Prospectus Supplement dated February 24, 1999 (To Prospectus dated November 13,
1998)
$569,286,424 (APPROXIMATE)
TRUST CERTIFICATES, SERIES 1999-1
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
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YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-7 IN THIS
PROSPECTUS SUPPLEMENT AND PAGE 16 IN THE PROSPECTUS.
The certificates will represent the entire beneficial ownership interest in a
trust 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.
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THE TRUST --
o will consist of a 91.88% percentage interest in a class of mortgage
pass-through certificates previously issued by CWMBS, Inc. (such
certificates are referred to herein as the underlying certificates); and
o will be represented by thirteen classes of certificates, twelve of which
are offered hereby.
THE TRUST CERTIFICATES --
o will represent the entire beneficial ownership interest in the trust and
will receive distributions from the assets of the trust; and
o will receive monthly distributions commencing on March 26, 1999.
Salomon Smith Barney Inc. (the "Underwriter") will offer the Class A-1
Certificates, the Class A-2 Certificates, the Class A-3 Certificates, the Class
A-4 Certificates, the Class A-5 Certificates, the Class A-6 Certificates, the
Class A-7 Certificates, the Class A-8 Certificates, the Class A-9 Certificates,
the Class A-10 Certificates, the Class A-11 Certificates and the Class A-12
Certificates (collectively, the "Offered Certificates") from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The proceeds to the Depositor from the sale of
such certificates, before deducting expenses, will be approximately 99.27% 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 TRUST CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
SALOMON SMITH BARNEY
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD NOT
ASSUME THAT THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS DOCUMENT.
We provide information to you about the Offered Certificates in two separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to this series of certificates; and
o this prospectus supplement, which describes the specific terms of this
series of certificates.
Salomon Brothers Mortgage Securities VII, Inc.'s principal offices are located
at 390 Greenwich Street, 4th Floor, New York, New York 10013 and its phone
number is (212) 723-6391.
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
SUMMARY OF PROSPECTUS SUPPLEMENT..........................................S-3
RISK FACTORS..............................................................S-7
DESCRIPTION OF THE TRUST CERTIFICATES....................................S-10
DESCRIPTION OF THE UNDERLYING CERTIFICATES...............................S-21
THE MORTGAGE POOL........................................................S-32
YIELD ON THE TRUST CERTIFICATES..........................................S-37
TRUST AGREEMENT..........................................................S-47
POOLING AND SERVICING AGREEMENT..........................................S-48
FEDERAL INCOME TAX CONSEQUENCES..........................................S-54
METHOD OF DISTRIBUTION...................................................S-55
SECONDARY MARKET.........................................................S-56
RATINGS..................................................................S-56
LEGAL INVESTMENT.........................................................S-56
ERISA CONSIDERATIONS.....................................................S-57
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.,
Trust Certificates, Series 1999-1.
Reference Date...................January 1, 1999.
Closing Date.....................On or about February 25, 1999.
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 underlying
certificates into the trust. See "The
Depositor" in the prospectus.
Master Servicer..................Countrywide Home Loans, Inc. (the "Master
Servicer"). See "Pooling and Servicing
Agreement--The Master Servicer" herein.
Trustee..........................The Bank of New York (the "Trustee"), a New
York banking corporation, will be the Trustee
of the trust. See "Trust Agreement--The
Trustee" herein.
Underlying Trustee...............The Bank of New York (the "Underlying
Trustee"), a New York banking corporation, will
be the Trustee for the trust relating to the
underlying certificates. See "Pooling and
Servicing Agreement--The Underlying Trustee"
herein.
Distribution Dates...............Distributions on the Trust Certificates will be
made on the 26th day of each month, or, if such
day is not a business day, on the next
succeeding business day, beginning in March
1999. Distributions on the underlying
certificates will be received by the trust on
the 25th day of each month, or, if such day is
not a business day, on the next succeeding
business day.
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.
S-3
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================
INITIAL CERTIFICATE PASS-THROUGH INITIAL CERTIFICATE PASS-THROUGH
CLASS PRINCIPAL RATE CLASS PRINCIPAL BALANCE(1) RATE
BALANCE(1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A-1............. $161,000,000 6.50% A-7 . . . . . $27,000,000 6.50%
A-2............. $ 1,000,000 (2) A-8 . . . . . $ 9,400,000 6.75%
A-3............. $ 15,775,000 6.00% A-9 . . . . . $ 7,800,000 6.75%
A-4............. $ 59,300,000 6.50% A-10 . . . . . $ 7,373,000 6.75%
A-5............. $264,661,424 6.50% A-11 . . . . . $ 4,977,000 6.75%
A-6............. $ 10,000,000 6.50% A-12 . . . . . $ 1,000,000 (3)
==================================================================================================================
</TABLE>
- ----------------------
(1) Approximate. The Initial Certificate Principal Balance on each class of
certificates is subject to adjustment as described herein under
"Description of the Trust Certificates."
(2) Rate will equal 8.00% for 1st through 12th distribution, 6.75% for 13th
through 24th distribution and 6.50% thereafter.
(3) Rate will equal 6.50% for 1st through 12th distribution, 6.75 for 13th
through 24th distribution and 7.00% thereafter.
THE TRUST
The Depositor will establish a trust with respect to the Trust Certificates,
pursuant to a trust agreement dated as of February 25, 1999 between the
Depositor and the Trustee. There are thirteen classes of certificates
representing the trust, twelve of which are offered hereby. See "Description of
the Trust Certificates" herein.
The Trust Certificates will evidence in the aggregate the entire beneficial
ownership interest in the trust, other than a noneconomic residual interest. The
trust consists of a 91.88% percentage interest in a class of mortgage
pass-through certificates previously issued by CWMBS, Inc. (such certificates
are referred to herein as the "Underlying Certificates"). Distributions on the
Trust Certificates will be made only from distributions received on the
Underlying Certificates.
THE TRUST CERTIFICATES
The Trust Certificates offered hereby 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, other than the Class A-2, Class A-8, Class A-9, Class
A-10, Class A-11 and Class A-12 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 $25,000 and
integral multiples of $1,000 in excess thereof. The Class A-2, Class A-8, Class
A-9, Class A-10, Class A-11 and Class A-12 Certificates will initially be issued
in minimum denominations of $1,000 and integral multiples of $1,000 in excess
thereof. See "Description of the Trust Certificates --Registration of the
Book-Entry Certificates" herein.
THE UNDERLYING CERTIFICATES
The Underlying Certificates will consist of a 91.88% percentage interest in a
class of mortgage pass-through certificates issued by CWMBS, Inc. on December
22, 1998 entitled CWMBS, Inc., CHL Mortgage Pass-Through Trust, Series 1998-23,
Mortgage Pass-Through Certificates, Series 1998-23, Class A. The Underlying
Certificates had a certificate principal balance of approximately $569,286,524
as of January 1, 1999. The series of mortgage pass-through certificates to which
the Underlying Certificates belong consists of four classes of senior
certificates and six classes of subordinate certificates. The Underlying
Certificates belong to one of
S-4
<PAGE>
the classes of senior certificates of such series. The Underlying Certificates
and the other certificates of such series represent interests in a separate
trust which relates to such series and consists of mortgage loans.
For additional information regarding the Underlying Certificates, see
"Description of the Underlying Certificates" herein.
SUBORDINATION
The Underlying Certificates, which belong to a class of senior certificates,
will have a payment priority over the certificates of the same series that are
designated as subordinate certificates.
Subordination is designed to provide holders of certificates with a higher
payment priority, such as the Underlying Certificates, with protection against
most losses realized when the remaining unpaid principal balance on a mortgage
loan exceeds the amount of proceeds recovered upon the liquidation of that
mortgage loan. In general, this loss protection is accomplished by allocating
the realized losses to the subordinate certificates until the principal amount
of each class of subordinate certificates has been reduced to zero. Thereafter,
realized losses would be applied to the classes of senior certificates. Certain
categories of losses, however, such as special hazard losses, bankruptcy losses
and fraud losses in excess of the amounts set forth in this prospectus
supplement, are not allocated among the subordinate certificates before they are
allocated among the classes of senior certificates. Rather, such excess losses
will be allocated among all classes of certificates, even if the principal
balance of each class of certificates with a lower payment of priority has not
been reduced to zero.
For further information regarding the payment priority of the Underlying
Certificates, see "Description of the Underlying Certificates--Subordination of
the CWMBS Subordinate Certificates".
ADVANCES
The Master Servicer will be obligated to advance delinquent installments of
principal and interest (net of the related servicing fees) on the mortgage loans
included in the trust relating to the Underlying Certificates under certain
circumstances. See "Description of the Underlying Certificates--Advances"
herein.
THE MORTGAGE POOL
The Underlying Certificates represent a partial, senior interest in a separate
trust fund consisting of a pool of conventional, fixed-rate, fully-amortizing
mortgage loans secured by first liens on one- to four- family residential
properties. As of January 1, 1999, the mortgage pool consisted of 1,869 mortgage
loans having an aggregate principal balance of $647,986,119. For additional
information regarding the mortgage loans, see "The Mortgage Pool" herein.
OPTIONAL TERMINATION
The Trust Certificates are not subject to any optional termination. However, the
Master Servicer is entitled, subject to certain conditions relating to the
then-remaining size of the mortgage pool, to purchase all outstanding mortgage
loans and thereby effect early retirement of the Underlying Certificates and
thereby the Trust Certificates. See "Pooling and Servicing Agreement-- Optional
Termination" herein.
FEDERAL INCOME TAX CONSEQUENCES
A real estate mortgage investment conduit election will be made for federal
income tax purposes with respect to the trust fund.
For further information regarding the federal income tax consequences of
investing in the Trust Certificates, see "Federal Income Tax Consequences"
herein and in the Prospectus.
S-5
<PAGE>
RATINGS
It is a condition to the issuance of the certificates that the Offered
Certificates receive a rating of "AAA" from each of Duff & Phelps Credit Rating
Co. ("DCR") and Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P").
A security rating does not address the frequency of prepayments on the mortgage
loans or the corresponding effect on yield to investors in the Trust
Certificates. See "Yield on the Trust Certificates" and "Ratings" herein and
"Yield Considerations" in the prospectus.
LEGAL INVESTMENT
The Offered Certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") for
so long as they are rated 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.
ERISA CONSIDERATIONS
The U.S. Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption 91-23, to the Underwriter. Such exemption generally
exempts from the application of certain of the prohibited transaction provisions
of Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the excise taxes imposed on such prohibited transactions
by Section 4975(a) and (b) of the Internal Revenue Code of 1986 (the "Code") and
Section 502(i) of ERISA, transactions relating to the purchase, sale and holding
of pass-through certificates underwritten by the Underwriter. Such exemption
generally applies to certificates such as the Offered Certificates, and the
servicing and operation of asset pools such as the mortgage pool, provided that
certain conditions are satisfied. See "ERISA Considerations" herein and in the
prospectus.
S-6
<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 Trust Certificates.
THE MORTGAGE LOANS ARE CONCENTRATED IN THE STATE OF CALIFORNIA, WHICH MAY
PRESENT A GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately 49.91% of the mortgage loans by aggregate principal balance
of the mortgage loans as of January 1, 1999, are secured by mortgaged properties
located in the State of California. The aggregate principal balance of mortgage
loans in the California zip code with the largest amount of such mortgage loans,
by aggregate principal balance as of January 1, 1999, was approximately
$6,414,063. If the California residential real estate market should experience
an overall decline in property values after the dates of origination of the
mortgage loans, the rates of delinquencies, foreclosures, bankruptcies and
losses on the mortgage loans may increase over historical levels of comparable
type loans, and may increase substantially.
THE TRUST CERTIFICATES ARE OBLIGATIONS OF THE TRUST ONLY
The Trust Certificates will not represent an interest in or obligation of
the Depositor or the Trustee or any of their respective affiliates and the
Underlying Certificates do not represent an interest in or obligation of CWMBS,
the Master Servicer, the Underlying Trustee or any of their respective
affiliates. None of the Trust Certificates, the Underlying Certificates or the
underlying mortgage loans will be guaranteed or insured by any governmental
agency or instrumentality, or by the Depositor, CWMBS, the Master Servicer, the
Trustee, the Underlying Trustee or any of their respective affiliates. Proceeds
of the assets included in the trust fund will be the sole source of payments on
the Trust Certificates, and there will be no recourse to the Depositor, CWMBS,
the Master Servicer, the Trustee, the Underlying Trustee or any other entity in
the event that such proceeds are insufficient or otherwise unavailable to make
all payments provided for under the Trust Certificates.
THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON THE TRUST CERTIFICATES WILL BE
AFFECTED BY PREPAYMENT SPEEDS
The rate and timing of distributions allocable to principal on the Trust
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 Underlying Certificates as provided herein. As is the case with mortgage
pass-through certificates generally, the Underlying Certificates, and as a
result the Trust Certificates, are subject to substantial inherent cash-flow
uncertainties because the mortgage loans may be prepaid at any time, and the
actual rate of prepayment of principal on the mortgage loans can not be
predicted.
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 mortgage pass-through 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 mortgage pass-through certificates at a time
when reinvestment at comparable yields may not be possible.
S-7
<PAGE>
The timing of commencement of principal distributions and the weighted
average life of the Trust Certificates will be affected by the rate and timing
of prepayments on the mortgage loans. The amount of principal payments
distributed on the Trust Certificates will also be affected by certain other
factors, as follows:
SUBORDINATION FEATURES AFFECTING THE UNDERLYING CERTIFICATES. As
described herein, during certain periods all or a disproportionately
large percentage of principal prepayments on the mortgage loans will be
allocated among the senior classes of the related series, which include
the Underlying Certificates. To the extent that a disproportionately
large percentage of principal prepayments on the mortgage loans is
distributed on such senior classes, the subordination afforded such
senior classes, including the Underlying Certificates, by the
subordinate classes of the related series, in the absence of offsetting
realized losses allocated thereto, will be increased.
WEIGHTED AVERAGE LIFE VOLATILITY OF THE UNDERLYING CERTIFICATES. The
weighted average life of the Underlying Certificates will be affected
by the rate of principal payments on the mortgage loans and the timing
of changes in such rate of payments.
See "Description of the Trust Certificates--Principal Distributions on the
Trust Certificates" and "Yield on the Trust Certificates" herein, and "Maturity
and Prepayment Considerations" in the Prospectus. For further information
regarding the effect of principal prepayments on the weighted average life of
the Offered Certificates, see the table entitled "Percent of Initial Certificate
Principal Balance Outstanding at the Following Percentages of the Prepayment
Assumption" herein.
THE YIELD TO MATURITY ON THE TRUST CERTIFICATES WILL DEPEND ON A VARIETY OF
FACTORS
The yield to maturity on the Trust Certificates will depend, in general,
on:
o the applicable purchase price; and
o the rate and timing of principal payments on the Underlying
Certificates (including principal payments on the Underlying
Certificates that result from prepayments and collections upon
defaults, liquidations and repurchases of the mortgage loans) and the
allocation thereof to reduce the certificate principal balance of each
class of Trust Certificates, as well as other factors.
In general, if the Trust 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 Trust 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 Trust Certificates were
determined based on a number of assumptions, including a prepayment assumption
of 275% 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. The yield assumptions for the Trust
Certificates will vary as determined at the time of sale.
S-8
<PAGE>
THE MULTIPLE CLASS STRUCTURE OF THE TRUST CERTIFICATES CAUSES THE YIELD OF
CERTAIN CLASSES TO BE PARTICULARLY SENSITIVE TO CHANGES IN THE RATES OF
PREPAYMENT OF THE MORTGAGE LOANS
GENERAL. Because distributions of principal will be made to the classes
of Trust Certificates according to the priorities described herein, the
yield to maturity on the Trust Certificates of any such class will be
sensitive to the rates of prepayment on the mortgage loans experienced
both before and after the commencement of principal distributions on
such class.
LOCKOUT CERTIFICATES. Because the Class A-4 Certificates do not receive
(unless the certificate principal balances of the Trust Certificates,
other than the Class A-4 Certificates, have been reduced to zero) any
portion of principal payments prior to the distribution date occurring
in March 2004 and will receive (unless the certificate principal
balances of the Trust Certificates, other than the Class A-4
Certificates, have been reduced to zero) a disproportionately small or
large portion of the principal distribution amount thereafter, the
weighted average life of the Class A-4 Certificates will be longer or
shorter than would otherwise be the case, and the effect on the market
value of the Class A-4 Certificates of changes in market interest rates
or market yields for similar securities may be greater or lesser than
for the other classes of Trust Certificates entitled to principal
distributions.
RETAIL CERTIFICATES. The Class A-2, Class A-8, Class A-9, Class A-10,
Class A-11 and Class A-12 Certificates will receive a portion of
principal payments AFTER certain other classes of Trust Certificates
have received principal payments. Therefore, an investor's yield on
such certificates will be sensitive to the rate and timing of such
distributions and such certificates would not be an appropriate
investment for any investor requiring a distribution of a particular
amount of principal or interest on a specific date or dates. IN
ADDITION TO THE CONSIDERATIONS SET FORTH ABOVE, INVESTORS IN THE CLASS
A-2, CLASS A-8, CLASS A-9, CLASS A-10, CLASS A-11 AND CLASS A-12
CERTIFICATES SHOULD BE AWARE THAT SUCH CERTIFICATES MAY NOT BE AN
APPROPRIATE INVESTMENT FOR ALL PROSPECTIVE INVESTORS.
Investors in the Class A-2, Class A-8, Class A-9, Class A-10, Class
A-11 and Class A-12 Certificates should be aware that payments of
principal on such Certificates will be allocated according to a random
lot procedure. Therefore it is highly uncertain that payments will be
made to investors on the date desired by such investor.
Investors in the Class A-2, Class A-8, Class A-9, Class A-10, Class
A-11 and Class A-12 Certificates should be aware that such certificates
have a later priority of payment with respect to principal in relation
to some of the other classes of Trust Certificates. Therefore, such
certificates are particularly sensitive to the rate and timing of
principal prepayments.
STEP RATE CERTIFICATES. Investors in the Class A-2 Certificates should
be aware that such Certificates will accrue interest at a pass-through
rate of 8.00% per annum on the 1st through the 12th distributions, will
accrue interest at a pass-through rate of 6.75% per annum on each of
the 13th through the 24th distributions and will accrue interest at a
pass-through rate of 6.50% per annum on all distributions thereafter.
Investors in the Class A-12 Certificates should be aware that such
Certificates will accrue interest at a pass-through rate of 6.50% per
annum on the 1st through the 12th distributions, will accrue interest
at a pass-through rate of 6.75% per annum on each of the 13th through
the 24th distributions and will accrue interest at a pass-through rate
of 7.00% per annum on all distributions thereafter
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<PAGE>
The Trust Certificates are not subject to any optional termination.
However, the Master Servicer is entitled, subject to certain conditions relating
to the then-remaining size of the mortgage pool, to purchase all outstanding
mortgage loans and thereby effect early retirement of the Underlying
Certificates and thereby the Trust Certificates which would decrease the average
lives of such certificates, perhaps significantly. The earlier that such
termination occurs, the greater the effect on the yield of the Trust
Certificates.
YEAR 2000 SYSTEMS RISK COULD AFFECT THE ABILITY OF THE MASTER SERVICER AND THE
TRUSTEE PERFORM ITS DUTIES
As is the case with most companies using computers in their operations, the
Master Servicer and the Trustee are faced with the task of completing their
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 or
the Trustee'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.
Each of the Master Servicer and the Trustee 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 the Trustee, or any
of their suppliers, customers or agents do not successfully and timely achieve
year 2000 compliance, the performance of obligations of the Master Servicer or
the Trustee under the pooling and servicing agreement could be materially
adversely affected.
DESCRIPTION OF THE TRUST CERTIFICATES
GENERAL
The Trust Certificates, Series 1999-1 will consist of thirteen classes of
certificates (collectively, the "Trust Certificates"), designated as (i) the
Class A-1 Certificates, the Class A-3 Certificates, the Class A-5 Certificates,
the Class A-6 Certificates, the Class A-7 Certificates, the Class A-8
Certificates, the Class A-9 Certificates and the Class A-10 Certificates; (ii)
the Class A-2 Certificate and the Class A-12 Certificates (the "Step-Rate
Certificates"); (iii) the Class A-4 Certificates (the "Lockout Certificates"),
(iv) the Class A-11 Certificates (the "Retail Lottery Certificates") and (v) the
Class R Certificates. The Class A-8 Certificates, the Class A-9 Certificates,
the Class A-10 Certificates, the Retail Lottery Certificates and the Step-Rate
Certificates are collectively referred to herein as the "Retail Certificates."
All of the Trust Certificates (other than the Class R Certificates) are offered
hereby.
The Trust Certificates in the aggregate will evidence the entire beneficial
ownership interest in a trust fund (the "Trust Fund"), consisting of the
Underlying Certificates (as defined herein) together with all distributions
thereon payable after the Closing Date and such assets as from time to time are
acquired in respect of the Underlying Certificates. As of January 1, 1999 the
("Reference Date"), the Certificate Principal Balance of the Underlying
Certificates was approximately $569,286,524.
The initial Certificate Principal Balance of each class of Trust
Certificates indicated herein was based on the actual Certificate Principal
Balance of the Underlying Certificates immediately following the Underlying
Distribution Date (as defined herein) in January 1999. To the extent that any
principal is distributed on the Underlying Certificates in February 1999, the
actual initial Certificate Principal Balance of each class of Trust Certificates
will be adjusted downward accordingly.
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<PAGE>
Distributions on the Trust Certificates will be made on the 26th day of
each month, or, if such day is not a business day, on the next succeeding
business day, beginning in March 1999 (each, a "Distribution Date").
The Offered Certificates, other than the Retail 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 $25,000 and integral multiples of $1,000 in excess thereof. The
Retail Certificates will be issued, maintained and transferred on the book-entry
records of DTC and its Participants in minimum denominations of $1,000 and
integral multiples of $1,000 in excess thereof.
The Offered Certificates (for so long as they are issued, maintained and
transferred on the book-entry records of DTC, the "Book-Entry 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 Book-Entry 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 reference to actions by Certificateholders with respect to the Book-Entry
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 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.
Any Definitive Certificate will be transferable and exchangeable at the
offices of the Trustee. 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 charged imposed in connection therewith.
All distributions to holders of the Trust Certificates, other than the
final distribution on any class of Trust Certificates, will be made on each
Distribution Date (as defined herein) by or on behalf of the Trustee to the
persons in whose names such Trust 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 Trustee
at least five business days prior to the relevant Record Date by any holder of
Trust Certificates having an aggregate initial Certificate Principal Balance
that is in excess of (i) $5,000,000 or (ii) two-thirds of the initial aggregate
Certificate Principal Balance of such class of Trust 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 Trust
Certificates will be made in like manner, but only upon presentment and
surrender of such Trust Certificates at the corporate trust office of the
Trustee or such other location specified in the notice to Certificateholders of
such final distribution.
