this Registration Statement.
6. For federal income tax purposes, assuming compliance with
all provisions of the related Indenture, Owner Trust Agreement and certain
related documents and upon issuance of the Notes or Debt Certificates, (i) the
Notes or Debt Certificates 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. This opinion confirms
and adopts the opinion set forth in the Prospectuses and Prospectus Supplements
which form a part of this Registration Statement.
7. For federal income tax purposes, 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. This
opinion confirms and adopts the opinion set forth in the Prospectuses and
Prospectus Supplements which form a part of this Registration Statement.
<PAGE>
Salomon Brothers Mortgage Securities VII, Inc.
August 2, 1999 Page 4.
We hereby consent to the filing of this opinion letter as an
Exhibit to the Registration Statement, and to the use of our name in the
prospectuses included in the Registration Statement under the heading "Legal
Matters" and in the prospectus supplement for any series of Securities in which
our name appears under the heading "Legal Matters" and/or "Federal Income Tax
Consequences", without admitting that we are "experts" within the meaning of the
Act, and the rules and regulations thereunder, with respect to any part of the
Registration Statement, including this Exhibit.
Very truly yours,
THACHER PROFFITT & WOOD
By /s/ Thacher Proffitt & Wood
EXHIBIT 5.2
LETTERHEAD OF SIDLEY & AUSTIN
July 22, 1999
Salomon Brothers Mortgage Securities VII, Inc.
390 Greenwich Street
New York, New York 10013
Re: Salomon Brothers Mortgage Securities VII, Inc.
Commercial Mortgage Pass-Through Certificates
----------------------------------------------
Ladies and Gentlemen:
We have acted as co-counsel for Salomon Brothers Mortgage
Securities VII, Inc., a Delaware corporation (the "Registrant"), in connection
with a registration statement on Form S-3 (the "Registration Statement") filed
by the Registrant on or about the date hereof with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933 (the "Act"). In
particular, our representation of the Registrant in connection with the
Registration Statement is limited to the extent that the Registration Statement
relates to the offering of various series of commercial mortgage pass-through
certificates (the "Offered CMBS").
Each series of Offered CMBS is to be sold as described in the
Registration Statement, any amendment thereof, and the prospectus and prospectus
supplement relating to such series of CMBS (the "Prospectus" and "Prospectus
Supplement", respectively). In general, each series of Offered CMBS will be
issued under a pooling and servicing agreement (a "Pooling and Servicing
Agreement") between the Registrant and the master servicer, special servicer and
trustee named therein. A form of Pooling and Servicing Agreement has been
incorporated by reference into the Registration Statement from an earlier
registration statement on Form S-3 filed by the Registrant.
<PAGE>
Salomon Brothers Mortgage Securities VII, Inc.
July 22, 1999
Page 2
In acting on behalf of the Registrant, we have examined
originals, or copies certified or otherwise identified to our satisfaction, of
such documents, corporate records and other instruments as we deemed necessary
for the purposes of this opinion. In our examination, we have assumed the
following: (a) the genuineness of all signatures; (b) the legal capacity of
natural persons; (c) the authenticity of all documents submitted to us as
originals; (d) the conformity to original documents of all documents submitted
to us as certified or photostatic copies and the authenticity of the originals
of such documents; and (e) the truth, accuracy and completeness of the
information, representations and warranties contained in the records, documents,
instruments and certificates that we have reviewed. As to any facts material to
the opinions expressed herein which were not known to us, we have relied upon
certificates, statements and representations of officers and other
representatives of the Registrant and others.
In rendering this opinion, we have assumed that the Pooling
and Servicing Agreement with respect to each series of Offered CMBS is executed
and delivered substantially in the form incorporated by reference into the
Registration Statement and that the transactions contemplated to occur with
respect to each series of Offered CMBS under the Registration Statement, the
related Prospectus, the related Prospectus Supplement and the related Pooling
and Servicing Agreement in fact occur in accordance with the terms thereof. We
have also assumed, with respect to each series of Offered CMBS, that:
(a) each party to the related Pooling and Servicing Agreement
has the power and authority to enter into and perform all of such
party's obligations thereunder, and
(b) when the related Pooling and Servicing Agreement has been
duly authorized by all necessary action, executed and delivered by each
party thereto, it will constitute the valid and binding obligation of
each party thereto, enforceable against such party in accordance with
its terms.
Based upon and subject to the foregoing, we are of the opinion
that when--
(i) the Registration Statement becomes effective,
(ii) the issuance and principal terms of a series of Offered
CMBS have been duly authorized by appropriate corporate action by the
Registrant,
(iii) the Pooling and Servicing Agreement for such Offered
CMBS has been duly authorized by all necessary action, executed and
delivered by each party thereto, and
<PAGE>
Salomon Brothers Mortgage Securities VII, Inc.
July 22, 1999
Page 3
(iv) such Offered CMBS have been duly executed, authenticated
and delivered in accordance with the terms and conditions of the
related Pooling and Servicing Agreement and sold in the manner
described in the Registration Statement, in any amendment thereto and
in the Prospectus and Prospectus Supplement relating thereto,
such Offered CMBS will be legally and validly issued and outstanding, fully paid
and non-assessable, and the holders of such Certificates will be entitled to the
benefits of the related Pooling and Servicing Agreement.