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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
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 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 (as defined
herein) 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
interests in the Book-Entry Certificates.
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
Book-Entry Certificates, may be limited due to the absence of Definitive
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 evidenced such specified Voting
Rights. DTC may take conflicting actions with respect to Voting Rights, to the
extent that Participants whose holdings of Book-Entry Certificates evidenced
such Voting Rights, authorize divergent action.
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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 and the Trustee 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 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, advises the Trustee 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 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 $1,000, except that any beneficial ownership represented by a
Book-Entry Certificate in an amount less than $1,000 immediately prior to the
issuance of a
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Definitive Certificate shall be issued in a minimum denomination equal to the
amount represented by such Book-Entry Certificate.
AVAILABLE DISTRIBUTION AMOUNT
The Available Distribution Amount with respect to the Trust Certificates
for any Distribution Date is equal to the aggregate amount of distributions on
the Underlying Certificates on the related Underlying Distribution Date, net of
any Extraordinary Trust Fund Expenses (as defined herein) payable by the Trust
Fund as of such Distribution Date. Notwithstanding the foregoing, the Available
Distribution Amount will be adjusted on each of the first twenty-four
Distribution Dates as described below.
At the time of initial issuance of the Certificates, the Underwriter will
remit to the Trustee, for deposit in the Certificate Account (as defined in the
Agreement), an amount equal to $10,000 (the "Interest Shortfall Deposit")
representing the aggregate amount by which interest distributions on the Class
A-2 Certificates for the first twelve Distribution Dates are projected to be in
excess of interest on such Certificates at 7.00% per annum. On the first
Distribution Date, the Available Distribution Amount (i) will be increased by
the Interest Shortfall Deposit and (ii) will be decreased by an amount (the
"Interest Reserve Amount") equal to the amount by which interest distributions
on the Class A-2 Certificates for each Distribution Date from the next
Distribution Date through the twelfth Distribution Date are projected to be in
excess of interest on such Certificates at 7.00% per annum. On each of the
second through the eleventh Distribution Dates, the Available Distribution
Amount (i) will be increased by the Interest Reserve Amount from the prior
Distribution Date and (ii) will be decreased by the Interest Reserve Amount for
the current Distribution Date. On the twenty-fourth Distribution Date, the
Available Distribution Amount will be increased by the Interest Reserve Amount
from the prior Distribution Date.
INTEREST DISTRIBUTIONS ON THE TRUST CERTIFICATES
Distributions in respect of interest will be made on each Distribution Date
to the holders of the Trust Certificates in an aggregate amount equal to the
Interest Distribution Amount for each class of Trust Certificates for such
Distribution Date.
The "Interest Distribution Amount" for the Trust 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 class of
Trust Certificates immediately prior to such Distribution Date at the
Pass-Through Rate thereon plus, in the case of each such class, any such amount
remaining unpaid from previous Distribution Dates, and reduced, in the case of
each such class (to not less than zero), by the PRO RATA share for such class of
interest shortfalls allocated to the Underlying Certificates. For purposes of
the foregoing, the aggregate amount of interest shortfalls for any Distribution
Date will be equal to the aggregate amount of interest shortfalls, if any,
allocated to the Underlying Certificates for the related Underlying Distribution
Date.
The Pass-Through Rate applicable to the calculation of the Interest
Distribution Amount for each class of Trust Certificates (other than the
Step-Rate Certificates) is fixed and is set forth under "Summary of the
Prospectus Supplement--Offered Certificates" herein. The Class A-2 Certificates
will accrue interest at a Pass-Through Rate of 8.00% per annum effective for
distributions made on the first Distribution Date up to and including the
Distribution Date in February 2000, a Pass- Through Rate of 6.75% per annum
effective for distributions made on the Distribution Date in March 2000 up to
and including the Distribution Date in February 2001, and thereafter, at a Pass-
Through Rate of 6.50% per annum. The Class A-12 Certificates will accrue
interest at a Pass- Through Rate of 6.50% per annum effective for distributions
made on the first Distribution Date up to and including the Distribution Date in
February 2000, a Pass-Through Rate of 6.75% per annum
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effective for distributions made on the Distribution Date in March 2000 up to
and including the Distribution Date in February 2001, and thereafter, at a
Pass-Through Rate of 7.00% per annum.
The "Interest Accrual Period" for each class of Trust Certificates for any
Distribution Date is the calendar month preceding the month in which such
Distribution Date occurs. Notwithstanding the foregoing, distributions of
interest on the Trust Certificates on any Distribution Date will reflect
interest accrued, and receipts with respect thereto, on the Underlying
Certificates for the preceding calendar month, as the same may be reduced by any
shortfalls in collections of interest on the Mortgage Loans to the extent
described herein, and all distributions of interest on the Trust Certificates
will be based on a 360-day year of twelve equal 30-day Interest Accrual Periods.
Except as otherwise described herein, on any Distribution Date,
distributions of the Interest Distribution Amount for a class of Trust
Certificates will be made in respect of such class of Trust Certificates, to the
extent provided herein, on a PARI PASSU basis, based on the Certificate
Principal Balance of the Trust Certificates of each such class.
The Certificate Principal Balance of a Trust 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
Underlying Certificates. The Certificate Principal Balance of the Trust
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 Trust Certificate and
(b) any reductions in the Certificate Principal Balance thereof deemed to have
occurred in connection with allocations thereto of (i) Realized Losses (as
defined herein) on the Mortgage Loans (as defined herein) allocated to the
principal of the Underlying Certificates and (ii) Extraordinary Trust Fund
Expenses, in the manner described herein.
PRINCIPAL DISTRIBUTIONS ON THE TRUST CERTIFICATES
The holders of the Trust Certificates on each Distribution Date will be
entitled to receive distributions allocable to principal in reduction of the
Certificate Principal Balance thereof equal to the aggregate amount distributed
in respect of principal on the Underlying Certificates on the related Underlying
Distribution Date, to the extent of the Available Distribution Amount remaining
after distribution of the Interest Distribution Amount (the "Principal
Distribution Amount"). Distributions of the Principal Distribution Amount
payable to the Trust Certificates on each Distribution Date will be made as
follows:
(i) To the holders of the Lockout Certificates, the Lockout
Distribution Percentage (as defined herein) of the Principal Distribution
Amount, until the Certificate Principal Balance thereof has been reduced to
zero;
(ii) To the holders of the Class R Certificates on the first
Distribution Date, until the Certificate Principal Balance has been reduced
to zero;
(iii) Until the Certificate Principal Balance of the Class A-1
Certificates and the Class A-6 Certificates has been reduced to zero,
concurrently as follows:
(A) 39.5535194421% of the amount distributable under this clause
(iii) to the Class A-1 Certificates;
(B) 53.0109102508% of the amount distributable under this clause
(iii) to the Class A-5 Certificates; and
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<PAGE>
(C) 7.4355703071% of the amount distributable under this clause
(iii) FIRST, to the Class A-6 Certificates until the
Certificate Principal Balance thereof has been reduced to zero
and SECOND, to the Class A-7 Certificates;
(iv) Until the Certificate Principal Balance of each of the Class A-5
Certificates and the Class A-7 Certificates has been reduced to zero,
concurrently as follows:
(A) 87.8921912365% of the amount distributable under this clause
(iv) to the Class A-5 Certificates; and
(B) 12.1078087635% of the amount distributable under this clause
(iv) to the Class A-7 Certificates;
(v) Until the Certificate Principal Balance of the Class A-8
Certificates has been reduced to zero, concurrently as follows:
(A) 33.3333333333% of the amount distributable under this clause
(v) to the Class A-3 Certificates; and
(B) 66.6666666667% of the amount distributable under this clause
(v) to the Class A-8 Certificates;
(vi) Until the Certificate Principal Balance of the Class A-9
Certificates has been reduced to zero, concurrently as follows:
(A) 33.3333333333% of the amount distributable under this clause
(vi) to the Class A-3 Certificates; and
(B) 66.6666666667% of the amount distributable under this clause
(vi) to the Class A-9 Certificates;
(vii) Concurrently on a PRO RATA basis based on the then current
Certificate Principal Balance outstanding, to the Class A-2 Certificates,
Class A-3 Certificates, the Class A-10 Certificates, the Class A-11
Certificates and the Class A-12 Certificates, until the Certificate
Principal Balances thereof have been reduced to zero; and
(viii) 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 CWMBS Subordinate Certificates (as defined
herein) to zero, the priority of distributions of principal among the Trust
Certificates will be disregarded and distributions allocable to principal will
be paid on each succeeding Distribution Date to holders of the Trust
Certificates, on a PRO RATA basis, based on the Certificate Principal Balances
thereof.
For purposes of all principal distributions described above, the
Certificate Principal Balance of a Trust Certificate for any Distribution Date
shall be determined after the allocation thereto on such Distribution Date of
(i) the principal portion of Realized Losses on the Mortgage Loans allocated to
the Underlying Certificates and (ii) Extraordinary Trust Fund Expenses, in each
case as described under "--Allocation of Losses" below.
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
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Lockout Certificates immediately prior to such Distribution Date divided by the
sum of the aggregate Certificate Principal Balances of the Trust 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 March 2004 will be equal to 0%. The Lockout
Distribution Percentage for any Distribution Date occurring after the first five
years following the Closing Date will be as follows: for any Distribution Date
during the sixth year after the Closing Date, 30% of the Lockout Certificate
Percentage for such Distribution Date; for any Distribution Date during the
seventh year after the Closing Date, 40% of the Lockout Certificate Percentage
for such Distribution Date; for any Distribution Date during the eighth year
after the Closing Date, 60% of the Lockout Certificate Percentage for such
Distribution Date, for any Distribution Date during the ninth year after the
Closing Date, 80% of the Lockout Certificate percentage for such Distribution
Date and for any Distribution Date during the tenth year after the Closing Date
and thereafter, 100% of the Lockout Certificate Percentage for such Distribution
Date.
PRINCIPAL DISTRIBUTIONS ON THE RETAIL LOTTERY CERTIFICATES
GENERAL. As to distributions of principal among holders of the Retail
Lottery Certificates, Deceased Holders (as defined below) who request
distributions as provided below of such class will be entitled to first priority
and beneficial owners other than Deceased Holders (the "Living Holders") who
request distributions as provided below of such class will be entitled to a
second priority. Beneficial owners of the retail certificates have the right to
request that distributions of principal be made with respect to their
Certificates ON ANY DISTRIBUTION DATE ON WHICH SUCH CLASS OF CERTIFICATES IS
ENTITLED TO RECEIVE DISTRIBUTIONS OF PRINCIPAL. Prospective Certificateholders
in the Retail Lottery Certificates should be aware that distributions of
principal on such Certificates may be significantly earlier or later than the
date that may be desired by such Certificateholder. All such requested
distributions are subject to the priorities described below under "--Priority of
Requested Distributions" and are further subject to the limitation that they be
made (i) only in lots equal to integral multiples of $1,000 of initial
Certificate Principal Balance (each $1,000 initial Certificate Principal
Balance, an "Individual Retail Lottery Certificate") and (ii) only to the extent
that the portion of the Principal Distribution Amount allocated to the Retail
Lottery Certificates on the applicable Distribution Date (plus any amounts
available from the Rounding Account, as defined below) provides sufficient funds
for such requested distributions. To the extent that amounts available for
distributions in respect of principal on the Retail Lottery Certificates on any
Distribution Date exceed the aggregate amount of the requests made by Deceased
Holders and Living Holders for principal distributions applicable to such
Distribution Date, such excess amounts will be distributed to the beneficial
owners of Retail Lottery Certificates by random lot, as described below under
"--Mandatory Distributions of Principal on the Retail Lottery Certificates."
On each Distribution Date on which amounts are available for distributions
in reduction of the Certificate Principal Balance of the Retail Lottery
Certificates, the aggregate amount allocable to such distributions for such
class will be rounded, as necessary, to an amount equal to an integral multiple
of $1,000, except as provided below, in accordance with the limitations set
forth herein. Such rounding will be accomplished on the first Distribution Date
on which distributions of principal on the Retail Lottery Certificates are made
by withdrawing, from a non-interest bearing account to be established on the
Closing Date for the Retail Lottery Certificates with a $999.99 deposit by the
Depositor (the "Rounding Account"), the amount of funds, if any, needed to round
the amount otherwise available for such distribution with respect to the Retail
Lottery Certificates upward to the next higher integral multiple of $1,000. On
each succeeding Distribution Date on which distributions of principal on the
Retail Lottery Certificates are to be made, the aggregate amount allocable to
the Retail Lottery Certificates will be applied first to repay any funds
withdrawn from the Rounding Account on the prior Distribution Date, and then the
remainder of such allocable amount, if any, will be similarly rounded upward
through another withdrawal from the Rounding Account and distributed in
reduction of the Certificate Principal Balance of the Retail Lottery
Certificates. This
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process will continue on succeeding Distribution Dates until the Certificate
Principal Balance of the Retail Lottery Certificates has been reduced to zero.
Thus, the aggregate distribution made in reduction of the Certificate Principal
Balance of the Retail Lottery Certificates on each Distribution Date may be
slightly more or less than would be the case in the absence of such rounding
procedures, but such difference will be no more than $999.99 on any Distribution
Date. Under no circumstances will the sum of all distributions made in reduction
of the Certificate Principal Balance of the Retail Lottery Certificates, through
any Distribution Date, be less than the sum of such distributions that would
have resulted in the absence of such rounding procedures. The Class R
Certificates will be entitled to any amount remaining in the Rounding Account
after the Certificate Principal Balance of the Retail Lottery Certificates has
been reduced to zero.
There is no assurance that a beneficial owner of a Retail Lottery
Certificate who has submitted a request for such distribution will receive such
distribution at any particular time after such distribution is requested, since
there can be no assurance that funds will be available for making such
distributions on any particular Distribution Date, or, even if funds are
available for making principal distributions on the Retail Lottery Certificates,
that such distributions will be made to any particular beneficial owner whether
such beneficial owner is a Deceased Holder or a Living Holder. Also, due to the
procedure for mandatory distributions described below, there can be no assurance
that on any Distribution Date on which the funds available for distribution in
respect of principal of the Retail Lottery Certificates exceed the aggregate
amount of distributions requested by beneficial owners of Certificates of such
class, any particular beneficial owner will receive a principal distribution
from such excess funds. THUS, THE TIMING OF DISTRIBUTIONS IN REDUCTION OF THE
PRINCIPAL BALANCE WITH RESPECT TO ANY PARTICULAR RETAIL LOTTERY CERTIFICATE,
WHETHER OR NOT THE SUBJECT OF A REQUEST FOR DISTRIBUTION BY A DECEASED HOLDER OR
A LIVING HOLDER, IS HIGHLY UNCERTAIN AND MAY BE MADE EARLIER OR LATER THAN THE
DATE THAT MAY BE DESIRED BY A BENEFICIAL OWNER OF SUCH CERTIFICATE.
Notwithstanding any provisions herein to the contrary, on each Distribution
Date following the first Distribution Date on which any Realized Losses are
allocated to the Retail Lottery Certificates, distributions in reduction of the
Certificate Principal Balance of the Retail Lottery Certificates will be made
PRO RATA among the holders of the Retail Lottery Certificates and will not be
made in integral multiples of $1,000 or pursuant to requested distributions or
mandatory distributions by random lot.
PRIORITY OF REQUESTED DISTRIBUTIONS. Subject to the limitations described
herein, including the timing and the order of the receipt of the request for
distributions as described below under "--Procedure for Requested
Distributions," beneficial owners of the Retail Lottery Certificates have the
right to request that distributions be made in reduction of the Certificate
Principal Balance of such Certificates. On each Distribution Date on which
distributions in reduction of the Certificate Principal Balance of the Retail
Lottery Certificates are made, such distributions will be made in the following
order of priority: (i) any request by a Deceased Holder, in an amount up to but
not exceeding $100,000 per request; and (ii) any request by a Living Holder, in
an amount up to but not exceeding $10,000 per request. Thereafter, distributions
will be made as provided in clauses (i) and (ii) above up to a second $100,000
and $10,000, respectively. This sequence of priorities will be repeated for each
request for principal distributions made by the beneficial owners of such Retail
Lottery Certificates until all such requests have been honored.
PROCEDURE FOR REQUESTED DISTRIBUTIONS. Under the current procedures of DTC,
a beneficial owner may request that distributions in reduction of the
Certificate Principal Balance of its Retail Lottery Certificates be made on a
Distribution Date by delivering a written request therefor to the Participant or
Indirect Participant that maintains the beneficial owner's account with respect
to the Retail Lottery Certificates so that such request is received by the
Trustee from DTC on DTC's "participant terminal system" on or before the Record
Date for such Distribution Date. In the case of a request on behalf of a
Deceased Holder, appropriate evidence of death and any tax waivers are
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required to be forwarded to the Participant under separate cover. Furthermore,
such requests of Deceased Holders that are incomplete may not be honored by the
Participant. The Participant shall forward a certification satisfactory to the
Trustee certifying the death of the beneficial owner and the receipt of the
appropriate death and tax waivers. The Participant should in turn make the
request of DTC (or, in the case of an Indirect Participant, such firm must
notify the related Participant of such request, which Participant should make
the request of DTC) on DTC's participant terminal system. The Trustee will not
accept a request from a Person other than DTC. DTC may establish such procedures
as it deems fair and equitable to establish the order of receipt of requests for
such distributions received by it on the same day. None of the Depositor or the
Trustee shall be liable for any delay by DTC, any Participant or any Indirect
Participant in the delivery of requests for distributions or withdrawals of such
distributions to the Trustee or for any changes made to the procedures described
herein by DTC, any Participant or any Indirect Participant. Requests for
distributions are to be honored in the order of their receipt (subject to the
priorities described above). The exact procedures to be followed by the Trustee
for purposes of determining the order of receipt of such requests will be those
established from time to time by DTC. Requests for distributions of principal
received by DTC and forwarded to the Trustee on DTC's participant terminal
system after the Record Date for such Distribution Date and requests for
principal distributions received in a timely manner but not accepted with
respect to a given Distribution Date, will be treated as requests for
distributions on the next succeeding Distribution Date and each succeeding
Distribution Date thereafter until each request is accepted or is withdrawn as
described below. Each request for distributions in reduction of the Certificate
Principal Balance of a Retail Lottery Certificate submitted by a beneficial
owner thereof will be held on DTC's participant terminal system until such
request has been accepted by the Trustee or has been withdrawn by the
Participant in writing. Each Individual Retail Lottery Certificate covered by
such request will continue to bear interest at the related Pass-Through Rate
through the Interest Accrual Period related to such Distribution Date.
With respect to Retail Lottery Certificates as to which beneficial owners
have requested distributions to be made on a particular Distribution Date and on
which distributions of principal are being made, the Trustee will notify DTC
prior to such Distribution Date whether, and the extent to which, such
Certificates have been accepted for distributions. Participants and Indirect
Participants holding Retail Lottery Certificates are required to forward such
notices to the beneficial owners of such Certificates. Individual Retail Lottery
Certificates that have been accepted for a distribution will be due and payable
on the applicable Distribution Date and will cease to bear interest after the
Interest Accrual Period related to such Distribution Date.
Any beneficial owner of a Retail Lottery Certificate who has requested a
distribution may withdraw its request by so notifying in writing the Participant
or Indirect Participant that maintains such beneficial owner's account. In the
event that such account is maintained by an Indirect Participant, such Indirect
Participant must notify the related Participant which in turn must forward the
withdrawal of such request, on DTC's participant terminal system. If such notice
of withdrawal of a request for distribution has not been received on DTC's
participant terminal system on or before the Record Date for such Distribution
Date, the previously made request for distribution will be irrevocable with
respect to the making of distributions in reduction of the Certificate Principal
Balance of such Retail Lottery Certificate on the applicable Distribution Date.
MANDATORY DISTRIBUTIONS OF PRINCIPAL ON THE RETAIL LOTTERY CERTIFICATES. To
the extent, if any, that distributions in reduction of the Certificate Principal
Balance of the Retail Lottery Certificates on a Distribution Date exceed the
outstanding Certificate Principal Balance of Retail Lottery Certificates with
respect to which distribution requests have been received by the applicable
Record Date, additional Retail Lottery Certificates in lots equal to Individual
Retail Lottery Certificates will be selected to receive principal distributions
in accordance with the then-applicable established random lot procedures of DTC,
and the then-applicable established procedures of the Participants
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and Indirect Participants, which may or may not be by random lot. Investors may
ask such Participants or Indirect Participants what allocation procedures they
use. Participants and Indirect Participants holding Retail Lottery Certificates
selected for mandatory distributions of principal are required to provide notice
of such mandatory distributions to the affected beneficial owners.
A "Deceased Holder" is a beneficial owner of a Retail Lottery Certificate
who was a natural person living at the time such holder's interest was acquired
and whose executor or other authorized representative causes to be furnished to
the Participant, evidence of death satisfactory to the Participant, and any tax
waivers requested by the Participant. The Participant shall forward
certification satisfactory to the Trustee certifying the death of the beneficial
owner and the receipt of the appropriate death and tax waivers. Retail Lottery
Certificates beneficially owned by tenants by the entirety, joint tenants or
tenants in common will be considered to be beneficially owned by a single owner.
The death of a tenant by the entirety, joint tenant or tenant in common will be
deemed to be the death of the beneficial owner, and the Retail Lottery
Certificates so beneficially owned will be eligible to request priority with
respect to distributions in reduction of the Certificate Principal Balance
thereof, subject to the limitations stated herein. The Retail Lottery
Certificates beneficially owned by a trust will be considered to be beneficially
owned by each beneficiary of the trust to the extent of such beneficiary's
beneficial interest therein, but in no event will a trust's beneficiaries
collectively be deemed to be beneficial owners of a number of Individual Retail
Lottery Certificates greater than the number of Individual Retail Lottery
Certificates of which such trust is the owner. The death of a beneficiary of a
trust will be deemed to be the death of a beneficial owner of the Retail Lottery
Certificates beneficially owned by the trust but only to the extent of such
beneficiary's beneficial interest in such trust. The death of an individual who
was a tenant by the entirety, joint tenant or tenant in common in a tenancy
which is the beneficiary of a trust will be deemed to be the death of the
beneficiary of the trust. The death of a person who, during his or her lifetime,
was entitled to substantially all of the beneficial ownership interests in
Retail Lottery Certificates will be deemed to be the death of the beneficial
owner of such Certificates regardless of the registration of ownership, if such
beneficial interest can be established to the satisfaction of the Participant.