We hereby consent to the filing of this opinion letter as an
exhibit to the Registration Statement and to the use of our name under the
heading "Legal Matters" in the Prospectus and Prospectus Supplement relating to
each series of Offered CMBS with respect to which we act as counsel to the
Registrant. In giving such consent, we do not consider that we are "experts",
within the meaning of that term as used in the Act or the rules and regulations
of the Commission issued thereunder, with respect to any part of the
Registration Statement, including this opinion as an exhibit or otherwise.
We express no opinion as to any laws other than the laws of
the State of New York and do not express any opinion, either implicitly or
otherwise, on any issue not expressly addressed above.
Very truly yours,
/s/ Sidley & Austin
EXHIBIT 8.2
LETTERHEAD OF SIDLEY & AUSTIN
July 22, 1999
Salomon Brothers Mortgage Securities VII, Inc.
390 Greenwich Street
New York, New York 10013
Re: Salomon Brothers Mortgage Securities VII, Inc.
Commercial Mortgage Pass-Through Certificates
----------------------------------------------
Ladies and Gentlemen:
We have acted as co-counsel for Salomon Brothers Mortgage
Securities VII, Inc., a Delaware corporation (the "Registrant"), in connection
with a registration statement on Form S-3 (the "Registration Statement") filed
by the Registrant on or about the date hereof with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933 (the "Act"). In
particular, our representation of the Registrant in connection with the
Registration Statement is limited to the extent that the Registration Statement
relates to the offering of various series of commercial mortgage pass-through
certificates (the "Offered CMBS").
Each series of Offered CMBS are to be sold as described in the
Registration Statement, any amendment thereof, and the prospectus and prospectus
supplement relating to such series of CMBS (the "Prospectus" and "Prospectus
Supplement", respectively). In general, each series of Offered CMBS will be
issued under a pooling and servicing agreement (a "Pooling and Servicing
Agreement") between the Registrant and the master servicer, special servicer and
trustee
<PAGE>
Salomon Brothers Mortgage Securities VII, Inc.
July 22, 1999
Page 2
named therein. A form of Pooling and Servicing Agreement has been incorporated
by reference into the Registration Statement from an earlier registration
statement on Form S-3 filed by the Registrant.
In acting on behalf of the Registrant, we have examined
originals, or copies certified or otherwise identified to our satisfaction, of
such documents, corporate records and other instruments as we deemed necessary
for the purposes of this opinion. In our examination, we have assumed the
following: (a) the genuineness of all signatures; (b) the legal capacity of
natural persons; (c) the authenticity of all documents submitted to us as
originals; (d) the conformity to original documents of all documents submitted
to us as certified or photostatic copies and the authenticity of the originals
of such documents; and (e) the truth, accuracy and completeness of the
information, representations and warranties contained in the records, documents,
instruments and certificates that we have reviewed. As to any facts material to
the opinions expressed herein which were not known to us, we have relied upon
certificates, statements and representations of officers and other
representatives of the Registrant and others.
Based upon the foregoing, we are of the opinion that the
description set forth under the caption "Federal Income Tax Consequences" in the
form of Prospectus included in the Registration Statement that relates to
Offered CMBS correctly describes, as of the date hereof, the material aspects of
the federal income tax treatment of an investment in Offered CMBS to investors
that are United States Persons (as defined in that form of Prospectus) and,
where expressly indicated therein, to investors that are not United States
Persons.
We know that we are referred to under the heading "Federal
Income Tax Consequences" in the form of Prospectus included in the Registration
Statement that relates to Offered CMBS and will be referred to under the heading
"Certain Federal Income Tax Consequences" in the Prospectus Supplement for each
series of Offered CMBS with respect to which we act as counsel to the
Registrant, and we hereby consent to such use of our name in that form of
Prospectus and each such Prospectus Supplement and to the use of this opinion
for filing in connection with the Registration Statement. In giving such
consent, we do not consider that we are "experts", within the meaning of the
term as used in the Act or the rules and regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement including
this opinion as an exhibit or otherwise.
<PAGE>
Salomon Brothers Mortgage Securities VII, Inc.
July 22, 1999
Page 3
We express no opinion as to any laws other than the federal
laws of the United States of America, and do not express any opinion, either
implicitly or otherwise, on any issue not expressly addressed above.
Very truly yours,
/s/ Sidley & Austin
Exhibit 24.1
------------
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints any of Matthew Bollo, Susan Mills or
David Reedy as his true and lawful attorney-in-fact and agents for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agents full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming that said attorney-in-fact and agents,
may lawfully do or cause to be done by virtue hereof.
Signature Capacity Date
- --------- -------- ----
/s/ Thomas G. Maheras Director and President July 20, 1999
- ------------------------ (Principal Executive Officer)
Thomas G. Maheras
/s/ Jeffrey A. Perlowitz Director and Vice President July 20, 1999
- ------------------------
Jeffrey A. Perlowitz
/s/ Mark Tsesarsky Director July 20, 1999
- ------------------------
Mark Tsesarsky