Such beneficial interest will be deemed to exist in typical cases of street name
or nominee ownership, ownership by a trustee, ownership under the Uniform Gift
to Minors Act and community property or other joint ownership arrangements
between a husband and wife. Beneficial interest shall include the power to sell,
transfer or otherwise dispose of a Retail Lottery Certificate and the right to
receive the proceeds therefrom, as well as interest and distributions of
principal with respect thereto. As used in this Prospectus Supplement, a request
for a distribution in reduction of the Certificate Principal Balance of a Retail
Lottery Certificate by a Deceased Holder shall mean a request by the personal
representative, surviving tenant by the entirety, surviving joint tenant or a
surviving tenant in common of the Deceased Holder.
ALLOCATION OF LOSSES
The Trust Certificates will not be covered by any credit support other than
the limited subordination provided to the Underlying Certificates by the CWMBS
Subordinate Certificates. See "Description of the Underlying
Certificates--Subordination of the CWMBS Subordinate Certificates" herein.
In the case of any Realized Loss allocated to the principal of the
Underlying Certificates on any Underlying Distribution Date, such Realized Loss
will be allocated to the Trust Certificates by reducing the Certificate
Principal Balance thereof by the amount allocated thereto, as of the related
Distribution Date. In the case of any Realized Loss allocated to interest on the
Underlying Certificates on any Underlying Distribution Date, such Realized Loss
will be allocated on a PRO RATA basis among each class of Trust Certificates
based on interest accrued in each case by reducing the Interest Distribution
Amount thereon by the amount allocated thereto for the related Distribution
Date. For a description of the allocation of Realized Losses to the Underlying
Certificates, see
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<PAGE>
"Description of the Underlying Certificates--Subordination of the CWMBS
Subordinate Certificates" herein.
Extraordinary Trust Fund Expenses are amounts that may become reimbursable
to the Depositor or the Trustee from the assets of the Trust Fund as provided in
the Agreement. Any Extraordinary Trust Fund Expenses will be allocated on a PRO
RATA basis among each class of Trust Certificates. Any Extraordinary Trust Fund
Expenses so allocated to the Trust Certificates as of any Distribution Date will
reduce the Available Distribution Amount for such Distribution Date and will
result in a reduction in the amount distributable on such Distribution Date to
the holders of one or more classes of Trust Certificates.
DESCRIPTION OF THE UNDERLYING CERTIFICATES
GENERAL
The CWMBS , Inc., CHL Mortgage Pass-Through Trust 1998-23, Mortgage
Pass-Through Certificates, Series 1998-23 (collectively, the "CWMBS
Certificates"), Class A (the "Underlying Certificates"), representing a 91.88%
percentage interest in such class, evidences a partial, senior beneficial
interest in a separate REMIC trust fund (the "Underlying Trust Fund"),
consisting primarily of the Mortgage Pool (as defined herein). The Underlying
Certificates are rated "AAA" by DCR and "AAA" by Standard & Poor's (each as
defined herein). The CWMBS Certificates, including the Underlying Certificates,
were issued pursuant to a Pooling and Servicing Agreement (the "Pooling and
Servicing Agreement"), dated as of December 1, 1998 (the "Underlying Cut-off
Date"), among CWMBS, Inc. as depositor ("CWMBS"), Countrywide Home Loans, Inc.
as seller and master servicer (in its capacity as seller, the "Seller" and in
its capacity as master servicer, the "Master Servicer") and The Bank of New York
as trustee (in such capacity, the "Underlying Trustee"). The Underlying
Certificates were issued on December 22, 1998 and the first distribution on the
Underlying Certificates occurred on the Underlying Distribution Date in January
1999.
The CWMBS Certificates consist of (i) the Class A Certificates, the Class
PO Certificates, the Class X Certificates and the Class A-R Certificates
(collectively the "CWMBS Senior Certificates") and (ii) the Class M
Certificates, the Class B-1 Certificates, the Class B-2 Certificates, the Class
B- 3 Certificates, the Class B-4 Certificates and the Class B-5 Certificates
(collectively, the "CWMBS Subordinate Certificates"). The CWMBS Senior
Certificates are entitled to a certain priority, as described herein, relative
to the CWMBS Subordinate Certificates, in right of distributions on the Mortgage
Loans. The Certificate Principal Balance of each class of CWMBS Senior
Certificates and the aggregate Certificate Principal Balance of the CWMBS
Subordinate Certificates, as of the date of the initial issuance thereof and as
of the Reference Date, are as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
CERTIFICATE PRINCIPAL CERTIFICATE PRINCIPAL
BALANCE AS OF BALANCE AS OF
CWMBS CERTIFICATE CLASS INITIAL ISSUANCE THE REFERENCE DATE
----------------------- ---------------- ------------------
<S> <C> <C>
Class A $624,725,900 $619,595,882
Class PO $ 652,565 $ 651,986
Class X (1) (1)
Class A-R $ 100 $ 0
CWMBS Subordinate Certificates $ 27,758,600 $ 27,738,250
</TABLE>
(1) The Class X Certificates will have no principal balance and will bear
interest on their notional amount.
S-21
<PAGE>
The description of the CWMBS Certificates herein is a summary of certain of
the terms and provisions relating to the CWMBS Certificates and does not purport
to be complete. Such description is subject to, and is qualified in its entirety
by reference to, the actual terms and provisions of the Pooling and Servicing
Agreement, a copy of which will be made available (without exhibits) to
prospective investors upon written request therefor made to the Depositor. The
information set forth herein relating to the Underlying Certificates is based on
information obtained by the Depositor relating to the Underlying Certificates
from the prospectus dated November 9, 1998 and the prospectus supplement dated
December 18, 1998, used in connection with the initial offering thereof, and
from statements furnished to holders of the CWMBS Certificates for each
Underlying Distribution Date. None of the Depositor, the Trustee, the
Underwriter or any of their affiliates has made or will make any representation
as to the accuracy or completeness of such information. Unless otherwise
specified, references to Certificates of any class throughout the text under
this heading "Description of the Underlying Certificates" refer to CWMBS
Certificates.
The "Certificate Principal Balance" of any class of CWMBS Certificates as of
any Underlying Distribution Date is the initial Certificate Principal Balance
thereof reduced by the sum of (i) all amounts previously distributed to holders
of Certificates of such class as payments of principal, (ii) the amount of
Realized Losses (including Excess Losses, as defined herein) allocated to such
class and (iii) in the case of any class of CWMBS Subordinate Certificates, any
amounts allocated to such class in reduction of its Certificate Principal
Balance in respect of payments of Class PO Deferred Amounts (as defined herein),
as described under "--Subordination of the CWMBS Subordinate
Certificates--ALLOCATION OF LOSSES ON THE MORTGAGE LOANS" herein. In addition,
the Certificate Principal Balance of the class of CWMBS Subordinate Certificates
then outstanding with the highest numerical class designation will be reduced if
and to the extent that the aggregate of the Certificate Principal Balances of
all classes of CWMBS Certificates, following all distributions and the
allocation of Realized Losses on an Underlying Distribution Date, exceeds the
Pool Principal Balance (as defined herein) as of the first day of the month (the
"Due Date") occurring in the month of such Underlying Distribution Date. The
Class X Certificates do not have a principal balance and are not entitled to any
distributions in respect of principal of the Mortgage Loans.
BOOK-ENTRY FORM
The Underlying Certificates were issued in book-entry form, in one or more
certificates equal to the aggregate initial Certificate Principal Balance of the
Underlying Certificates and are registered in the name of CEDE as nominee of DTC
(the "CWMBS Certificateholder"). Beneficial interests in the Underlying
Certificates are held indirectly by investors through the book-entry facilities
of DTC, as described herein. Investors are permitted to hold such beneficial
interests in the Underlying Certificates in minimum denominations representing
an original principal amount of $25,000 and integral multiples of $1,000 in
excess thereof. One investor in the Underlying Certificates is permitted to hold
a beneficial interest therein that is not an integral multiple of $1,000. No
person who acquiring an interest in the Underlying Certificates (each a
"beneficial owner"), including the Trustee on behalf of holders of the Trust
Certificates, will be entitled to receive a physical certificate representing
such Underlying Certificate (a "Definitive Underlying Certificate") except as
set forth below.
Unless and until definitive Certificates are issued to beneficial owners in
respect of the Underlying Certificates under the limited circumstances described
herein, all references to actions taken by CWMBS Certificateholders shall, in
the case of the Underlying Certificates, refer to actions taken by DTC upon
instructions from its Participants, and all references herein to distributions,
notices, reports and statements to CWMBS Certificateholders shall, in the case
of the Underlying Certificates, refer to distributions, notices, reports and
statements to DTC or CEDE, as the registered holder of the Underlying
Certificates for distribution to beneficial owners in accordance
S-22
<PAGE>
with DTC procedures. The Trustee on behalf of the holders of the Trust
Certificates will be the beneficial owner of the Underlying Certificates. The
Trustee is a Participant.
Neither CWMBS nor the Underlying Trustee will have any responsibility
for any aspect of the records relating to or payments made on account of
beneficial ownership interests of the Underlying Certificates held by CEDE, as
nominee for DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests. In the event of the insolvency
of DTC or a Participant or Indirect Participant in whose name the Underlying
Certificates are registered, the ability of the beneficial owners of such
Underlying Certificates to obtain timely payment may be impaired. In addition,
in such event, if the limits of applicable insurance coverage by the Securities
Investor Protection Corporation are exceeded or if such coverage is otherwise
unavailable, ultimate payment of amounts distributable with respect to such
Underlying Certificates may be impaired.
Underlying Certificates will be converted to definitive Certificates and
re-issued to Beneficial Owners or their nominees, rather than to DTC or its
nominee, only if (i) CWMBS or DTC advises the Underlying Trustee in writing that
DTC is no longer willing or able to discharge properly its responsibilities as
depository with respect to the Underlying Certificates and CWMBS or the
Underlying Trustee is unable to locate a qualified successor, (ii) CWMBS, at its
option, elects to terminate the book-entry system through DTC or (iii) after the
occurrence of an event of default of the Master Servicer under the Pooling and
Servicing Agreement, beneficial owners aggregating not less than 51% of the
Certificate Principal Balances of CWMBS Book-Entry Certificates (defined as all
the classes of CWMBS Certificates other than the Class X Certificates, the Class
PO Certificates and the Class A-R Certificates) advise the Underlying Trustee
and DTC, in writing, that the continuation of a book-entry system through DTC
(or a successor thereto) is no longer in the Beneficial Owners' best interest.
Upon surrender by DTC of the physical Certificates representing the
Underlying Certificates and receipt of instructions for re-registration, the
Underlying Trustee will reissue the Underlying Certificates as definitive
Certificates to beneficial owners. Upon the issuance of definitive Underlying
Certificates, all obligations of DTC shall be deemed to be imposed upon the
Underlying Trustee to the extent applicable.
CWMBS AVAILABLE FUNDS
The aggregate amount of funds available for distribution to CWMBS
Certificateholders on each Underlying Distribution Date will be the CWMBS
Available Funds. With respect to each Underlying Distribution Date, the "CWMBS
Available Funds" will equal the sum of (i) all scheduled installments of (A)
interest, net of the related Expense Fees (as defined herein) and (B) principal,
in each case due on the Due Date in the month in which such Underlying
Distribution Date occurs and received prior to the related Determination Date
(as defined herein), and in each case together with any Advances (as defined
herein) in respect thereof; (ii) all proceeds of any primary mortgage guaranty
insurance policies and any other insurance policies with respect to the Mortgage
Loans, to the extent such proceeds are not applied to the restoration of the
related Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures (collectively, "Insurance
Proceeds") and all other cash amounts received and retained in connection with
the liquidation of defaulted Mortgage Loans, by foreclosure or otherwise
("Liquidation Proceeds") during the month preceding the month of such Underlying
Distribution Date (in each case, net of unreimbursed expenses incurred in
connection with a liquidation or foreclosure and unreimbursed Advances, if any);
(iii) all partial or full prepayments received during the period from the
sixteenth day of a calendar month (or in the case of the first Underlying
Distribution Date, from the Underlying Cut-off Date) through the fifteenth day
of the succeeding calendar month (each such period, a "Prepayment Period") and
(iv) amounts received with respect to such Underlying
S-23
<PAGE>
Distribution Date as the Substitution Adjustment Amount (as defined herein) or
purchase price in respect of a deleted Mortgage Loan or a Mortgage Loan
repurchased by the Seller or the Master Servicer as of such Underlying
Distribution Date, reduced by amounts in reimbursement for Advances previously
made and other amounts as to which the Master Servicer is entitled to be
reimbursed pursuant to the Pooling and Servicing Agreement.
"Substitution Adjustment Amount" means, with respect to any Mortgage Loan
substituted for a deleted Mortgage Loan in connection with a breach of
representation or warranty or defective documentation for such deleted Mortgage
Loan, the amount, if any, by which the aggregate principal balance of all such
substitute Mortgage Loans as of the date of substitution is less than the
aggregate Stated Principal Balance (as defined herein) of all such deleted
Mortgage Loans, after application of the scheduled principal portion of the
monthly payments due in the month of substitution, which amount shall be
deposited by the Seller and held for distribution to the CWMBS
Certificateholders on the related Underlying Distribution Date.
DISTRIBUTIONS--GENERAL
Distributions of interest and principal to holders of CWMBS Certificates
will be made monthly on the 25th day of each month or, if such day is not a
business day, on the next succeeding business day (each, an "Underlying
Distribution Date"), to the persons in whose names such Certificates are
registered at the close of business on the last business day of the month
preceding the month of such Underlying Distribution Date (the "Underlying Record
Date").
ALLOCATION OF CWMBS AVAILABLE FUNDS
As more fully described herein, distributions will be made on each
Underlying Distribution Date from CWMBS Available Funds in the following order
of priority: (i) to interest on each interest-bearing class of CWMBS Senior
Certificates; (ii) to principal on the classes of CWMBS Senior Certificates then
entitled to receive distributions of principal, in the order and subject to the
priorities set forth herein under "--Principal Distributions on the CWMBS
Certificates," in each case in an aggregate amount up to the maximum amount of
principal to be distributed on such classes on such Underlying Distribution
Date; (iii) to any Class PO Deferred Amounts (as defined herein) with respect to
the Class PO Certificates, but only from amounts that would otherwise be
distributable on such Underlying Distribution Date as principal of the CWMBS
Subordinate Certificates and (iv) to interest on and then principal of each
class of CWMBS Subordinate Certificates, in the order of their numerical class
designations, beginning with the Class M Certificates, in each case subject to
certain limitations set forth herein under "--Principal Distributions on the
CWMBS Certificates."
INTEREST DISTRIBUTIONS ON THE CWMBS CERTIFICATES
On each Underlying Distribution Date, to the extent of funds available
therefor, each interest bearing class of CWMBS Certificates will be entitled to
receive an amount allocable to interest (as to each such class, the "Interest
Distribution Amount") with respect to the related Interest Accrual Period. For
any Underlying Distribution Date, the Interest Distribution Amount for the
Underlying Certificates will be equal to the sum of (i) interest at the
pass-through rate on the Underlying Certificates of 6.50% per annum on the
Certificate Principal Balance of the Underlying Certificates immediately prior
to such Underlying Distribution Date and (ii) the sum of the amounts, if any, by
which the amount described in clause (i) above on each prior Underlying
Distribution Date exceeded the amount actually distributed as interest on such
prior Underlying Distribution Date and not subsequently distributed ("Unpaid
Interest Amounts").
With respect to each Underlying Distribution Date, the "Interest Accrual
Period" for the classes of CWMBS Certificates bearing interest will be the
calendar month preceding the month of such
S-24
<PAGE>
Underlying Distribution Date. Interest will be calculated and payable on the
basis of a 360-day year consisting of twelve 30-day months.
The interest entitlement described above for each interest-bearing class of
CWMBS Certificates for any Underlying Distribution Date (including the
Underlying Certificates) will be reduced by the amount of "Net Interest
Shortfalls" for such Underlying Distribution Date. With respect to any
Underlying Distribution Date, the "Net Interest Shortfall" is equal to the sum
of (i) the amount of interest that would otherwise have been received with
respect to any Mortgage Loan that was the subject of (x) a Relief Act Reduction
or (y) a Special Hazard Loss, Fraud Loss, Debt Service Reduction or Deficient
Valuation, after the exhaustion of the respective amounts of coverage provided
by the CWMBS Subordinate Certificates for such types of losses and (ii) any Net
Prepayment Interest Shortfalls with respect to any Underlying Distribution Date.
A "Relief Act Reduction" is a reduction in the amount of monthly interest
payment on a Mortgage Loan pursuant to the Soldiers' and Sailors' Civil Relief
Act of 1940. See "Certain Legal Aspects of Mortgage Loans--Soldiers' and
Sailors' Civil Relief Act of 1940" in the Prospectus. With respect to any
Underlying Distribution Date, a "Net Prepayment Interest Shortfall" is the
amount by which the aggregate of Prepayment Interest Shortfalls during the
portion of the Prepayment Period occurring in the calendar month preceding the
month of such Underlying Distribution Date exceeds the aggregate amount payable
on such Underlying Distribution Date by the Master Servicer for such period
which will not exceed one-half of the Master Servicing Fee (as defined herein).
A "Prepayment Interest Shortfall" is the amount by which interest paid by a
borrower in connection with a prepayment of principal on a Mortgage Loan is less
than one month's interest at the related Mortgage Rate on the Stated Principal
Balance of such Mortgage Loan. Each class' PRO RATA share of such Net Interest
Shortfalls will be based on the amount of interest such class otherwise would
have been entitled to receive on such Underlying Distribution Date.
In the event that, on a particular Underlying Distribution Date, CWMBS
Available Funds applied in the order described above under "--Allocation of
CWMBS Available Funds" are not sufficient to make a full distribution of the
interest entitlement on the CWMBS Certificates (the "Unpaid Interest Amount"),
interest will be distributed on each class of CWMBS Certificates of equal
priority based on the amount of interest each such class would otherwise have
been entitled to receive in the absence of such shortfall. Any Unpaid Interest
Amount will be carried forward and added to the amount holders of each such
class of CWMBS Certificates will be entitled to receive on the next Underlying
Distribution Date. Such a shortfall could occur, for example, if losses realized
on the Mortgage Loans were exceptionally high or were concentrated in a
particular month. Any Unpaid Interest Amount will not bear interest.
PRINCIPAL DISTRIBUTIONS ON THE CWMBS CERTIFICATES
GENERAL. All payments and other amounts received in respect of principal of
the Mortgage Loans will be allocated between (i) the CWMBS Senior Certificates
(other than the Class PO Certificates and the Class X Certificates) and the
CWMBS Subordinate Certificates and (ii) the Class PO Certificates, in each case
based on the applicable Non-PO Percentage and the applicable PO Percentage,
respectively, of such amounts.
The "Non-PO Percentage" with respect to any Mortgage Loan with a Net
Mortgage Rate (as defined herein and referred to below as "NMR"), less than
6.50% (each such Mortgage Loan, a "Discount Mortgage Loan") will be equal to NMR
/ 6.50%. The Non-PO Percentage with respect to any Mortgage Loan with an NMR
equal to or greater than 6.50% (each such Mortgage Loan, a "Non-Discount
Mortgage Loan") will be 100%. The PO Percentage with respect to any Discount
Mortgage Loan will be equal to (6.50% - NMR) / 6.50%. The PO Percentage with
respect to any Non-Discount Mortgage Loan will be 0%.
S-25
<PAGE>
NON-PO FORMULA PRINCIPAL AMOUNT. On each Underlying Distribution Date, the
Non-PO Formula Principal Amount will be distributed as principal of the CWMBS
Senior Certificates (other than the Class PO Certificates and the Class X
Certificates) and the CWMBS Subordinate Certificates, to the extent of the
amount available from CWMBS Available Funds for the distribution of principal on
such respective classes, as described below.
The "Non-PO Formula Principal Amount" for any Underlying Distribution Date
will equal the sum of the applicable Non-PO Percentage of (a) all monthly
payments of principal due on each Mortgage Loan on the related Due Date, (b) the
principal portion of the purchase price of each Mortgage Loan that was
repurchased by the Seller or another person pursuant to the Pooling and
Servicing Agreement as of such Underlying Distribution Date, (c) the
Substitution Adjustment Amount in connection with any deleted Mortgage Loan
received with respect to such Underlying Distribution Date, (d) any Insurance
Proceeds or Liquidation Proceeds allocable to recoveries of principal of
Mortgage Loans that are not yet Liquidated Mortgage Loans (as defined herein)
received during the calendar month preceding the month of such Underlying
Distribution Date, (e) with respect to each Mortgage Loan that became a
Liquidated Mortgage Loan during the calendar month preceding the month of such
Underlying Distribution Date, the amount of the Liquidation Proceeds allocable
to principal received with respect to such Mortgage Loan and (f) all partial and
full principal prepayments by borrowers received during the related Prepayment
Period.
SENIOR PRINCIPAL DISTRIBUTION AMOUNT. On each Underlying Distribution Date
prior to the Senior Credit Support Depletion Date (as defined herein), the
Non-PO Formula Principal Amount, up to the amount of the Senior Principal
Distribution Amount (as defined herein) for such Underlying Distribution Date,
will be distributed as principal sequentially, to the Class A-R Certificates and
the Class A Certificates, in that order, until the respective class Certificate
Balances thereof are reduced to zero.
Notwithstanding the foregoing, on each Underlying Distribution Date on and
after the Senior Credit Support Depletion Date, the Non-PO Formula Principal
Amount will be distributed, concurrently, as principal of the classes of CWMBS
Senior Certificates (other than the Class PO Certificates and the Class X
Certificates), PRO RATA, in accordance with their respective Certificate
Principal Balances immediately prior to such Underlying Distribution Date.
The "Senior Credit Support Depletion Date" is the date on which the
Certificate Principal Balances of the CWMBS Subordinate Certificates have been
reduced to zero.
The "Senior Principal Distribution Amount" for any Underlying Distribution
Date will equal the sum of (i) the Senior Percentage (as defined herein) of the
applicable Non-PO Percentage of all amounts described in clauses (a) through (d)
of the definition of "Non-PO Formula Principal Amount" for such Underlying
Distribution Date, (ii) with respect to each Mortgage Loan that became a
Liquidated Mortgage Loan during the calendar month preceding the month of such
Underlying Distribution Date, the lesser of (x) the Senior Percentage of the
applicable Non-PO Percentage of the Stated Principal Balance of such Mortgage
Loan and (y) either (A) the Senior Prepayment Percentage (as defined herein) or
(B) if an Excess Loss was sustained with respect to such Liquidated Mortgage
Loan during such preceding calendar month, the Senior Percentage of the
applicable Non-PO Percentage of the amount of the amount of the Liquidation
Proceeds allocable to principal received with respect to such Mortgage Loan and
(iii) the Senior Prepayment Percentage of the applicable Non-PO Percentage of
the amounts described in clause (f) of the definition of "Non-PO Formula
Principal Amount" for such Underlying Distribution Date; provided, however, that
the Senior Principal Distribution Amount will be reduced on any Underlying
Distribution Date by the Senior Percentage of the applicable Non-PO Percentage
of the principal portion of any Bankruptcy Loss (as defined herein) that is an
Excess Loss sustained with respect to a Mortgage Loan that is not a Liquidated
Mortgage Loan.
S-26
<PAGE>
"Stated Principal Balance" means as to any Mortgage Loan and Due Date, the
unpaid principal balance of such Mortgage Loan as of such Due Date, as specified
in the amortization schedule at the time relating thereto (before any adjustment
to such amortization schedule by reason of any moratorium or similar waiver or
grace period), after giving effect to any previous partial principal prepayments
and Liquidation Proceeds received and to the payment of principal due on such
Due Date and irrespective of any delinquency in payment by the related
Mortgagor. The "Pool Principal Balance" with respect to any Underlying
Distribution Date equals the aggregate of the Stated Principal Balances of the
Mortgage Loans outstanding on the Due Date in the month preceding the month of
such Underlying Distribution Date.
The "Senior Percentage" for any Underlying Distribution Date is the
percentage equivalent of a fraction the numerator of which is the aggregate of
the Certificate Principal Balances of each class of CWMBS Senior Certificates
(other than the Class PO Certificates) immediately prior to such date and the
denominator of which is the aggregate of the Certificate Principal Balances of
all classes of CWMBS Certificates, other than the Class PO Certificates,
immediately prior to such date. The "CWMBS Subordinate Percentage" for any
Underlying Distribution Date will be calculated as the difference between 100%
and the Senior Percentage for such date.
The Senior Prepayment Percentage for any Underlying Distribution Date
occurring during the five years that began on the first Underlying Distribution
Date in January 1999 will equal 100%. Thereafter, the Senior Prepayment
Percentage will, except as described below, be subject to gradual reduction as
described in the following paragraph. This disproportionate allocation of
certain unscheduled payments in respect of principal will have the effect of
accelerating the amortization of the CWMBS Senior Certificates (other than the
Class PO Certificates) which receive these unscheduled payments of principal
while, in the absence of Realized Losses, increasing the interest in the Pool
Principal Balance evidenced by the CWMBS Subordinate Certificates. Increasing
the respective interest of the CWMBS Subordinate Certificates relative to that
of the CWMBS Senior Certificates is intended to preserve the availability of the
subordination provided by the CWMBS Subordinate Certificates. The "Subordinated
Prepayment Percentage" as of any Underlying Distribution Date will be calculated
as the difference between 100% and the Senior Prepayment Percentage.
The Senior Prepayment Percentage for any Underlying Distribution Date
occurring on or after the fifth anniversary of the first Underlying Distribution
Date will be as follows: for any Underlying Distribution Date in the first year
thereafter, the Senior Percentage plus 70% of the CWMBS Subordinate Percentage
for such Underlying Distribution Date; for any Underlying Distribution Date in
the second year thereafter, the Senior Percentage plus 60% of the CWMBS
Subordinate Percentage for such Underlying Distribution Date; for any Underlying
Distribution Date in the third year thereafter, the Senior Percentage plus 40%
of the CWMBS Subordinate Percentage for such Underlying Distribution Date; for
any Underlying Distribution Date in the fourth year thereafter, the Senior
Percentage plus 20% of the CWMBS Subordinate Percentage for such Underlying
Distribution Date; and for any Underlying Distribution Date thereafter, the
Senior Percentage for such Underlying Distribution Date (unless on any of the
foregoing Underlying Distribution Dates the Senior Percentage exceeds the
initial Senior Percentage, in which case the Senior Prepayment Percentage for
such Underlying Distribution Date will once again equal 100%). Notwithstanding
the foregoing, no decrease in the Senior Prepayment Percentage will occur unless
both of the following conditions (the "Step Down Conditions") are satisfied, (i)
the outstanding principal balance of all Mortgage Loans delinquent 60 days or
more (averaged over the preceding six month period), as a percentage of the
aggregate principal balance of the CWMBS Subordinate Certificates on such
Underlying Distribution Date, does not equal or exceed 50% and (ii) cumulative
Realized Losses with respect to the Mortgage Loans do not exceed (a) with
respect to the Underlying Distribution Date on the fifth anniversary of the
first Underlying Distribution Date, 30% of the aggregate of the principal
balances of the CWMBS Subordinate Certificates as of the Underlying Cut-off Date
(the
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<PAGE>
"Original Subordinated Principal Balance"), (b) with respect to the Underlying
Distribution Date on the sixth anniversary of the first Underlying Distribution
Date, 35% of the Original Subordinated Principal Balance, (c) with respect to
the Underlying Distribution Date on the seventh anniversary of the first
Underlying Distribution Date, 40% of the Original Subordinated Principal
Balance, (d) with respect to the Underlying Distribution Date on the eighth
anniversary of the first Underlying Distribution Date, 45% of the Original
Subordinated Principal Balance and (e) with respect to the Underlying
Distribution Date on the ninth anniversary of the first Underlying Distribution
Date, 50% of the Original Subordinated Principal Balance.
If on any Underlying Distribution Date, the allocation to the class or
classes of CWMBS Senior Certificates (other than the Class PO Certificates) then
entitled to distributions of principal, full and partial principal prepayments
and other amounts in the percentage required above would reduce the outstanding
Certificate Principal Balance of such class or classes below zero, the
distribution to such class or classes of the Senior Prepayment Percentage of
such amounts on such Underlying Distribution Date will be limited to the
percentage necessary to reduce the related Certificate Principal Balance to
zero.
CLASS PO PRINCIPAL DISTRIBUTION AMOUNT. On each Underlying Distribution
Date, distributions of principal of the Class PO Certificates will be made in an
amount (the "Class PO Principal Distribution Amount") equal to the lesser of (x)
the PO Formula Principal Amount for such Underlying Distribution Date and (y)
the product of (i) CWMBS Available Funds remaining after distribution of
interest on the CWMBS Senior Certificates and (ii) a fraction, the numerator of
which is the PO Formula Principal Amount and the denominator of which is the sum
of the PO Formula Principal Amount and the Senior Principal Distribution Amount.
If the Class PO Principal Distribution Amount on an Underlying Distribution
Date is calculated as provided in clause (y) above, principal distributions to
holders of the CWMBS Senior Certificates (other than the Class PO Certificates)
will be in an amount equal to the product of (i) CWMBS Available Funds remaining
after distribution of interest on the CWMBS Senior Certificates and (ii) a
fraction, the numerator of which is the Senior Principal Distribution Amount and
the denominator of which is the sum of the Senior Principal Distribution Amount
and the PO Formula Principal Amount.
The PO Formula Principal Amount for any Underlying Distribution Date will
equal the sum of the applicable PO Percentage of (a) all monthly payments of
principal due on each Mortgage Loan on the related Due Date, (b) the principal
portion of the purchase price of each Mortgage Loan that was repurchased by the
Seller or another person pursuant to the Pooling and Servicing Agreement as of
such Underlying Distribution Date, (c) any Substitution Adjustment Amount in
connection with any deleted Mortgage Loan received with respect to such
Underlying Distribution Date, (d) any Insurance Proceeds or Liquidation Proceeds
allocable to recoveries of principal of Mortgage Loans that are not yet
Liquidated Mortgage Loans received during the calendar month preceding the month
of such Underlying Distribution Date, (e) with respect to each Mortgage Loan
that became a Liquidated Mortgage Loan during the calendar month preceding the
month of such Underlying Distribution Date, the amount of Liquidation Proceeds
allocable to principal received with respect to such Mortgage Loan and (f) all
partial and full principal prepayments by borrowers received during the related
Prepayment Period, provided, however, that if a Bankruptcy Loss that is an
Excess Loss is sustained with respect to a Discount Mortgage Loan that is not a
Liquidated Mortgage Loan, the PO Formula Principal Amount will be reduced on the
related Underlying Distribution Date by the applicable PO Percentage of the
principal portion of such Bankruptcy Loss.
SUBORDINATION OF THE CWMBS SUBORDINATE CERTIFICATES
ALLOCATION OF LOSSES ON THE MORTGAGE LOANS. On each Underlying Distribution
Date, the applicable PO Percentage of any Realized Loss, including any Excess
Loss, on a Discount
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Mortgage Loan will be allocated to the Class PO Certificates until the
Certificate Principal Balance thereof is reduced to zero. The amount of any such
Realized Loss, other than an Excess Loss, allocated on or prior to the Senior
Credit Support Depletion Date will be treated as a "Class PO Deferred Amount".
To the extent funds are available therefor on such Underlying Distribution Date
or on any future Underlying Distribution Date from amounts that would otherwise
be allocable to the principal entitlement of the CWMBS Subordinate Certificates,
Class PO Deferred Amounts will be paid on the Class PO Certificates prior to
distributions on the CWMBS Subordinate Certificates. Any distribution of CWMBS
Available Funds in respect of unpaid Class PO Deferred Amounts will not further
reduce the Certificate Principal Balance of the Class PO Certificates. The Class
PO Deferred Amounts will not bear interest. The Certificate Principal Balance of
the CWMBS Subordinate Certificates then outstanding with the highest numerical
class designation will be reduced by the amount of any payments in respect of
Class PO Deferred Amounts. After the Senior Credit Support Depletion Date no new
Class PO Deferred Amounts will be created.
On each Underlying Distribution Date, the applicable Non-PO Percentage of
any Realized Loss, other than any Excess Loss, will be allocated first to the
CWMBS Subordinate Certificates, in the reverse order of their numerical class
designations (beginning with the class of CWMBS Subordinate Certificates then
outstanding with the highest numerical class designation), in each case until
the Certificate Principal Balance of the respective class of Certificates has
been reduced to zero, and then to the CWMBS Senior Certificates (other than the
Class PO Certificates and the Class X Certificates), PRO RATA, based upon their
respective Certificate Principal Balances.
On each Underlying Distribution Date, the applicable Non-PO Percentage of
Excess Losses will be allocated PRO RATA among the classes of CWMBS Senior
Certificates (other than the Class PO Certificates and the Class X Certificates)
and the CWMBS Subordinate Certificates based upon their respective Certificate
Principal Balances.
Because principal distributions are paid to certain classes of CWMBS Senior
Certificates (other than the Class PO Certificates) before other classes of
CWMBS Senior Certificates, holders of such CWMBS Senior Certificates that are
entitled to receive principal later bear a greater risk of being allocated
Realized Losses on the Mortgage Loans than holders of classes that are entitled
to receive principal earlier.
ln general, a "Realized Loss" means, with respect to a Liquidated Mortgage
Loan, the amount by which the remaining unpaid principal balance of the Mortgage
Loan exceeds the amount of Liquidation Proceeds applied to the principal balance
of the related Mortgage Loan. "Excess Losses" are (i) Special Hazard Losses in
excess of the Special Hazard Loss Coverage Amount (as defined herein), (ii)
Bankruptcy Losses in excess of the Bankruptcy Loss Coverage Amount (as defined
herein) and (iii) Fraud Losses in excess of the Fraud Loss Coverage Amount (as
defined herein). "Bankruptcy Losses" are losses that are incurred as a result of
Debt Service Reductions and Deficient Valuations (each as defined herein).
"Special Hazard Losses" are Realized Losses in respect of Special Hazard
Mortgage Loans (as defined herein). "Fraud Losses" are Realized Losses sustained
on a Liquidated Mortgage Loan by reason of a default arising from fraud,
dishonesty or misrepresentation. See "--Priority of the CWMBS Senior
Certificates" below. As of the Reference Date, there have been no Realized
Losses on the Mortgage Loans.
A "Liquidated Mortgage Loan" is a defaulted Mortgage Loan as to which the
Master Servicer has determined that all recoverable liquidation and insurance
proceeds have been received. A "Special Hazard Mortgage Loan" is a Liquidated
Mortgage Loan as to which the ability to recover the full amount due thereunder
was substantially impaired by a hazard not insured against under a standard
hazard insurance policy. See "--Priority of the CWMBS Senior Certificates"
below.
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PRIORITY OF CWMBS SENIOR CERTIFICATES. The rights of the holders of the
CWMBS Subordinate Certificates to receive distributions with respect to the
Mortgage Loans will be subordinated to such rights of the holders of the CWMBS
Senior Certificates only to the extent described herein. The subordination of
the CWMBS Subordinate Certificates to the CWMBS Senior Certificates is intended
to increase the likelihood of receipt by the holders of CWMBS Senior
Certificates of the maximum amount to which they are entitled on any Underlying
Distribution Date and to provide such holders protection against Realized
Losses, other than Excess Losses. In addition, the CWMBS Subordinate
Certificates will provide limited protection against Special Hazard Losses,
Bankruptcy Losses and Fraud Losses up to the Special Hazard Loss Coverage
Amount, Bankruptcy Loss Coverage Amount and Fraud Loss Coverage Amount,
respectively, as described below. The applicable Non-PO Percentage of Realized
Losses, other than Excess Losses, will be allocated to the class of CWMBS
Subordinate Certificates then outstanding with the highest numerical class
designation. In addition, the Certificate Principal Balance of such class of
CWMBS Subordinate Certificates will be reduced by the amount of distributions on
the Class PO Certificates in reimbursement for Class PO Deferred Amounts.
At the issuance of the CWMBS Certificates, the CWMBS Subordinate
Certificates provided protection to the CWMBS Senior Certificates against (i)
Special Hazard Losses in an initial amount then expected to be up to
approximately $6,531,372 (the initial "Special Hazard Loss Coverage Amount"),
(ii) Bankruptcy Losses in an initial amount then expected to be up to
approximately $206,457 (the initial "Bankruptcy Loss Coverage Amount") and (iii)
Fraud Losses in an initial amount then expected to be up to approximately
$13,062,743 (the initial "Fraud Loss Coverage Amount").
The Special Hazard Loss Coverage Amount will be reduced, from time to time,
to be an amount equal on any Underlying Distribution Date to the lesser of (a)
the greatest of (i) 1% of the aggregate of the principal balances of the
Mortgage Loans, (ii) twice the principal balance of the largest Mortgage Loan
and (iii) the aggregate principal balances of the Mortgage Loans secured by
Mortgaged Properties located in the single California postal zip code area
having the highest aggregate principal balance of any such zip code area and (b)
the initial Special Hazard Loss Coverage Amount less the amount, if any, of
losses attributable to Special Hazard Mortgage Loans incurred since the initial
issuance of the CWMBS Certificates. All principal balances for the purpose of
this definition will be calculated as of the first day of the month preceding
such Underlying Distribution Date after giving effect to scheduled installments
of principal and interest on the Mortgage Loans then due, whether or not paid.
The Fraud Loss Coverage Amount will be reduced, from time to time, by the
amount of Fraud Losses allocated to the CWMBS Certificates. In addition, on each
anniversary of the Underlying Cut-off Date, the Fraud Loss Coverage Amount will
be reduced as follows: (a) on the first, second, third and fourth anniversaries
of the Underlying Cut-off Date, to an amount equal to the lesser of (i) 1% of
the then current Pool Principal Balance and (ii) the excess of the Fraud Loss
Coverage Amount as of the preceding anniversary of the Underlying Cut-off Date
over the cumulative amount of Fraud Losses allocated to the CWMBS Certificates
since such preceding anniversary and (b) on the fifth anniversary of the
Underlying Cut-off Date, to zero.
The Bankruptcy Loss Coverage Amount will be reduced, from time to time, by
the amount of Bankruptcy Losses allocated to the CWMBS Certificates.
The amount of coverage provided by the CWMBS Subordinate Certificates for
Special Hazard Losses, Bankruptcy Losses and Fraud Losses may be canceled or
reduced from time to time for each of the risks covered, provided that the then
current ratings of the CWMBS Certificates assigned by DCR and Standard & Poor's
are not adversely affected thereby. In addition, a reserve fund or other form of
credit enhancement may be substituted for the protection provided by the
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CWMBS Subordinate Certificates for Special Hazard Losses, Bankruptcy Losses and
Fraud Losses.
As used herein, a "Deficient Valuation" is a bankruptcy proceeding whereby
the bankruptcy court may establish the value of the Mortgaged Property at an
amount less than the then outstanding principal balance of the Mortgage Loan
secured by such Mortgaged Property or may reduce the outstanding principal
balance of a Mortgage Loan. In the case of a reduction in the value of the
related Mortgaged Property, the amount of the secured debt could be reduced to
such value, and the holder of such Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding principal balance of such Mortgage Loan
exceeds the value so assigned to the Mortgaged Property by the bankruptcy court.
In addition, certain other modifications of the terms of a Mortgage Loan can
result from a bankruptcy proceeding, including the reduction (a "Debt Service
Reduction") of the amount of the monthly payment on the related Mortgage Loan.
Notwith standing the foregoing, no such occurrence shall be considered a Debt
Service Reduction or Deficient Valuation so long as the Master Servicer is
pursuing any other remedies that may be available with respect to the related
Mortgage Loan and (i) such Mortgage Loan is not in default with respect to
payment due thereunder or (ii) scheduled monthly payments of principal and
interest are being advanced by the Master Servicer without giving effect to any
Debt Service Reduction or Deficient Valuation.
ADVANCES
Subject to the following limitations, the Master Servicer will be required
to advance prior to each Underlying Distribution Date, from its own funds or
funds in an account which will be maintained in trust for the benefit of the
Certificateholders (the "Underlying Certificate Account") that do not constitute
CWMBS Available Funds for such Underlying Distribution Date, an amount equal to
the aggregate of payments of principal of and interest on the Mortgage Loans
(net of the Master Servicing Fee with respect to the related Mortgage Loans)
which were due on the related Due Date and which were delinquent on the related
Determination Date, together with an amount equivalent to interest on each
Mortgage Loan as to which the related Mortgaged Property has been acquired by
the Underlying Trust Fund through foreclosure or deed-in-lieu of foreclosure
("REO Property") (any such advance, an "Advance"). The "Determination Date" is
the 22nd day of each month or, if such day is not a business day, the preceding
business day; provided that the Determination Date in each month will be at
least two business days prior to the related Underlying Distribution Date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the CWMBS Certificates rather than to guarantee or insure
against losses. The Master Servicer is obligated to make Advances with respect
to delinquent payments of principal of or interest on each Mortgage Loan to the
extent that such Advances are, in its reasonable judgment, recoverable from
future payments and collections or insurance payments or proceeds of liquidation
of the related Mortgage Loan. If the Master Servicer determines on any
Determination Date to make an Advance, such Advance will be included with the
distribution to CWMBS Certificateholders on the related Underlying Distribution
Date. Any failure by the Master Servicer to make a deposit in the Underlying
Certificate Account as required under the Pooling and Servicing Agreement,
including any failure to make an Advance, will constitute an Event of Default
under the Pooling and Servicing Agreement if such failure remains unremedied for
five days after written notice thereof. If the Master Servicer is terminated as
a result of the occurrence of an Event of Default, the Underlying Trustee or the
successor master servicer will be obligated to make any such Advance, in
accordance with the terms of the Pooling and Servicing Agreement.
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THE MORTGAGE POOL
The Underlying Trust Fund consists primarily of a pool (the "Mortgage Pool")
of conventional, fixed-rate, fully-amortizing mortgage loans (the "Mortgage
Loans"). The Mortgage Loans are secured by mortgages, deeds of trust or other
security instruments (each, a "Mortgage") creating a first lien on one- to
four-family residential properties (the "Mortgaged Properties").
As of January 1, 1999 (the "Reference Date"), the Mortgage Pool consisted of
1,869 Mortgage Loans having an aggregate Stated Principal Balance, after
deducting payments of principal due on or before such date, of approximately
$647,986,119. As of the Reference Date, each Mortgage Loan had a Stated
Principal Balance of not less than $32,000 or more than $1,343,000. As of the
Underlying Cut-off Date, the Mortgage Loans had an aggregate Stated Principal
Balance, after deducting payments of principal due on or before such date, of
approximately $653,137,166 (the "Underlying Cut-off Date Aggregate Principal
Balance").
The Mortgage Loans have interest rates thereon (each a "Mortgage Rate")
ranging from 6.250% to 9.125% per annum as of the Reference Date, with a
weighted average Mortgage Rate, based on Stated Principal Balances as of the
Reference Date, of approximately 7.237% per annum as of the Reference Date.
The Mortgage Loans have original terms to maturity of up to 30 years, and a
weighted average calculated remaining term to maturity as of the Reference Date,
based on Stated Principal Balances as of the Reference Date, of approximately 29
years and 9 months. The Mortgage Loans have a weighted average age since the
commencement of their terms of approximately 1 month.
As of the date of the initial issuance of the CWMBS Certificates (the "CWMBS
Certificates Issuance Date"), two of the Mortgage Loans were subject to buydown
agreements. No Mortgage Loan provides for deferred interest or negative
amortization.
No Mortgage Loan will have had a Loan-to-Value Ratio (as defined herein) at
origination of more than 95%. As of the CWMBS Certificates Issuance Date,
generally each Mortgage Loan with a Loan-to-Value Ratio at origination of
greater than 80% will have been covered by a primary mortgage guaranty insurance
policy issued by a mortgage insurance company acceptable to the Federal National
Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). Such policy provides coverage in an amount equal to
a specified percentage times the sum of the remaining principal balance of the
related Mortgage Loan, the accrued interest thereon and the related foreclosure
expenses. The specified percentage is either 12% for Loan-to-Value Ratios
between 80.01% and 85.00%, 25% for Loan-to-Value Ratios between 85.01% and
90.00% and 30% for Loan-to-Value Ratios between 90.01% and 95.00%. With respect
to 38 Mortgage Loans as of the CWMBS Certificates Issuance Date, the lender
(rather than the borrower) acquired the primary mortgage guaranty insurance and
charged the related borrower an interest premium (such Mortgage Loans, the
"Lender PMI Mortgage Loans"). Except with respect to the Lender PMI Mortgage
Loans, no such primary mortgage guaranty insurance policy is required with
respect to any such Mortgage Loan (i) after the date on which the related
Loan-to-Value Ratio is 80% or less or, based on a new appraisal, the principal
balance of such Mortgage Loan represents 80% or less of the new appraised value
or (ii) if maintaining such policy is prohibited by applicable law. With respect
to the Lender PMI Mortgage Loans, the primary mortgage guaranty insurance policy
will be maintained for the life of such Mortgage Loans.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is a
fraction, expressed as a percentage, the numerator of which is the principal
balance of the related Mortgage Loan at the date of determination and the
denominator of which is (a) in the case of a purchase, the lesser of the selling
price of the Mortgaged Property or its appraised value at the time of sale or
(b) in the
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case of a refinance, the appraised value of the Mortgaged Property at the time
of such refinance, except in the case of a Mortgage Loan underwritten pursuant
to the Seller's Streamlined Documentation Program as described herein under
"--Underwriting Standards." With respect to Mortgage Loans originated pursuant
to the Streamlined Documentation Program (a) if the loan-to-value ratio at the
time of the origination of the mortgage loan being refinanced was 90% or less,
the "Loan-to-Value Ratio" is the ratio of the principal amount of the Mortgage
Loan outstanding at the date of determination divided by the appraised value of
the related mortgaged property at the time of the origination of the mortgage
loan being refinanced or (b) if the loan-to-value ratio at the time of the
origination of the mortgage loan being refinanced was greater than 90%, then the
"Loan-to-Value Ratio" is the ratio of the principal amount of the Mortgage Loan
outstanding at the date of determination divided by the appraised value as
determined by a limited appraisal report at the time of the origination of such
Mortgage Loan. See "--Underwriting Standards" herein. No assurance can be given
that the value of any Mortgaged Property has remained or will remain at the
level that existed on the appraisal or sales date. If residential real estate
values generally or in a particular geographic area decline, the Loan-to-Value
Ratios might not be a reliable indicator of the rates of delinquencies,
foreclosures and losses that could occur with respect to such Mortgage Loans. If
after the Closing Date the real estate market and economy were to decline, the
Master Servicer may experience an increase in delinquencies on the loans it
master services and higher net losses on liquidated loans.
As of the Reference Date, no Realized Losses had been allocated to the CWMBS
Subordinate Certificates. On the Underlying Distribution Date in January 1999,
the Underlying Trustee reported that no Mortgage Loan was delinquent in payment
and no Mortgage Loan was in
foreclosure.
UNDERWRITING STANDARDS
The Mortgage Loans generally have been originated in accordance with the
underwriting standards of the Seller (sometimes referred to herein as
"Countrywide") in effect at the time of origination as disclosed by CWMBS at the
time of the initial issuance of the CWMBS Certificates. Such underwriting
standards are summarized below.
All mortgage loans must have met credit, appraisal and underwriting
standards acceptable to Countrywide. Countrywide's underwriting standards were
applied in accordance with applicable federal and state laws and regulations.
In certain cases, including with respect to mortgage loans originated
through a loan correspondent or mortgage broker, the data used by Countrywide to
complete the underwriting analysis may have been obtained by a third party. In
such instances, the initial determination as to whether a mortgage loan complied
with Countrywide's underwriting guidelines may have been made by an independent
company hired to perform underwriting services on behalf of Countrywide, the
loan correspondent or mortgage broker. In addition, under certain circumstances,
Countrywide may have acquired mortgage loans from approved correspondent lenders
under a program pursuant to which Countrywide delegated to the correspondent the
obligation to underwrite the mortgage loans to Countrywide's standards. Under
these circumstances, the underwriting of a mortgage loan may not have been
reviewed by Countrywide prior to acquisition of the mortgage loan and the
correspondent represented that Countrywide's underwriting standards had been
met. After purchasing mortgage loans under such circumstances, Countrywide
conducted a quality control review of a sample of such mortgage loans. The
number of loans reviewed in the quality control process varied based on a
variety of factors, including Countrywide's prior experience with the
correspondent lender and the results of the quality control review process
itself.
Countrywide's underwriting standards are applied by or on behalf of
Countrywide to evaluate the prospective borrower's credit standing and repayment
ability and the value and adequacy of the
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mortgaged property as collateral. Under such standards, a prospective borrower
must generally demonstrate that the ratio of the borrower's monthly housing
expenses (including principal and interest on the proposed mortgage loan and, as
applicable, the related monthly portion of property taxes, hazard insurance and
mortgage insurance) to the borrower's monthly gross income and the ratio of
total monthly debt to the monthly gross income (the 'debt-to-income' ratios) are
within certain limits. If the prospective borrower has applied for an adjustable
rate loan and the Loan-to-Value Ratio is less than or equal to 75%, the interest
component of the monthly housing expense is calculated based on the initial loan
interest rate; if the Loan-to-Value Ratio exceeds 75%, the interest component of
the monthly housing expense calculation is based on the maximum possible
interest rate payable in the second year of the mortgage loan. The maximum
acceptable debt-to-income ratio, which is determined on a loan-by-loan basis
varies depending on a number of underwriting criteria, including the
Loan-to-Value Ratio, loan purpose, loan amount and credit history of the
borrower. In addition to meeting the debt-to-income ratio guidelines, each
prospective borrower is required to have sufficient cash resources to pay the
down payment and closing costs. Certain exceptions to Countrywide's underwriting
guidelines are made in the event that compensating factors are demonstrated by a
prospective borrower.
The nature of the information which a borrower is required to disclose and
whether such information is verified depends, in part, on the documentation
program used in the origination process. In general under the Full Documentation
Loan Program (the "Full Documentation Program"), each prospective borrower is
required to complete an application which includes information with respect to
the applicant's assets, liabilities, income, credit history, employment history
and other personal information. Self-employed individuals are generally required
to submit their two most recent federal income tax returns. Under the Full
Documentation Program, the underwriter verifies the information contained in the
application relating to employment, income, assets or mortgages.
Under certain circumstances, a prospective borrower may be eligible for a
loan approval process which limits or eliminates Countrywide's standard
disclosure and/or verification requirements. Countrywide offers the following
documentation programs as alternatives to its Full Documentation Program: an
Alternative Documentation Loan Program (the "Alternative Documentation
Program"), a Reduced Documentation Loan Program (the "Reduced Documentation
Program"), a No Income/No Asset Documentation Loan Program (the "No Income/No
Asset Documentation Program") and a Streamlined Documentation Loan Program (the
"Streamlined Documentation Program").
Countrywide obtains a credit report relating to the applicant from a credit
reporting company. The credit report typically contains information relating to
such matters as credit history with local and national merchants and lenders,
installment debt payments and any record of defaults, bankruptcy, dispossession,
suits or judgments. All adverse information in the credit report is required to
be explained by the prospective borrower to the satisfaction of the lending
officer.
Except with respect to its Streamlined Documentation Program (as further
described below), Countrywide obtains appraisals from independent appraisers or
appraisal services for properties that are to secure mortgage loans. Such
appraisers inspect and appraise the proposed mortgaged property and verify that
such property is in acceptable condition. Following each appraisal, the
appraiser prepares a report which includes a market data analysis based on
recent sales of comparable homes in the area and, when deemed appropriate, a
replacement cost analysis based on the current cost of constructing a similar
home. All appraisals are required to conform to Fannie Mae or Freddie Mac
appraisal standards then in effect. Every independent appraisal is reviewed by a
Countrywide underwriter before the loan is approved.
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Countrywide requires title insurance on all of its mortgage loans secured by
first liens on real property. Countrywide also requires that fire and extended
coverage casualty insurance be maintained on the mortgaged property in an amount
at least equal to the principal balance of the related single-family mortgage
loan or the replacement cost of the mortgaged property, whichever is less.
In addition to Countrywide's standard underwriting guidelines (the "Standard
Underwriting Guidelines"), which are consistent in many respects with the
guidelines applied to mortgage loans purchased by Fannie Mae and Freddie Mac,
Countrywide uses underwriting guidelines featuring expanded criteria (the
"Expanded Underwriting Guidelines"). The Standard Underwriting Guidelines and
the Expanded Underwriting Guidelines are described further below.
STANDARD UNDERWRITING GUIDELINES
Countrywide's Standard Underwriting Guidelines generally allow Loan-to-Value
Ratios at origination of up to 95% for purchase money or rate and term refinance
mortgage loans with original principal balances of up to $300,000, up to 90% for
mortgage loans with original principal balances of up to $400,000, up to 85% for
mortgage loans with original principal balances of up to $500,000, up to 80% for
mortgage loans with original principal balances of up to $650,000, up to 75% for
mortgage loans with original principal balances of up to $750,000 and up to 70%
for mortgage loans with original principal balances of up to $1,000,000.
For cash out refinance mortgage loans with original principal balances of up
to $650,000, Countrywide's Standard Underwriting Guidelines generally allow
Loan-to-Value Ratios at origination of up to 75%. The maximum "cash-out" amount
permitted is $150,000 and is based in part on the original Loan-to-Value Ratio
of the related mortgage loan. As used herein, a refinance mortgage loan is
classified as a cash-out refinance mortgage loan by Countrywide if the borrower
retains greater than 1.0% of the entire amount of the proceeds from the
refinancing of the existing loan.
Under its Standard Underwriting Guidelines, Countrywide generally permits a
debt-to-income ratio based on the borrower's monthly housing expenses of up to
33% and a debt-to-income ratio based on the borrower's total monthly debt of up
to 38%.
In connection with the Standard Underwriting Guidelines, Countrywide
originates or acquires mortgage loans under the Full Documentation Program, the
Alternative Documentation Program, the Reduced Documentation Program or the
Streamlined Documentation Program.
The Alternative Documentation Program permits a borrower to provide W-2
forms instead of tax returns covering the most recent two years, permits bank
statements in lieu of verification of deposits and permits alternative methods
of employment verification. Mortgage loans which have been originated under the
Alternative Documentation Program may be eligible for sale to Fannie Mae or
Freddie Mac.
Under the Reduced Documentation Program, certain underwriting documentation
concerning income and employment verification is waived. Countrywide obtains
from a prospective borrower either a verification of deposit or bank statements
for the two-month period immediately prior to the date of the mortgage loan
application. Since information relating to a prospective borrower's income and
employment is not verified, such borrower's debt-to-income ratios are calculated
based on the information provided by the borrower in the mortgage loan
application. The maximum Loan-to-Value Ratio (including secondary financing)
ranges up to 70% maximum.
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The Streamlined Documentation Program is available for borrowers who are
refinancing an existing Countrywide mortgage loan provided that, among other
things, such mortgage loan has not been more than 30 days delinquent in payment
during the previous twelve-month period. Under the Streamlined Documentation
Program, appraisals are obtained only if the loan being refinanced had a
Loan-to-Value Ratio at the time of origination in excess of 90%. In addition,
under the Streamlined Documentation Program, a credit report is obtained but
only a limited credit review is conducted, no income or asset verification is
required, and telephonic verification of employment is permitted. The maximum
Loan-to-Value Ratio under the Streamlined Documentation Program ranges up to
95%.
As of the CWMBS Certificates Issuance Date, Mortgage Loans comprising
approximately 69.86% of the Mortgage Pool were underwritten pursuant to
Countrywide's Standard Underwriting Guidelines.
EXPANDED UNDERWRITING GUIDELINES
Mortgage loans which are underwritten pursuant to the Expanded Underwriting
Guidelines may have higher Loan-to-Value Ratios, higher loan amounts and
different documentation requirements than those associated with the Standard
Underwriting Guidelines. The Expanded Underwriting Guidelines also permit higher
debt-to-income ratios than mortgage loans underwritten pursuant to the Standard
Underwriting Guidelines.
Countrywide's Expanded Underwriting Guidelines generally allow Loan-to-Value
Ratios at origination of up to 95% for purchase money or rate and term refinance
mortgage loans with original principal balances of up to $300,000, up to 90% for
mortgage loans with original principal balances of up to $400,000, up to 85% for
mortgage loans with original principal balances of up to $500,000, up to 80% for
mortgage loans with original principal balances of up to $650,000, up to 70% for
mortgage loans with original principal balances of up to $750,000, up to 65% for
mortgage loans with original principal balances of up to $1,000,000 and up to
70% for mortgage loans with original principal balances of up to $3,000,000.
For cash-out refinance mortgage loans with original principal balances of up
to $3,000,000, Countrywide's Expanded Underwriting Guidelines generally allow
Loan-to-Value Ratios at origination of up to 90%. The maximum 'cash-out' amount
permitted is $600,000 and is based in part on the original Loan-to-Value Ratio
of the related mortgage loan.
Under its Expanded Underwriting Guidelines, Countrywide generally permits a
debt-to-income ratio based on the borrower's monthly housing expenses of up to
36% and a debt-to-income ratio based on the borrower's total monthly debt of up
to 40%; provided, however, that if the Loan-to-Value Ratio exceeds 80%, such
maximum permitted debt-to-income ratios are 33% and 38%, respectively.
In connection with the Expanded Underwriting Guidelines, Countrywide
originates or acquires mortgage loans under the Full Documentation Program, the
Alternative Documentation Program, the Reduced Documentation Loan Program and
the No Income/ No Asset Documentation Program. The No Income/No Asset
Documentation Program is not available under the Standard Underwriting
Guidelines.
The same documentation and verification requirements apply to mortgage loans
documented under the Alternative Documentation Program regardless of whether the
loan has been underwritten under the Expanded Underwriting Guidelines or the
Standard Underwriting Guidelines. However, under the Alternative Documentation
Program, mortgage loans that have been underwritten pursuant to the Expanded
Underwriting Guidelines may have higher loan
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balances and Loan-to-Value Ratios than those permitted under the Standard
Underwriting Guidelines.
Similarly, the same documentation and verification requirements apply to
mortgage loans documented under the Reduced Documentation Program regardless of
whether the loan has been underwritten under the Expanded Underwriting
Guidelines or the Standard Underwriting Guidelines. However, under the Reduced
Documentation Program, higher loan balances and Loan-to-Value Ratios are
permitted for mortgage loans underwritten pursuant to the Expanded Underwriting
Guidelines than those permitted under the Standard Underwriting Guidelines. The
maximum Loan-to-Value Ratio (including secondary financing) ranges up to 90%.
With respect to certain mortgage loans originated under the Reduced
Documentation Program, the borrower is not required to disclose any income
information, and accordingly debt-to-income ratios are not calculated or
included in the underwriting analysis. With respect to such mortgage loans, the
maximum Loan-to-Value Ratio (including secondary financing) ranges up to 80%.
Under the No Income/No Asset Documentation Program, no documentation
relating to a prospective borrower's income, employment or assets is required
and therefore debt-to-income ratios are not calculated or included in the
underwriting analysis (or if such documentation or calculations are included in
a mortgage loan file, they are not taken into account for purposes of the
underwriting analysis). This program is limited to borrowers with excellent
credit histories. Under the No Income/No Asset Documentation Program, the
maximum Loan-to-Value Ratio (including secondary financing) ranges up to 75%.
Mortgage loans originated under the No Income/No Asset Documentation Program are
not eligible for sale to Fannie Mae or Freddie Mac.
As of the CWMBS Certificates Issuance Date, Mortgage Loans originated under
either the No Income/No Asset Documentation Program or the Reduced Documentation
Program pursuant to which debt-to-income ratios are not calculated as described
above were expected to comprise approximately 5.51% of the Mortgage Pool.
Under the Expanded Underwriting Guidelines, Countrywide may also provide
mortgage loans to borrowers who are not U.S. citizens, including permanent and
non-permanent residents. The borrower is required to have a valid U.S. social
security number or a certificate of foreign status (IRS form W-8). The
borrower's income and assets must be verified under the Full Documentation
Program or the Alternative Documentation Program. The maximum Loan-to-Value
Ratio (including secondary financing) is 80%.
As of the CWMBS Certificates Issuance Date, Mortgage Loans comprising
approximately 30.14% of the Mortgage Pool were underwritten pursuant to
Countrywide's Expanded Underwriting Guidelines.
YIELD ON THE TRUST CERTIFICATES
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
Net Interest Shortfalls allocated to the Underlying Certificates will affect
the yield on the Trust Certificates. Full or partial prepayments of principal on
the Mortgage Loans are passed through to the CWMBS Certificateholders in the
month following the month of receipt or payment. Any prepayment of a Mortgage
Loan or liquidation of a Mortgage Loan (including by foreclosure proceedings or
by virtue of the purchase of a Mortgage Loan in advance of its stated maturity
as required or permitted by the Pooling and Servicing Agreement) will generally
have the effect of passing through to the CWMBS Certificateholders principal
amounts which would otherwise be
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<PAGE>
passed through (or reduced) in amortized increments over the remaining term of
such Mortgage Loan.
GENERAL PREPAYMENT CONSIDERATIONS
The yield to maturity and the aggregate amount of distributions on the Trust
Certificates will be affected by the rate and timing of principal payments on
the Underlying Certificates, which in turn will be affected by the rate and
timing of principal payments on the Mortgage Loans and the amount and timing of
Mortgagor defaults resulting in Realized Losses.
Principal payments on the Underlying Certificates will result in
distributions in respect of principal to the holders of the Trust Certificates
that otherwise would be distributed over the remaining term of the Underlying
Certificates. Since the rates of payment of principal on the Mortgage Loans, and
therefore on the Underlying Certificates, 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 on
the Underlying Certificates or the aggregate amount of distributions on the
Underlying Certificates. The extent to which the yield to maturity of any class
of Trust 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 principal payments on the
Underlying Certificates. Further, in the case of any such Trust Certificate
purchased at a discount, an investor should consider the risk that a slower than
anticipated rate of principal payments on the Underlying Certificates could
result in an actual yield to such investor that is lower than the anticipated
yield and, in the case of any such Trust 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 is
allocated to the Underlying Certificates, the greater will be the effect on the
yield to maturity on the Trust Certificates. As a result, the effect on the
yield on the Trust Certificates of principal payments allocated to the
Underlying Certificates at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Trust
Certificates would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments allocated to the Underlying
Certificates.
The rate of distributions in reduction of the principal balance of the
Underlying Certificates and the aggregate amount of distributions on the
Underlying Certificates will be directly related to the rate of payments of
principal on the Mortgage Loans in the Underlying Trust Fund and the amount and
timing of Mortgagor defaults resulting in Realized Losses. The rate of principal
payments on the Mortgage Loans will in turn be affected by the amortization
schedules of the Mortgage Loans, the rate of principal prepayments (including
partial prepayments and those resulting from refinancing) thereon by Mortgagors,
liquidations of defaulted Mortgage Loans, repurchases of Mortgage Loans as a
result of defective documentation or breaches of representations and warranties
and optional purchase by the Master Servicer of all of the Mortgage Loans in
connection with the termination of the Underlying Trust Fund. See "Pooling and
Servicing Agreement--Optional Termination" herein. Mortgagors are permitted to
prepay the Mortgage Loans, in whole or in part, at any time without penalty. As
described under "Description of the Underlying Certificates--Principal
Distributions on the CWMBS Certificates" herein, all or a disproportionate
percentage of principal prepayments on the Mortgage Loans (including
liquidations and repurchases of Mortgage Loans) will be distributed to the
holders of the CWMBS Senior Certificates then entitled to distributions in
respect of principal during the five years that began in January 1999.
Prepayments (which, as used herein, include all unscheduled payments of
principal, including payments as the result of liquidations, purchases and
repurchases) of the Mortgage Loans in the Underlying Trust Fund will result in
distributions to CWMBS
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<PAGE>
Certificateholders then entitled to distributions in respect of principal of
amounts which would otherwise be distributed over the remaining terms of such
Mortgage Loans.
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 rates for similar mortgage loans fall below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment would generally be expected to increase.
Conversely, if interest rates on similar mortgage loans rise significantly above
the Mortgage Rates on the Mortgage Loans, the rate of prepayment would generally
be expected to decrease. The rate of prepayment on the Mortgage Loans may also
be influenced by programs offered by mortgage loan originators and mortgage loan
brokers to encourage refinancing through such originators and brokers, including
but not limited to general or targeted solicitations, reduced origination fees
or closing costs, or other financial incentives.
Because principal distributions are paid to certain classes of Trust
Certificates before other such classes, holders of classes of Trust Certificates
having a later priority of payment bear a greater risk of losses (because such
Trust 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. As described under "Description of the Trust Certificates--Principal
Distributions on the Trust Certificates" herein, during certain periods, no
principal payments or a disproportionately small portion of the Principal
Distribution Amount will be distributed on the Lockout Certificates, and during
certain other periods, a disproportionately large portion of the amount of the
Principal Distribution Amount will be distributed on the Lockout Certificates.
Unless the Certificate Principal Balances of the Trust 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 March 2004.
Other factors affecting prepayment of mortgage loans include changes in
mortgagors' housing needs, job transfers, unemployment or, in the case of
self-employed mortgagors or mortgagors relying on commission income, substantial
fluctuations in income, significant declines in real estate values and adverse
economic conditions either generally or in particular geographic areas,
mortgagors' 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 Underlying Certificates.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years. In addition, default rates generally are higher
for mortgage loans used to refinance an existing mortgage loan. In the event of
a borrower's default on a Mortgage Loan, there can be no assurance that recourse
beyond the specific Mortgaged Property pledged as security for repayment will be
available.
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 Trust
Certificates will be influenced by, among other things, 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 borrower as
well as amounts received by virtue of condemnation, insurance or foreclosure
with respect to the Mortgage Loans).
Except as otherwise described under "Description of the Trust
Certificates--Principal Distributions on the Trust Certificates" herein,
distributions of principal will be made to the classes of Trust Certificates
according to the priorities described herein, rather than on a PRO RATA basis
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<PAGE>
among such classes, unless the Certificate Principal Balances of the CWMBS
Subordinate Certificates have been reduced to zero. The timing of commencement
of principal distributions to each class of the Trust 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 Trust Certificates, other than the Lockout Certificates, have
been reduced to zero) any portion of principal payments prior to the
Distribution Date occurring in March 2004 and thereafter will receive (unless
the Certificate Principal Balances of the Trust 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 Trust Certificates entitled to principal
distributions.
IN ADDITION TO THE CONSIDERATIONS SET FORTH ABOVE, INVESTORS IN THE
RETAIL CERTIFICATES SHOULD BE AWARE THAT SUCH CERTIFICATES MAY NOT BE AN
APPROPRIATE INVESTMENT FOR ALL PROSPECTIVE INVESTORS. The Retail Certificates
would not be an appropriate investment for any investor requiring a distribution
of a particular amount of principal or interest on a specific date or dates or
an otherwise predictable stream of cash payments. The timing of such
distributions may have a significant effect on an investor's yield on such
Certificates if the Certificate is purchased at a discount or a premium.
Investors in the Retail Lottery Certificates also should be aware that
distributions of principal to the Retail Lottery Certificates will be allocated
by DTC according to a random lot procedure (except as provided herein under
"Description of the Trust Certificates--Principal Distributions on the Retail
Lottery Certificates"). Due to this random lot procedure, there can be no
assurance that on any Distribution Date, any holder of a Retail Lottery
Certificate will receive a principal distribution. Thus, the timing of
distributions in reduction of the Certificate Principal Balance with respect to
any particular Retail Lottery Certificate, even if a request for distribution
has been made as provided herein under "Description of the Trust
Certificates--Principal Distributions on the Retail Lottery Certificates," is
highly uncertain and may be earlier or later than the date that may be desired
by such Certificateholder.
Furthermore, investors in the Retail Certificates should be aware that
because such Certificates have a later priority of payment with respect to
principal in relation to the other classes of Trust Certificates, the effect on
the market value of the Retail Certificates of changes in market interest rates
or market yields for similar securities will be greater than would be the effect
of such changes on other classes of Trust Certificates entitled to principal
distributions. Furthermore, this later payment priority also makes the Retail
Certificates particularly sensitive to the rate and timing of principal
prepayments on the Mortgage Loans. If prepayments on the Mortgage Loans occur at
a higher rate than anticipated, the weighted average life of the Retail
Certificates may be shortened. Conversely, if prepayments on the Mortgage Loans
occur at a lower rate than anticipated, the weighted average life of the Retail
Certificates may be extended.
Investors in the Class A-2 Certificates should be aware that the Class A-2
Certificates will accrue interest at a Pass-Through Rate of 8.00% per annum
effective for distributions made on the first Distribution Date up to and
including the Distribution Date in February 2000, a Pass-Through Rate of 6.75%
per annum effective for distributions made on the Distribution Date in March
2000 up to and including the Distribution Date in February 2001, and thereafter,
at a Pass-Through Rate of 6.50% per annum. The Class A-12 Certificates will
accrue interest at a Pass-Through Rate of 6.50% per annum effective for
distributions made on the first Distribution Date up to and including the
Distribution Date in February 2000, a Pass-Through Rate of 6.75% per annum
effective for
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distributions made on the Distribution Date in March 2000 up to and including
the Distribution Date in February 2001, and thereafter, at a Pass-Through Rate
of 7.00% per annum.
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 275% SPA. The
standard prepayment assumption ("SPA") represents an assumed rate of prepayment
each month of the then outstanding principal balance of a pool of mortgage
loans. 100% SPA assumes prepayment rates of 0.2% per annum of the then
outstanding principal balance of such mortgage loans in the first month of the
life of the mortgage 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 mortgage loans, 100% SPA assumes a
constant prepayment rate of at 6% per annum each month. 275% SPA assumes, for
example, prepayment rates will be approximately 0.55% per annum in month one,
approximately 1.10% per annum in month two, reaching approximately 16.5% per
annum in month thirty and remaining constant at 16.5% per annum thereafter. SPA
does not purport to be an historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans. No representation is made that the Mortgage Loans
will prepay at the above-described rates or any other rate.
The following table indicates the percentage of the initial Certificate
Principal Balance (as defined below) of each class of Trust Certificates
included in the table 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 each such class of Trust Certificates. The table is
based on the following assumptions (the "Modeling Assumptions"):
(i) the Mortgage Pool consists of two Mortgage Loans; the first Mortgage
Loan is a Discount Mortgage Loan with the following characteristics:
(a) a Stated Principal Balance of $68,434,665.93; (b) a Mortgage
Rate of 6.7100116480% per annum; (c) a Servicing Fee of
0.2719380593% per annum; (d) a loan seasoning of 1 month; and (e) a
remaining term to maturity of 353 months;
the second Mortgage Loans is a Non-Discount Mortgage Loan with the following
characteristics:
(a) a Stated Principal Balance of $579,551,452.62; (b) a Mortgage
Rate of 7.2994422559% per annum; (c) a Servicing Fee of
0.2709080045% per annum; (d) a loan seasoning of 1 month; and (e) a
remaining term to maturity of 358 months;
(ii) distributions on such Trust Certificates are received, in cash, on the
26th day of each month, commencing in March 1999;
(iii) the Mortgage Loans prepay at the constant percentages of the
Prepayment Assumption indicated;
(iv) no defaults or delinquencies occur or have occurred in the payment by
mortgagors of principal and interest on the Mortgage Loans and no interest
shortfalls are allocated to the Underlying Certificates;
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<PAGE>
(v) neither the Master Servicer nor any other person purchases from the
Underlying Trust Fund any Mortgage Loan or substitutes a mortgage loan for a
deleted Mortgage Loan pursuant to any obligation or option under the Pooling
and Servicing 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 February 1999, and are computed prior
to giving effect to any prepayments received in the prior month;
(vii) prepayments representing payment in full of individual Mortgage Loans
are received on the last day of each month (commencing in January 1999) 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) as of the date of issuance of the Trust Certificates, the CWMBS
Certificates, except with respect to the Certificate Principal Balances
thereof, are as described under "Description of the Underlying Certificates"
herein;
(x) the percentage interest in the Class A CWMBS Certificates represented
by the Underlying Certificates varies (after taking into account scheduled
payments of principal and prepayments that would be received on the Mortgage
Loans, at each percentage of the Prepayment Assumption shown in the tables
below, to the extent distributed on the Class A CWMBS Certificates on the
Underlying Distribution Date in February 1999) such that the initial
Certificate Principal Balance of the Underlying Certificates is $569,286,524
as of the Closing Date, which was the approximate Certificate Principal
Balance of the Underlying Certificates as of the Reference Date;
(xi) each class of the Trust Certificates is issued with the initial
Certificate Principal Balance indicated for such class under "Summary of
Prospectus Supplement--Offered Certificates" herein; and
(xii) the Trust Certificates are issued on February 25,1999.
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the table. Any such
discrepancy may have an effect upon the percentages of the initial Certificate
Principal Balances outstanding (and the weighted average life) of the Trust
Certificates set forth in the table. The actual initial Certificate Principal
Balance of each class of Trust Certificates will be lower than the assumed
initial Certificate Principal Balance of such class, and the distribution on the
Underlying Certificates that occurs on the Underlying Distribution Date in
February 1999 will not be received by the Trust Fund or distributed on the Trust
Certificates. 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 set forth below, such Trust Certificates may mature earlier
or later than indicated by the table. Based on the foregoing assumptions, the
table indicates the weighted average lives of the Trust Certificates included in
the table, and sets forth the percentage of the initial Certificate Principal
Balance of such class of Trust Certificates that would be outstanding after each
of the dates shown, at various percentages of the Prepayment Assumption. Neither
the prepayment model used herein with respect to the Trust Certificates 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
Underlying Trust Fund. Variations in
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the prepayment experience and the balance of the Mortgage Loans that prepay may
increase or decrease the percentages of initial Certificate Principal Balance
(and weighted average lives) shown in the following table. Such variations may
occur even if the average prepayment experience of all such Mortgage Loans
equals any of the specified percentages of the prepayment assumption.
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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES CLASS A-3 CERTIFICATES
---------------------- ---------------------- ----------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- -- ---- ---- ---- ---- -- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date............. 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
February 26, 2000........ 99 96 92 89 86 100 100 100 100 100 100 100 100 100 100
February 26, 2001........ 97 89 75 65 58 100 100 100 100 100 100 100 100 100 100
February 26, 2002........ 96 80 54 38 26 100 100 100 100 100 100 100 100 100 100
February 26, 2003........ 94 71 37 17 4 100 100 100 100 100 100 100 100 100 100
February 26, 2004........ 92 62 22 2 0 100 100 100 100 100 100 100 100 100 100
February 26, 2005........ 90 55 11 0 0 100 100 100 100 100 100 100 100 100 50
February 26, 2006........ 88 48 3 0 0 100 100 100 100 24 100 100 100 88 11
February 26, 2007........ 86 42 0 0 0 100 100 100 100 0 100 100 100 54 0
February 26, 2008........ 84 36 0 0 0 100 100 100 79 0 100 100 100 36 0
February 26, 2009........ 81 31 0 0 0 100 100 100 59 0 100 100 100 27 0
February 26, 2010........ 79 27 0 0 0 100 100 100 44 0 100 100 100 20 0
February 26, 2011........ 76 22 0 0 0 100 100 100 32 0 100 100 82 15 0
February 26, 2012........ 73 18 0 0 0 100 100 100 24 0 100 100 67 11 0
February 26, 2013........ 70 14 0 0 0 100 100 100 17 0 100 100 54 8 0
February 26, 2014........ 66 10 0 0 0 100 100 96 13 0 100 100 43 6 0
February 26, 2015........ 63 7 0 0 0 100 100 77 9 0 100 100 35 4 0
February 26, 2016........ 59 4 0 0 0 100 100 61 7 0 100 100 28 3 0
February 26, 2017........ 55 1 0 0 0 100 100 49 5 0 100 100 22 2 0
February 26, 2018........ 50 0 0 0 0 100 100 38 4 0 100 100 17 2 0
February 26, 2019........ 45 0 0 0 0 100 100 30 3 0 100 100 14 1 0
February 26, 2020........ 40 0 0 0 0 100 100 23 2 0 100 100 11 1 0
February 26, 2021........ 35 0 0 0 0 100 100 18 1 0 100 100 8 1 0
February 26, 2022........ 29 0 0 0 0 100 100 13 1 0 100 100 6 0 0
February 26, 2023........ 22 0 0 0 0 100 100 10 1 0 100 91 4 0 0
February 26, 2024........ 15 0 0 0 0 100 100 7 0 0 100 73 3 0 0
February 26, 2025........ 8 0 0 0 0 100 100 5 0 0 100 56 2 0 0
February 26, 2026........ 0 0 0 0 0 100 87 3 0 0 100 40 1 0 0
February 26, 2027........ 0 0 0 0 0 100 54 2 0 0 100 24 1 0 0
February 26, 2028........ 0 0 0 0 0 100 22 1 0 0 60 10 0 0 0
February 26, 2029........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
in Years(1)............ 17.4 7.7 3.5 2.7 2.3 29.5 28.2 18.9 11.6 6.7 29.2 26.5 15.5 9.3 6.2
Weighted Average Life
in Years(2)............ 17.4 7.7 3.5 2.7 2.3 28.4 23.6 12.7 8.9 6.7 28.4 23.6 12.4 8.2 6.2
</TABLE>
CLASS A-4 CERTIFICATES
----------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500%
- ----------------- -- ---- ---- ---- ----
Closing Date............. 100% 100% 100% 100% 100%
February 26, 2000........ 100 100 100 100 100
February 26, 2001........ 100 100 100 100 100
February 26, 2002........ 100 100 100 100 100
February 26, 2003........ 100 100 100 100 100
February 26, 2004........ 100 100 100 100 100
February 26, 2005........ 100 98 94 91 88
February 26, 2006........ 99 95 86 80 74
February 26, 2007........ 98 90 76 66 54
February 26, 2008........ 96 84 65 52 36
February 26, 2009........ 94 78 53 39 25
February 26, 2010........ 92 71 43 29 17
February 26, 2011........ 90 65 35 21 12
February 26, 2012........ 87 59 29 16 8
February 26, 2013........ 84 54 23 12 5
February 26, 2014........ 81 49 19 8 4
February 26, 2015........ 78 44 15 6 2
February 26, 2016........ 74 40 12 4 2
February 26, 2017........ 71 36 9 3 1
February 26, 2018........ 67 32 7 2 1
February 26, 2019........ 63 28 6 2 0
February 26, 2020........ 58 24 4 1 0
February 26, 2021........ 53 21 3 1 0
February 26, 2022........ 48 18 3 1 0
February 26, 2023........ 42 15 2 0 0
February 26, 2024........ 36 12 1 0 0
February 26, 2025........ 29 9 1 0 0
February 26, 2026........ 22 6 1 0 0
February 26, 2027........ 14 4 0 0 0
February 26, 2028........ 6 2 0 0 0
February 26, 2029........ 0 0 0 0 0
Weighted Average Life
in Years(1)............ 21.3 15.8 11.4 9.9 8.8
Weighted Average Life
in Years(2)............ 21.3 15.4 10.1 8.1 7.0
- -----------------
(1) The weighted average life of a Trust 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 Trust Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial Certificate Principal Balance of such Trust Certificate.
(2) Calculated pursuant to footnote one but assumes the Master Servicer
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 --Optional Termination" herein.
(TABLE CONTINUED ON NEXT PAGE.)
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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-5 CERTIFICATES CLASS A-6 CERTIFICATES CLASS A-7 CERTIFICATES
---------------------- ---------------------- ----------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- -- ---- ---- ---- ---- -- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date............. 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
February 26, 2000........ 99 97 93 91 89 96 88 75 66 58 100 100 100 100 100
February 26, 2001........ 98 91 80 72 66 91 66 24 0 0 100 100 100 98 90
February 26, 2002........ 96 83 63 50 40 86 38 0 0 0 100 100 86 68 55
February 26, 2003........ 95 76 48 33 22 81 11 0 0 0 100 100 66 44 30
February 26, 2004........ 93 69 37 20 3 76 0 0 0 0 100 95 50 27 5
February 26, 2005........ 92 63 28 7 0 70 0 0 0 0 100 86 38 10 0
February 26, 2006........ 90 57 21 0 0 64 0 0 0 0 100 79 28 0 0
February 26, 2007........ 88 52 14 0 0 57 0 0 0 0 100 72 19 0 0
February 26, 2008........ 87 48 8 0 0 50 0 0 0 0 100 66 11 0 0
February 26, 2009........ 85 44 4 0 0 43 0 0 0 0 100 60 5 0 0
February 26, 2010........ 83 40 0 0 0 35 0 0 0 0 100 55 0 0 0
February 26, 2011........ 80 37 0 0 0 27 0 0 0 0 100 50 0 0 0
February 26, 2012........ 78 33 0 0 0 18 0 0 0 0 100 45 0 0 0
February 26, 2013........ 75 30 0 0 0 9 0 0 0 0 100 41 0 0 0
February 26, 2014........ 73 27 0 0 0 0 0 0 0 0 99 37 0 0 0
February 26, 2015........ 70 24 0 0 0 0 0 0 0 0 95 33 0 0 0
February 26, 2016........ 67 22 0 0 0 0 0 0 0 0 91 29 0 0 0
February 26, 2017........ 63 19 0 0 0 0 0 0 0 0 86 26 0 0 0
February 26, 2018........ 59 15 0 0 0 0 0 0 0 0 81 21 0 0 0
February 26, 2019........ 55 12 0 0 0 0 0 0 0 0 76 16 0 0 0
February 26, 2020........ 51 8 0 0 0 0 0 0 0 0 70 11 0 0 0
February 26, 2021........ 47 5 0 0 0 0 0 0 0 0 64 6 0 0 0
February 26, 2022........ 42 2 0 0 0 0 0 0 0 0 57 2 0 0 0
February 26, 2023........ 36 0 0 0 0 0 0 0 0 0 50 0 0 0 0
February 26, 2024........ 31 0 0 0 0 0 0 0 0 0 42 0 0 0 0
February 26, 2025........ 25 0 0 0 0 0 0 0 0 0 34 0 0 0 0
February 26, 2026........ 18 0 0 0 0 0 0 0 0 0 24 0 0 0 0
February 26, 2027........ 6 0 0 0 0 0 0 0 0 0 8 0 0 0 0
February 26, 2028........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
February 26, 2029........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
in Years(1)............ 19.4 10.1 4.5 3.3 2.7 8.6 2.6 1.5 1.2 1.1 23.3 12.8 5.6 4.0 3.3
Weighted Average Life
in Years(2)............ 19.4 10.1 4.5 3.3 2.7 8.6 2.6 1.5 1.2 1.1 23.3 12.8 5.6 4.0 3.3
</TABLE>
CLASS A-8 CERTIFICATES
----------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500%
- ----------------- -- ---- ---- ---- ----
Closing Date............. 100% 100% 100% 100% 100%
February 26, 2000........ 100 100 100 100 100
February 26, 2001........ 100 100 100 100 100
February 26, 2002........ 100 100 100 100 100
February 26, 2003........ 100 100 100 100 100
February 26, 2004........ 100 100 100 100 100
February 26, 2005........ 100 100 100 100 0
February 26, 2006........ 100 100 100 59 0
February 26, 2007........ 100 100 100 0 0
February 26, 2008........ 100 100 100 0 0
February 26, 2009........ 100 100 100 0 0
February 26, 2010........ 100 100 100 0 0
February 26, 2011........ 100 100 41 0 0
February 26, 2012........ 100 100 0 0 0
February 26, 2013........ 100 100 0 0 0
February 26, 2014........ 100 100 0 0 0
February 26, 2015........ 100 100 0 0 0
February 26, 2016........ 100 100 0 0 0
February 26, 2017........ 100 100 0 0 0
February 26, 2018........ 100 100 0 0 0
February 26, 2019........ 100 100 0 0 0
February 26, 2020........ 100 100 0 0 0
February 26, 2021........ 100 100 0 0 0
February 26, 2022........ 100 100 0 0 0
February 26, 2023........ 100 70 0 0 0
February 26, 2024........ 100 9 0 0 0
February 26, 2025........ 100 0 0 0 0
February 26, 2026........ 100 0 0 0 0
February 26, 2027........ 100 0 0 0 0
February 26, 2028........ 0 0 0 0 0
February 26, 2029........ 0 0 0 0 0
Weighted Average Life
in Years(1)............ 28.7 24.4 11.9 7.1 5.5
Weighted Average Life
in Years(2)............ 28.4 23.6 11.9 7.1 5.5
- -----------------
1) The weighted average life of a Trust 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 Trust Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial Certificate Principal Balance of such Trust Certificate.
(2) Calculated pursuant to footnote one but assumes the Master Servicer
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 --Optional Termination" herein.
(TABLE CONTINUED ON NEXT PAGE.)
S-45
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-9 CERTIFICATES CLASS A-10 CERTIFICATES CLASS A-11 CERTIFICATES
---------------------- ----------------------- -----------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- -- ---- ---- ---- ---- -- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date............. 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
February 26, 2000........ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
February 26, 2001........ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
February 26, 2002........ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
February 26, 2003........ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
February 26, 2004........ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
February 26, 2005........ 100 100 100 100 20 100 100 100 100 100 100 100 100 100 100
February 26, 2006........ 100 100 100 100 0 100 100 100 100 24 100 100 100 100 24
February 26, 2007........ 100 100 100 35 0 100 100 100 100 0 100 100 100 100 0
February 26, 2008........ 100 100 100 0 0 100 100 100 79 0 100 100 100 79 0
February 26, 2009........ 100 100 100 0 0 100 100 100 59 0 100 100 100 59 0
February 26, 2010........ 100 100 100 0 0 100 100 100 44 0 100 100 100 44 0
February 26, 2011........ 100 100 100 0 0 100 100 100 32 0 100 100 100 32 0
February 26, 2012........ 100 100 86 0 0 100 100 100 24 0 100 100 100 24 0
February 26, 2013........ 100 100 34 0 0 100 100 100 17 0 100 100 100 17 0
February 26, 2014........ 100 100 0 0 0 100 100 96 13 0 100 100 96 13 0
February 26, 2015........ 100 100 0 0 0 100 100 77 9 0 100 100 77 9 0
February 26, 2016........ 100 100 0 0 0 100 100 61 7 0 100 100 61 7 0
February 26, 2017........ 100 100 0 0 0 100 100 49 5 0 100 100 49 5 0
February 26, 2018........ 100 100 0 0 0 100 100 38 4 0 100 100 38 4 0
February 26, 2019........ 100 100 0 0 0 100 100 30 3 0 100 100 30 3 0
February 26, 2020........ 100 100 0 0 0 100 100 23 2 0 100 100 23 2 0
February 26, 2021........ 100 100 0 0 0 100 100 18 1 0 100 100 18 1 0
February 26, 2022........ 100 100 0 0 0 100 100 13 1 0 100 100 13 1 0
February 26, 2023........ 100 100 0 0 0 100 100 10 1 0 100 100 10 1 0
February 26, 2024........ 100 100 0 0 0 100 100 7 0 0 100 100 7 0 0
February 26, 2025........ 100 42 0 0 0 100 100 5 0 0 100 100 5 0 0
February 26, 2026........ 100 0 0 0 0 100 87 3 0 0 100 87 3 0 0
February 25, 2027........ 100 0 0 0 0 100 54 2 0 0 100 54 2 0 0
February 26, 2028........ 59 0 0 0 0 100 22 1 0 0 100 22 1 0 0
February 26, 2029........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
in Years(1)............ 29.1 25.9 13.8 7.9 5.9 29.5 28.2 18.9 11.6 6.7 29.5 28.2 18.9 11.6 6.7
Weighted Average Life
in Years(2)............ 28.4 23.6 12.7 7.9 5.9 28.4 23.6 12.7 8.9 6.7 28.4 23.6 12.7 8.9 6.7
</TABLE>
CLASS A-12 CERTIFICATES
-----------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500%
- ----------------- -- ---- ---- ---- ----
Closing Date............. 100% 100% 100% 100% 100%
February 26, 2000........ 100 100 100 100 100
February 26, 2001........ 100 100 100 100 100
February 26, 2002........ 100 100 100 100 100
February 26, 2003........ 100 100 100 100 100
February 26, 2004........ 100 100 100 100 100
February 26, 2005........ 100 100 100 100 100
February 26, 2006........ 100 100 100 100 24
February 26, 2007........ 100 100 100 100 0
February 26, 2008........ 100 100 100 79 0
February 26, 2009........ 100 100 100 59 0
February 26, 2010........ 100 100 100 44 0
February 26, 2011........ 100 100 100 32 0
February 26, 2012........ 100 100 100 24 0
February 26, 2013........ 100 100 100 17 0
February 26, 2014........ 100 100 96 13 0
February 26, 2015........ 100 100 77 9 0
February 26, 2016........ 100 100 61 7 0
February 26, 2017........ 100 100 49 5 0
February 26, 2018........ 100 100 38 4 0
February 26, 2019........ 100 100 30 3 0
February 26, 2020........ 100 100 23 2 0
February 26, 2021........ 100 100 18 1 0
February 26, 2022........ 100 100 13 1 0
February 26, 2023........ 100 100 10 1 0
February 26, 2024........ 100 100 7 0 0
February 26, 2025........ 100 100 5 0 0
February 26, 2026........ 100 87 3 0 0
February 25, 2027........ 100 54 2 0 0
February 26, 2028........ 100 22 1 0 0
February 26, 2029........ 0 0 0 0 0
Weighted Average Life
in Years(1)............ 29.5 28.2 18.9 11.6 6.7
Weighted Average Life
in Years(2)............ 28.4 23.6 12.7 8.9 6.7
- -----------------
(1) The weighted average life of a Trust 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 Trust Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial Certificate Principal Balance of such Trust Certificate.
(2) Calculated pursuant to footnote one but assumes the Master Servicer
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 --Optional Termination" herein.
(TABLE CONTINUED FROM PRIOR PAGE.)
S-46
<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 the Trust
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 the Trust Certificates is not necessarily
indicative of the weighted average life of such class that might be calculated
or projected under different or varying prepayment assumptions.
The initial Certificate Principal Balance of each class of Trust
Certificates indicated herein was based on the actual Certificate Principal
Balance of the Underlying Certificates immediately following the Underlying
Distribution Date (as defined herein) in January 1999. To the extent that any
principal is distributed on the Underlying Certificates in February 1999, the
actual initial Certificate Principal Balance of each class of Trust Certificates
will be adjusted downward accordingly.
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.
TRUST AGREEMENT
GENERAL
The Trust Certificates will be issued pursuant to a Trust Agreement to be
dated as of February 25, 1999, among the Depositor as depositor and the Trustee
as trustee (the "Agreement"). A Current Report on Form 8-K relating to the Trust
Certificates containing a copy of the Agreement as executed will be filed by the
Depositor with the Securities and Exchange Commission (the "Commission") within
fifteen days of initial issuance of the Trust Certificates. The Trust Fund
created under the Agreement will consist of the Underlying Certificates together
with all distributions thereon payable after the Closing Date and such assets as
from time to time are acquired in respect of the Underlying Certificates. The
Trust Certificates will receive distributions only from payments received on the
Underlying Certificates. The Trust Certificates in the aggregate will evidence
the entire beneficial ownership interest. 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 Trust
Certificates. The Trust Certificates will be transferable and exchangeable at
the corporate trust offices of the Trustee, located in New York, New York. 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., 390 Greenwich Street, 4th Floor, New York, New York 10013.
THE TRUSTEE
The Bank of New York, a New York banking corporation, will act as Trustee
for the Trust Certificates pursuant to the Agreement. The Trustee's offices for
notices under the Agreement are located at 101 Barclay Street, 12E, New York,
New York 10286 and its phone number is (212) 815- 7162.
S-47
<PAGE>
The principal compensation to be paid to the Trustee in respect of its
obligations under the Agreement will be the benefits of the investment by the
Trustee of amounts distributed on the Underlying Certificates on each Underlying
Distribution Date for the period from such Underlying Distribution Date to the
related Distribution Date. 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
incurred in connection with any claim or legal action or any pending or
threatened claim or legal action relating to the Agreement or the Trust
Certificates or the performance of the Trustee's duties under the Agreement,
other than any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence in the performance of the Trustee's duties
under the Agreement or by reason of reckless disregard, of the Trustee's
obligations and duties under the Agreement. In addition, as set forth in the
Agreement, the Trustee will also be indemnified for certain extraordinary
expenses relating to its REMIC administration duties.
ASSIGNMENT OF THE UNDERLYING CERTIFICATES
On the Closing Date, the Depositor will transfer or cause to be transferred
the ownership of the Underlying Certificates to the Trustee. The Trustee will be
entitled to receive distributions in respect of the Underlying Certificates
beginning with the distributions thereon in March 1999.
ACTIONS IN RESPECT OF THE UNDERLYING CERTIFICATES
If at any time the Trustee, as the holder of the Underlying Certificates,
is requested in such capacity to take any action or to give any consent,
approval or waiver, including without limitation in connection with an amendment
of the Pooling and Servicing Agreement or if an event of default occurs under
the Pooling and Servicing Agreement with respect to the Master Servicer or the
Underlying Trustee thereunder, the Agreement provides that the Trustee, in its
capacity as holder of the Underlying Certificates, may take action in connection
with the enforcement of any rights and remedies available to it in such capacity
with respect thereto and may request the direction of all of the holders of the
Trust Certificates and will be protected in acting in accordance with the
written directions of a majority of the holders of the Trust Certificates of
each affected class.
VOTING RIGHTS
At all times during the term of the Agreement, (A) 99% of all Voting Rights
will be allocated among the holders of the Trust Certificates in proportion to
the then outstanding Certificate Principal Balances of their respective Trust
Certificates (other than the Class R Certificates) and (B) 1% of all Voting
Rights will be allocated among the holders of the Class R Certificates.
TERMINATION
The Trust Certificates are not subject to any optional termination.
However, the Master Servicer is entitled, subject to certain conditions relating
to the then-remaining size of the Mortgage Pool, to purchase all outstanding
Mortgage Loans and thereby effect early retirement of the Underlying
Certificates and thereby the Trust Certificates. See "Pooling and Servicing
Agreement--Optional Termination" herein.
POOLING AND SERVICING AGREEMENT
The Underlying Certificates were issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement") dated as of the Underlying
Cut-off Date among CWMBS, Inc. as depositor (the "Depositor"), Countrywide Home
Loans, Inc. as seller and master servicer (in its
S-48
<PAGE>
capacity as seller, the "Seller" and in its capacity as master servicer, the
"Master Servicer") and The Bank of New York as trustee (in such capacity, the
"Underlying Trustee"). Reference is made to the prospectus dated November 9,
1998, used in connection with the initial offering of the CWMBS Certificates, as
supplemented by a supplement thereto dated December 18, 1998, for important
information in addition to that set forth herein regarding the terms and
conditions of the Pooling and Servicing Agreement. The Depositor will provide a
prospective or actual Certificateholder without charge, on written request, a
copy (without exhibits) of the Pooling and Servicing Agreement. Requests should
be addressed to the Secretary, Salomon Brothers Mortgage Securities VII, Inc.,
390 Greenwich Street, 4th Floor, New York, New York 10013.
THE UNDERLYING TRUSTEE
The Bank of New York (the "Underlying Trustee") will be the trustee under
the Pooling and Servicing Agreement. CWMBS and the Master Servicer may maintain
other banking relationships in the ordinary course of business with The Bank of
New York.
THE MASTER SERVICER
Countrywide Home Loans, Inc. ("Countrywide"), a New York corporation and a
subsidiary of Countrywide Credit Industries, Inc., is acting as Master Servicer
for the Mortgage Loans pursuant to the Agreement. Countrywide is engaged
primarily in the mortgage banking business, and as such, originates, purchases,
sells and services mortgage loans. Countrywide originates mortgage loans through
a retail branch system and through mortgage loan brokers and correspondents
nationwide. Countrywide's mortgage loans are principally first-lien, fixed or
adjustable rate mortgage loans secured by single-family residences.
As of November 30, 1998, Countrywide provided servicing for approximately
$205.4 billion aggregate principal amount of mortgage loans, substantially all
of which are being serviced for unaffiliated persons.
The principal executive offices of Countrywide are located at 4500 Park
Granada, Calabasas, California 91302.
Countrywide initially services substantially all of the mortgage loans it
originates or acquires. In addition, Countrywide has purchased in bulk the
rights to service mortgage loans originated by other lenders. Servicing includes
collecting and remitting loan payments, accounting for principal and interest,
holding escrow (impound) funds for payment of taxes and insurance, making
inspections as required of the mortgaged premises, contacting delinquent
mortgagors, supervising foreclosures in the event of unremedied defaults and
generally administering the loans, for which Countrywide receives servicing
fees. Countrywide has in the past and may in the future sell to other mortgage
bankers a portion of its portfolio of loan servicing rights.
For information on the delinquency and foreclosure experience of the
Mortgage Pool as of the Reference Date, see "The Mortgage Pool" herein.
MORTGAGE LOAN PRODUCTION
The following table, as filed with the Commission by or on behalf of
Countrywide, sets forth, by number and dollar amount of mortgage loans,
Countrywide's residential mortgage loan production for the periods indicated.
S-49
<PAGE>
<TABLE>
<CAPTION>
YEAR TO DATE
AS OF
YEAR ENDED FEBRUARY 28 (29), NOVEMBER
------------------------------------------------- 30,
1995 1996 1997 1998 1998
---- ---- ---- ---- ----
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT AVERAGE LOAN BALANCE)
<S> <C> <C> <C> <C> <C>
FHA/VA Loans
Number of Loans........... 72,365 125,127 143,587 162,328 148,162
Volume of Loans........... $ 6,808.3 $12,259.3 $13,657.1 $15,868.1 $14,797.0
Conventional Loans
Number of Loans........... 175,823 191,534 190,250 227,019 381,544
Volume of Loans........... $20,958.7 $21,883.4 $22,676.2 $29,886.8 $49,330.0
Other Loans
Number of Loans........... 2,147 9,927 29,214 61,412 67,640
Volume of Loans........... $ 99.2 $ 441.0 $ 1,477.5 $ 3,016.8 $ 3,685.0
Total Loans
Number of Loans........... 250,335 326,588 363,051 450,759 597,346
Volume of Loans........... $27,866.2 $34,583.7 $37,810.8 $48,771.7 $67,812.0
Average Loan
Balance...................... $ 111,000 $ 106,000 $ 104,000 $ 108,199 $ 113,522
</TABLE>
FORECLOSURE, DELINQUENCY AND LOSS EXPERIENCE
Historically, a variety of factors, including the appreciation of real
estate values, have limited the Master Servicer's loss and delinquency
experience on its portfolio of serviced mortgage loans. There can be no
assurance that factors beyond the Master Servicer's control, such as national or
local economic conditions or downturns in the real estate markets of its lending
areas, will not result in increased rates of delinquencies and foreclosure
losses in the future.
A general deterioration of the real estate market in regions where the
Mortgaged Properties are located may result in increases in delinquencies of
loans secured by real estate, slower absorption rates of real estate into the
market and lower sales prices for real estate. A general weakening of the
economy may result in decreases in the financial strength of borrowers and
decreases in the value of collateral serving as security for loans. If the real
estate market and economy were to decline, the Master Servicer may experience an
increase in delinquencies on the loans it services and higher net losses on
liquidated loans.
The following table, as filed with the Commission by or on behalf of
Countrywide, summarizes the delinquency, foreclosure and loss experience,
respectively, on the dates indicated, of all mortgage loans originated or
acquired by Countrywide, serviced or master serviced by the Master Servicer and
securitized by CWMBS as depositor. The delinquency, foreclosure and loss
percentages may be affected by the size and relative lack of seasoning of such
servicing portfolio which increased from approximately $8.554 billion at
February 28, 1995 to approximately $8.555 billion at February 29, 1996, to
approximately $8.671 billion at February 28, 1997, to approximately $11.002
billion at February 28, 1998 and to approximately $14.447 billion at November
30, 1998. Accordingly, the information should not be considered as a basis for
assessing the likelihood, amount or severity of delinquency or losses on the
Mortgage Loans and no assurances can be given that the foreclosure, delinquency
and loss experience presented in the table below will be indicative of such
experience on the Mortgage Loans:
S-50
<PAGE>
<TABLE>
<CAPTION>
AT
AT FEBRUARY 28 (29), NOVEMBER
--------------------------------------------------- 30,
1995 1996 1997 1998 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Delinquent Mortage Loans
and Pending Foreclosures at
Period End (1):
30-59 days......................... 0.41% 0.65% 0.65% 1.08% 0.87%
60-89 days......................... 0.03 0.09 0.15 0.16 0.14
90 days or more (excluding pending
foreclosures)...................... 0.03 0.09 0.16 0.16 0.11
---- ---- ---- ---- ----
Total of delinquencies................ 0.47% 0.83% 0.96% 1.40% 1.12%
==== ==== ==== ==== ====
Foreclosures pending....................... 0.05% 0.12% 0.17% 0.17% 0.15%
==== ==== ==== ==== ====
Total delinquencies and foreclosures
pending............................ 0.52% 0.95% 1.13% 1.57% 1.27%
==== ==== ==== ==== ====
Net Gains/(Losses) on liquidated loans(2) ($81,000) ($307,000) ($2,812,000) ($2,662,000) ($676,252)
Percentage of Net Gains/(Losses) on
liquidated loans(2)(3)............. 0.00% 0.00% (0.032)% (0.024)% (0.005)%
Percentage of Net Gains/(Losses) on
liquidated loans (based
on average oustanding principal
balance)(2)........................ (0.001)% (0.004)% (0.033)% (0.027)% (0.005)%
</TABLE>
- ----------------------
(1) Excluding loans subserviced for others.
(2) "Net Gains (Losses)" are actual gains or losses incurred on liquidated
properties which are calculated as net liquidation proceeds less book value
(excluding loan purchase premium or discount).
(3) Based upon the total principal balance of the mortgage loans outstanding on
the last day of the indicated period.
The following table, as filed with the Commission by or on behalf of
Countrywide, summarizes the delinquency and foreclosure experience,
respectively, on the dates indicated, of all mortgage loans serviced or master
serviced by the Master Servicer. Such mortgage loans have a variety of
underwriting, payment and other characteristics, many of which differ from those
of the Mortgage Loans, and no assurances can be given that the delinquency and
foreclosure experience presented in the table below will be indicative of such
experience of the Mortgage Loans. The delinquency and foreclosure percentages
may be affected by the size and relative lack of seasoning of such servicing
portfolio which increased from approximately $113.1 billion at February 28, 1995
to approximately $136.8 billion at February 29, 1996, to approximately $158.6
billion at February 28, 1997, to approximately $182.9 billion at February 28,
1998 and to approximately $205.4 billion at November 30, 1998.
S-51
<PAGE>
<TABLE>
<CAPTION>
AT
AT FEBRUARY 28 (29), NOVEMBER
-------------------------------------------------- 30,
1995 1996 1997 1998 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Delinquent Mortage Loans and Pending
Foreclosures at Period End (1):
30-59 days......................... 1.80% 2.13% 2.26% 2.68% 3.03%
60-89 days......................... 0.29 0.48 0.52 0.58 0.24
90 days or more (excluding pending
foreclosures)...................... 0.42 0.59 0.66 0.65 0.34
---- ---- ---- ---- ----
Total of delinquencies................ 2.51% 3.20% 3.44% 3.91% 3.61%
==== ==== ==== ==== ====
Foreclosures pending....................... 0.29% 0.49% 0.71% 0.45% 0.36%
==== ==== ==== ==== ====
Total delinquencies and
foreclosures pending....................... 2.80% 3.69% 4.15% 4.36% 3.97%
==== ==== ==== ==== ====
</TABLE>
- ----------------------
(1) Excluding loans subserviced for others.
YEAR 2000 COMPLIANCE
The Master Servicer has made and will continue to make investments to
identify, modify or replace any computer systems which are not year 2000
compliant and to address other related issues associated with the change of the
millennium. In the event that computer problems arise out of a failure of such
efforts to be completed on time, or in the event that the computer systems of
the Master Servicer or the Trustee (or the computer systems of any third party
upon which the Master Servicer or the Trustee relies) are not fully year 2000
compliant, the resulting disruptions in the collection or distribution of
receipts on the Mortgage Loans could materially and adversely affect the holders
of the Trust Certificates.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Expense Fees with respect to the Mortgage Pool are payable out of the
interest payments on each Mortgage Loan. The Expense Fees will be 0.259% per
annum of the Stated Principal Balance of each Mortgage Loan. The Expense Fees
consist of (a) servicing compensation payable to the Master Servicer in respect
of its master servicing activities (the "Master Servicing Fee") and (b) fees
payable to the Underlying Trustee in respect of its activities as trustee under
the Pooling and Servicing Agreement. The Master Servicing Fee will be 0.25% per
annum of the Stated Principal Balance of each Mortgage Loan. The Master Servicer
is obligated to pay certain ongoing expenses associated with the Underlying
Trust Fund and incurred by the Master Servicer in connection with its
responsibilities under the Pooling and Servicing Agreement and such amounts will
be paid by the Master Servicer out of the Master Servicing Fee. The amount of
the Master Servicing Fee is subject to adjustment with respect to prepaid
Mortgage Loans, as described herein under "--Adjustment to Master Servicing Fee
in Connection with Certain Prepaid Mortgage Loans." The Master Servicer is also
entitled to receive, as additional servicing compensation, all late payment
fees, assumption fees and other similar charges and all reinvestment income
earned on amounts on deposit in the Underlying Certificate Account and any
account created and maintained by the Underlying Trustee pursuant to Section
3.05 of the Pooling and Servicing Agreement for the benefit of the CWMBS
Certificateholders (the "Underlying Distribution Account"). The "Net
S-52
<PAGE>
Mortgage Rate" of a Mortgage Loan is the Mortgage Rate thereof (net of the
interest premium charged by the related lenders with respect to the Lender PMI
Mortgage Loans) less the Expense Fees with respect to such Mortgage Loan
(expressed as a per annum percentage of the Stated Principal Balance thereof).
ADJUSTMENT TO MASTER SERVICING FEE IN CONNECTION WITH CERTAIN PREPAID MORTGAGE
LOANS
When a borrower prepays a Mortgage Loan between Due Dates, the borrower is
required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. Except with respect to the month of the Underlying Cut-off
Date, principal prepayments by borrowers received by the Master Servicer from
the first day through the fifteenth day of a calendar month will be distributed
to CWMBS Certificateholders on the Underlying Distribution Date in the same
month in which such prepayments are received and, accordingly, no shortfall in
the amount of interest to be distributed to CWMBS Certificateholders with
respect to the prepaid Mortgage Loans results. Conversely, principal prepayments
by borrowers received by the Master Servicer from the sixteenth day (or, in the
case of the first Underlying Distribution Date, from the Underlying Cut-off
Date) through the last day of a calendar month will be distributed to CWMBS
Certificateholders on the Underlying Distribution Date in the month following
the month of receipt and, accordingly, a shortfall in the amount of interest to
be distributed to CWMBS Certificateholders with respect to such prepaid Mortgage
Loans would result. Pursuant to the Pooling and Servicing Agreement, the Master
Servicing Fee for any month will be reduced, but not by more than one-half of
such Master Servicing Fee, by an amount sufficient to pass through to CWMBS
Certificateholders the full amount of interest to which they would be entitled
in respect of each such prepaid Mortgage Loan on the related Underlying
Distribution Date. If shortfalls in interest as a result of prepayments in any
Prepayment Period exceed an amount equal to one-half of the Master Servicing Fee
otherwise payable on the related Underlying Distribution Date, the amount of
interest available to be distributed to CWMBS Certificateholders will be reduced
by the amount of such excess. See "Description of the Underlying
Certificates--Interest Distributions on the CWMBS Certificates" herein.
OPTIONAL PURCHASE OF DEFAULTED LOANS
The Master Servicer may, at its option, purchase from the Underlying Trust
Fund any Mortgage Loan which is delinquent in payment by 91 days or more. Any
such purchase shall be at a price equal to 100% of the Stated Principal Balance
of such Mortgage Loan plus accrued interest thereon at the applicable Mortgage
Rate from the date through which interest was last paid by the related Mortgagor
or advanced (and not reimbursed) to the first day of the month in which such
amount is to be distributed.
OPTIONAL TERMINATION
Subject to certain limitations set forth in the Pooling and Servicing
Agreement, the Master Servicer will have the right to repurchase all remaining
Mortgage Loans and REO Properties in the Mortgage Pool and thereby effect early
retirement of the CWMBS Certificates, subject to the Pool Principal Balance of
such Mortgage Loans and REO Properties at the time of repurchase being less than
10% of the Underlying Cut-off Date Aggregate Principal Balance. In the event the
Master Servicer exercises such option, the purchase price distributed with
respect to each CWMBS Certificate will be 100% of its then outstanding
Certificate Principal Balance plus any Class PO Deferred Amounts in the case of
the Class PO Certificates and, in the case of an interest-bearing CWMBS
Certificate, any unpaid accrued interest thereon at the applicable pass-through
rate (in each case subject to reduction as provided in the Pooling and Servicing
Agreement if the purchase price is based in part on the appraised value of any
REO Properties and such appraised value is less than the Stated Principal
Balance of the related Mortgage Loans). Distributions on the
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CWMBS Certificates in respect of any such optional termination will first be
paid to the CWMBS Senior Certificates and then to the CWMBS Subordinated
Certificates. The proceeds from any such distribution may not be sufficient to
distribute the full amount to which each class of CWMBS Certificates is entitled
if the purchase price is based in part on the appraised value of any REO
Property and such appraised value is less than the Stated Principal Balance of
the related Mortgage Loan.
FEDERAL INCOME TAX CONSEQUENCES
A real estate mortgage investment conduit ("REMIC") election will be made
for federal income tax purposes with respect to the Trust Fund consisting of the
Underlying Certificates.
Upon issuance of the Trust Certificates, Thacher Proffitt & Wood, counsel
to the Depositor, will deliver its opinion generally to the effect that,
assuming the qualification and maintenance of the status as a REMIC of the
Underlying Trust Fund and the treatment of the Underlying Certificates as
"regular interests" in such REMIC for federal income tax purposes, and assuming
compliance with all provisions of the Agreement and the Pooling and Servicing
Agreement pursuant to which the Underlying Certificates were issued, the
foregoing portion of the Trust Fund will qualify as a REMIC under Sections 860A
through 860G of the Internal Revenue Code of 1986 (the "Code"). However, counsel
will not address the matters assumed in rendering such opinion.
For federal income tax purposes, (i) the Class R Certificates not offered
hereby will be the sole class of "residual interests" in the REMIC and (ii) the
Offered Certificates will be "regular interests" in, and generally will be
treated as debt instruments of, the REMIC.
Based on the foregoing, the Offered 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) "obligations (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)(A) of the Code generally in the same proportion
that the assets of the Underlying Trust Fund would be so treated. In addition,
interest on the Offered 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.
For federal income tax reporting purposes, the Class A-3 Certificates will,
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 275% of 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--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 Trust
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
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reports to Certificateholders and the IRS. Prospective purchasers of Trust
Certificates issued with original issue discount are advised to consult their
tax advisors concerning the tax treatment of the Trust Certificates in this
regard.
Certain classes of Trust 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, generally, will 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 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.
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 been
negligent in the performance of its obligations with respect to REMIC compliance
under the Agreement and (ii) otherwise by the Trust Fund, with a resulting
reduction in amounts otherwise distributable to Certificateholders. See
"Description of the Certificates--General" and "Federal Income Tax
Consequences--REMICs--Prohibited Transactions and Other Possible REMIC Taxes" in
the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Trust Certificates, see "Federal Income Tax Consequences" in
the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated February 24, 1999, (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.
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 99.27% of the aggregate initial Certificate Principal Balance of
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 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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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 Trust 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
Certificate Principal Balance of the Trust Certificates. There can be no
assurance that any additional information regarding the Trust Certificates will
be available through any other source. In addition, the Depositor is not aware
of any source through which price information about the Trust Certificates will
be generally available on an ongoing basis. The limited nature of such
information regarding the Trust Certificates may adversely affect the liquidity
of the Trust Certificates, even if a secondary market for the Trust Certificates
becomes available.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Offered Certificates be rated "AAA" by each of Duff & Phelps Credit Rating Co.
("DCR") and Standard & Poor's, a division of the
McGraw-Hill Companies, Inc. ("S&P").
The ratings of DCR and S&P 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 address
structural and legal aspects associated with the Offered Certificates, including
the nature of the underlying Mortgage Loans and the nature of the Underlying
Certificates. 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.
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 Offered Certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") for
so long as they are rated 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
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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.
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 Trust Certificates would
likely 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.
The Depositor makes no representations as to the proper
characterization of any class of Trust Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Trust Certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of any class of Trust
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 Trust
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 the Trust 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 the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the excise taxes imposed on such prohibited transactions
by Section 4975(a) and (b) of the Code and Section 502(i) of ERISA, transactions
relating to the purchase, sale and holding of pass-through certificates
underwritten by the Underwriter such as the Offered Certificates, and the
servicing and operation of asset pools such as the Mortgage Pool, provided that
certain conditions are satisfied. The purchase of the Trust Certificates by, on
behalf
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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 Trust Certificate must make its own determination
that the conditions set forth in the Exemption will be satisfied with respect to
the Trust Certificates.
Before purchasing a Trust Certificate, a fiduciary of a Plan should itself
confirm (a) that the Trust 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 Trust
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 Trust
Certificates, see "ERISA Considerations" in the Prospectus.
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MORTGAGE PASS-THROUGH CERTIFICATES
MORTGAGE-BACKED NOTES
(ISSUABLE IN SERIES)
Principal and interest with respect to the Certificates and the Notes (together,
the "Securities") will be payable each month on the date specified in the
related Prospectus Supplement, commencing with the month following the month in
which the applicable Cut-off Date (as defined herein) occurs.
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
The Securities offered hereby and by Supplements to this Prospectus will be
offered from time to time in series.
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in, and each series of Notes will represent
indebtedness of certain assets deposited into a trust fund (the "Trust Fund" or
the "Trust Fund Assets"). The Trust Fund for any series of Securities will
consist of a segregated pool of (a) various types of one- to four-family
residential first and junior lien mortgage loans, multifamily residential
mortgage loans, cooperative apartment loans or manufactured housing conditional
sales contracts and installment loan agreements (collectively, the "Mortgage
Loans"), or beneficial interests therein, (b) pass-through or participation
certificates issued or guaranteed by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC") (any such certificates, "Agency
Securities"), (c) pass-through or participation certificates or other
mortgage-backed securities issued or guaranteed by private entities ("Private
Mortgage-Backed Securities") or (d) funding agreements secured by Mortgage
Loans, Agency Securities or Private Mortgage-Backed Securities (each, a "Funding
Agreement"), or any combination thereof, together with other assets described
herein.
Each series of Securities will include one or more classes. Each class of
Securities of any series will represent the right, which right may be senior to
the rights of one or more of the other classes of the Securities, to receive a
specified portion of payments of principal and interest on the Mortgage Loans,
Agency Securities, Private Mortgage-Backed Securities or Funding Agreements in
the related Trust Fund in the manner described herein and in the related
Prospectus Supplement. A series may include one or more classes of Securities
entitled to principal distributions, with disproportionate, nominal or no
interest distributions, or to interest distributions, with disproportionate,
nominal or no principal distributions. A series may include two or more classes
of Securities that differ as to the timing, sequential order or amount of
distributions of principal or interest or both. If so specified in the related
Prospectus Supplement, the Trust Fund for a series of Securities may include
pool insurance policies, letters of credit, reserve funds or other types of
credit support, or any combination thereof, and currency or interest rate
exchange agreements and other financial assets, or any combination thereof (with
respect to any series, collectively, "Cash Flow Agreements"). See "Description
of the Securities" and "Description of Credit Support".
The only obligations of the Depositor with respect to a series of Securities
will be pursuant to its representations and warranties. The Master Servicer with
respect to a series of Securities evidencing interests in a Trust Fund including
Mortgage Loans will be named in the related Prospectus Supplement. The principal
obligations of a Master Servicer will be limited to its contractual servicing
obligations, and, to the extent provided in the related Prospectus Supplement,
its obligation to make certain cash advances in the event of payment
delinquencies on the Mortgage Loans. The Securities of each series will not
represent an obligation of or interest in the Depositor, the Master Servicer or
any of their respective affiliates, except to the limited extent described
herein and in the related Prospectus Supplement. The Securities will not be
guaranteed or insured by any governmental agency or instrumentality. Although
payment of principal and interest on Agency Securities will be guaranteed as
described herein and in the related prospectus supplement by GNMA, FNMA or
FHLMC, the Securities of any series evidencing interests in a Trust Fund
including Agency Securities will not be so guaranteed. Each Trust Fund will be
held in trust for the benefit of the holders of (i) the related series of
Certificates pursuant to a Pooling and Servicing Agreement or a Trust Agreement
or (ii) the related series of Notes pursuant to an Indenture, each as more fully
described herein. If so provided in the related Prospectus Supplement, with
respect to each series of Certificates, one or more elections may be made to
treat the related Trust Fund or a designated portion thereof as a "real estate
mortgage investment conduit" for federal income tax purposes. See "Federal
Income Tax Consequences".
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS"
BEGINNING ON PAGE 16 HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, as more fully described under "Methods
of Distribution" and in the related Prospectus Supplement.
With respect to each series, all of the Securities of each class offered hereby
will be rated in one of the four highest rating categories by one or more
nationally recognized statistical rating organizations. There will have been no
public market for any series of Securities prior to the offering thereof. No
assurance can be given that such a market will develop as a result of such an
offering. All securities will be distributed by, or sold by underwriters managed
by:
SALOMON SMITH BARNEY
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS MAY NOT BE USED TO
CONSUMMATE SALES OF SECURITIES OFFERED HEREBY UNLESS ACCOMPANIED BY A PROSPECTUS
SUPPLEMENT.
The date of this Prospectus is November 13, 1998
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES OFFERED
HEREBY AND THEREBY OR AN OFFER OF THE SECURITIES TO ANY PERSON IN ANY STATE OR
OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE
THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE
AMENDED OR SUPPLEMENTED ACCORDINGLY.
<TABLE>
<CAPTION>
-------------------------------------------
TABLE OF CONTENTS
CAPTION PAGE
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<S> <C>
Available Information....................................................................................... 4
Reports to Securityholders.................................................................................. 4
Incorporation of Certain Information by Reference........................................................... 4
Summary of Prospectus....................................................................................... 5
Risk Factors................................................................................................ 16
The Trust Funds............................................................................................. 25
The Mortgage Loans..................................................................................... 25
Agency Securities...................................................................................... 30
Private Mortgage-Backed Securities..................................................................... 36
Funding Agreements..................................................................................... 37
Use of Proceeds............................................................................................. 38
Yield Considerations........................................................................................ 38
Maturity and Prepayment Considerations...................................................................... 40
The Depositor............................................................................................... 41
Mortgage Loan Program....................................................................................... 41
Underwriting Standards................................................................................. 41
Qualifications of Originators and Mortgage Loan Sellers................................................ 43
Representations by or on behalf of Mortgage Loan Sellers; Repurchases.................................. 43
Description of the Securities............................................................................... 45
General................................................................................................ 46
Assignment of Trust Fund Assets........................................................................ 47
Deposits to Certificate Account........................................................................ 51
Payments on Mortgage Loans............................................................................. 52
Payments on Agency Securities and Private Mortgage-Backed Securities................................... 53
Distributions.......................................................................................... 54
Available Distribution Amount.......................................................................... 54
Interest on the Securities............................................................................. 55
Principal of the Securities............................................................................ 55
Pre-Funding Account.................................................................................... 56
Allocation of Losses................................................................................... 56
Advances in Respect of Delinquencies................................................................... 57
Reports to Securityholders............................................................................. 58
Collection and Other Servicing Procedures.............................................................. 59
Sub-Servicing.......................................................................................... 60
Realization Upon Defaulted Mortgage Loans.............................................................. 61
Retained Interest; Servicing or Administration Compensation and Payment
of Expenses............................................................................................ 62
Evidence as to Compliance.............................................................................. 63
Certain Matters Regarding the Master Servicer and the Depositor........................................ 64
Events of Default and Rights Upon Events of Default.................................................... 65
Amendment.............................................................................................. 68
Termination............................................................................................ 68
Optional Purchase of Defaulted Mortgage Loans.......................................................... 69
Duties of the Trustee.................................................................................. 70
The Trustee............................................................................................ 70
Description of Credit Support............................................................................... 70
Subordination.......................................................................................... 70
Letter of Credit....................................................................................... 72
Mortgage Pool Insurance Policy......................................................................... 73
Special Hazard Insurance Policy........................................................................ 75
Bankruptcy Bond........................................................................................ 76
Financial Guarantee Insurance.......................................................................... 77
Reserve Fund........................................................................................... 77
Cash Flow Agreements................................................................................... 77
Description of Primary Insurance Policies................................................................... 77
Primary Mortgage Insurance Policies.................................................................... 78
Primary Hazard Insurance Policies...................................................................... 78
FHA Insurance.......................................................................................... 79
VA Guarantees.......................................................................................... 80
</TABLE>
2
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<TABLE>
<CAPTION>
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<S> <C>
Certain Legal Aspects of Mortgage Loans..................................................................... 80
General................................................................................................ 81
Single-Family Loans and Multifamily Loans.............................................................. 81
Leases and Rents....................................................................................... 82
Cooperative Loans...................................................................................... 82
Contracts.............................................................................................. 83
Foreclosure on Mortgages............................................................................... 85
Foreclosure on Cooperative Shares...................................................................... 86
Repossession with respect to Contracts................................................................. 87
Louisiana Law.......................................................................................... 88
Rights of Redemption with respect to Single-Family Properties and
Multifamily Properties...................................................................................... 89
Notice of Sale; Redemption Rights with respect to Manufactured Homes................................... 89
Anti-Deficiency Legislation and Other Limitations on Lenders........................................... 89
Junior Mortgages....................................................................................... 91
Consumer Protection Laws with respect to Contracts..................................................... 91
Other Limitations...................................................................................... 92
Enforceability of Certain Provisions................................................................... 93
Subordinate Financing.................................................................................. 94
Applicability of Usury Laws............................................................................ 95
Alternative Mortgage Instruments....................................................................... 95
Formaldehyde Litigation with respect to Contracts...................................................... 96
Soldiers' and Sailors' Civil Relief Act of 1940........................................................ 96
Environmental Legislation.............................................................................. 97
Forfeitures in Drug and RICO Proceedings............................................................... 98
Negative Amortization Loans............................................................................ 98
Federal Income Tax Consequences............................................................................. 98
General................................................................................................ 98
REMICs................................................................................................. 99
Notes.................................................................................................. 117
Grantor Trust Funds.................................................................................... 117
Partnership Trust Funds................................................................................ 127
State and Other Tax Consequences............................................................................ 134
ERISA Considerations........................................................................................ 134
Representation from Plans Investing in Notes with "Substantial Equity
Features"
or Certain Securities.................................................................................. 139
Tax Exempt Investors................................................................................... 140
Consultation with Counsel.............................................................................. 140
Legal Investment............................................................................................ 140
Methods of Distribution..................................................................................... 141
Legal Matters............................................................................................... 142
Financial Information....................................................................................... 142
Index of Principal Definitions.............................................................................. 143
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES COVERED BY SUCH SUPPLEMENT, WHETHER OR
NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER SUCH
SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS OF
THE SECURITIES COVERED BY SUCH SUPPLEMENT AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
3
<PAGE>
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information filed by the Depositor can be
inspected and copied at the public reference facilities maintained by the
Commission at its Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, and its Regional Offices located as follows: Chicago Regional
Office, 500 West Madison, 14th Floor, Chicago, Illinois 60661; New York Regional
Office, Seven World Trade Center, New York, New York 10048. Copies of such
material can also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates
and electronically through the Commission's Electronic Data Gathering, Analysis
and Retrieval System at the Commission's Web site (http:\\www.sec.gov). The
Depositor does not intend to send any financial reports to Securityholders (as
defined herein).
This Prospectus does not contain all of the information set forth in the
Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Depositor has filed with the Commission under the Securities
Act of 1933 and to which reference is hereby made.
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMC's most recent Information Statement and any subsequent information
statement, any supplement to any information statement relating to FHLMC and any
quarterly report made available by FHLMC after December 31, 1983 can be obtained
by writing or calling the FHLMC Investor Inquiry Department at 8200 Jones Branch
Drive, Mail Stop 319, McLean, Virginia 22102 (800-336-3672). The Depositor did
not participate in the preparation of FHLMC's Offering Circular, Information
Statement or any supplement and, accordingly, makes no representation as to the
accuracy or completeness of the information set forth therein.
Copies of FNMA's most recent Prospectus for FNMA Certificates are available
from FNMA's Mortgage Backed Securities Office, 3900 Wisconsin Avenue, N.W.,
Washington, D.C. 20016 (202-752- 6547). FNMA's annual report and quarterly
financial statements, as well as other financial information, are available from
FNMA's Office of the Treasurer, 3900 Wisconsin Avenue, N.W., Washington, D.C.
20016 (202-752-7000) or the Office of the Vice President of Investor Relations,
3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7000). The
Depositor did not participate in the preparation of FNMA's Prospectus and,
accordingly, makes no representations as to the accuracy or completeness of the
information set forth therein.
REPORTS TO SECURITYHOLDERS
The Trustee will mail monthly reports concerning each Trust Fund to all
registered holders of Securities (the "Securityholders") of the related series.
With respect to each series of Certificates or Notes, Securityholders will be
referred to as the "Certificateholders" or the "Noteholders", respectively. See
"Description of the Securities--Reports to Securityholders".
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of the offering of Securities offered hereby evidencing interest therein. The
Depositor will provide or cause to be provided without charge to each person to
whom this Prospectus is delivered in connection with the offering of one or more
classes of Securities offered hereby, a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to one or more of such classes of such offered Securities, other
than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to its principal executive office at Seven World Trade
Center, New York, New York 10048, Attention: Secretary, or by telephone at (212)
783-5635. The Depositor has determined that its financial statements are not
material to the offering of any Securities offered hereby.
4
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Securities contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. An Index of Principal
Definitions is included at the end of this Prospectus.
Title of Securities.........................Mortgage Pass-Through Certificates,
issuable in series (the
"Certificates") or Mortgage-Backed
Notes, issuable in series (the
"Notes," and together with the
Certificates, the "Securities").
Depositor...................................Salomon Brothers Mortgage Securities
VII, Inc., an indirect wholly-owned
subsidiary of Salomon Smith Barney
Holdings Inc. and an affiliate of
Salomon Smith Barney Inc. See "The
Depositor".
Master Servicer.............................The Master Servicer (the "Master
Servicer") for each series of
Securities evidencing interests in a
Trust Fund including Mortgage Loans
will be named in the related
Prospectus Supplement, which may be
the Depositor or an affiliate of the
Depositor. See "Description of the
Securities--Certain Matters
Regarding the Master Servicer and
the Depositor".
Issuer......................................With respect to each series of
Notes, the Issuer (the "Issuer")
will be the Depositor or an owner
trust established by it for the
purpose of issuing such series of
Notes. Each such owner trust will be
created pursuant to a trust
agreement (the "Owner Trust
Agreement") between the Depositor,
acting as depositor and the Owner
Trustee. Each series of Notes will
represent indebtedness of the Issuer
and will be issued pursuant to an
indenture (the "Indenture") between
the Issuer and the Trustee whereby
the Issuer will pledge the Trust
Fund to secure the Notes under the
lien of the Indenture. As to each
series of Notes where the Issuer is
an owner trust, the ownership of the
Trust Fund will be evidenced by
certificates (the "Equity
Certificates") issued under the
Owner Trust Agreement, which are not
offered hereby. The Notes will
represent nonrecourse obligations
solely of the Issuer, and the
proceeds of the Trust Fund will be
the sole source of payments on the
Notes, except as described herein
under "Description of Credit
Support" and in the related
Prospectus Supplement.
Trustees....................................The Trustee or Indenture Trustee
(each, the "Trustee") for each
series of Certificates and each
series of Notes, respectively, will
be named in the related Prospectus
Supplement. The Owner Trustee (the
"Owner Trustee") for each series of
Notes will be named in the related
Prospectus Supplement.
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Description of Securities...................Each series of Securities will
include one or more classes. Each
series of Securities (including any
class or classes of Securities of
such series not offered hereby) will
represent either (i) with respect to
each series of Certificates, in the
aggregate the entire beneficial
ownership interest in, or (ii) with
respect to each series of Notes,
indebtedness of, a segregated pool
of Mortgage Loans, or beneficial
interests therein, Agency
Securities, Private Mortgage-Backed
Securities or Funding Agreements, or
any combination thereof (each, a
"Trust Fund Asset"), and certain
other assets as described below (a
"Trust Fund"). Unless otherwise
provided in the related Prospectus
Supplement, each class of Securities
(other than certain Strip Securities
as defined below) will have a stated
principal amount (a "Principal
Balance") and will be entitled to
payments of interest thereon based
on a fixed, variable or adjustable
interest rate (a "Security Interest
Rate"). The Security Interest Rate
of each Security offered hereby will
be stated in the related Prospectus
Supplement as the "Pass- Through
Rate" with respect to a Certificate
and the "Note Interest Rate" with
respect to a Note. The related
Prospectus Supplement will specify
the Security Interest Rate for each
class or, in the case of a variable
or adjustable Security Interest
Rate, the method for determining the
Security Interest Rate.
A series of Securities may include
one or more classes of Securities
(collectively, the "Senior
Securities") that are senior to one
or more classes of Securities
(collectively, the "Subordinate
Securities") in respect of certain
distributions of principal and
interest and allocation of losses on
the Mortgage Loans. In addition,
certain classes of Senior (or
Subordinate) Securities may be
senior to other classes of Senior
(or Subordinate) Securities in
respect of such distribution or
losses. With respect to any series
of Notes, the related Equity
Certificates, insofar as they
represent the beneficial ownership
interest in the Issuer, will be
subordinate to the related Notes.
Credit enhancement also may be
provided with respect to any series
by means of various pool insurance
policies, letters of credit, reserve
funds or other types of credit
support, or any combination of the
foregoing, as described herein and
in the related Prospectus
Supplement. See "Description of
Credit Support".
A series may include one or more
classes of Securities entitled (i)
to principal distributions, with
disproportionate, nominal or no
interest distributions, or (ii) to
interest distributions, with
disproportionate, nominal or no
principal distributions ("Strip
Securities"). In addition, a series
may include two or more classes of
Securities which differ as to
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<PAGE>
timing, sequential order, priority
of payment, security interest rate
or amount of distributions of
principal or interest or both, or as
to which distributions of principal
or interest or both on any class may
be made upon the occurrence of
specified events, in accordance with
a schedule or formula, or on the
basis of collections from designated
portions of the Mortgage Pool, which
series may include one or more
classes of Securities ("Accrual
Securities"), as to which certain
accrued interest will not be
distributed but rather will be added
to the principal balance thereof on
each Distribution Date, as
hereinafter defined, in the manner
described in the related Prospectus
Supplement.
With respect to each series of
Certificates, one or more elections
may be made to treat the related
Trust Fund or a designated portion
thereof as a "real estate mortgage
investment conduit" or "REMIC" as
defined in the Internal Revenue Code
of 1986 (the "Code"). If any such
election is made with respect to a
series of Certificates, one of the
classes of Certificates comprising
such series will be designated as
evidencing all "residual interests"
in the related REMIC as defined in
the Code.
The Securities will not represent an
interest in or obligation of the
Depositor or any affiliate thereof
except as set forth herein, nor will
the Securities or any Mortgage Loans
be insured or guaranteed by any
governmental agency or
instrumentality. Although payment of
principal and interest on Agency
Securities will be guaranteed as
described herein and in the related
Prospectus Supplement by GNMA, FNMA
or FHLMC, the Securities of any
series including Agency Securities
will not be so guaranteed.
The Trust Funds.............................Each Trust Fund will consist
primarily of (a) a pool (a "Mortgage
Pool") of one- to four-family
residential mortgage loans,
multifamily residential mortgage
loans, cooperative apartment loans
or manufactured housing conditional
sales contracts and installment loan
agreements (collectively, the
"Mortgage Loans"), or beneficial
interests therein, or real property
acquired upon foreclosure or
comparable conversion of such
Mortgage Loans, (b) Agency
Securities, (c) Private
Mortgage-Backed Securities or (d)
Funding Agreements, or any
combination thereof.
A. The Mortgage Loans.....................As more specifically described
herein, the Mortgage Loans will be
secured by first or junior liens on,
or security interests in, (i) one-
to four-family residential
properties, (ii) rental apartment
buildings or projects containing
five or more residential units
(including apartment buildings owned
by cooperative housing
corporations), (iii)
7
<PAGE>
cooperative loans (the "Cooperative
Loans") secured primarily by shares
in a private cooperative housing
corporation (a "Cooperative") that
give the owner thereof the right to
occupy a particular dwelling unit in
the Cooperative or (iv) new or used
manufactured homes (collectively,
the "Mortgaged Properties"). The
Mortgaged Properties may be located
in any one of the fifty states or
the District of Columbia. Unless
otherwise provided in the related
Prospectus Supplement, all Mortgage
Loans will have individual principal
balances at origination of not less
than $25,000 or more than $5,000,000
and original terms to maturity of
not more than 40 years. All Mortgage
Loans will have been originated by
persons unaffiliated with the
Depositor and will have been
purchased, either directly or
indirectly, by the Depositor on or
before the date of initial issuance
of the related series of Securities.
Unless otherwise provided in the
related Prospectus Supplement, each
Trust Fund will contain one of the
following types of Mortgage Loans:
(1) Fully amortizing Mortgage Loans
with a fixed rate of interest (an
"Interest Rate") and level monthly
payments to maturity;
(2) Fully amortizing Mortgage Loans
with an Interest Rate adjusted
periodically (with corresponding
adjustments in the amount of monthly
payments) to equal the sum (which
may be rounded) of a fixed
percentage amount and an index ("ARM
Loans"), as described in the related
Prospectus Supplement;
(3) ARM Loans that provide for an
election, at the borrower's option,
to convert the adjustable Interest
Rate to a fixed interest rate, as
described in the related Prospectus
Supplement;
(4) ARM Loans that provide for
negative amortization or accelerated
amortization resulting from delays
in or limitations on the payment
adjustments necessary to amortize
fully the outstanding principal
balance of the loan at its then
applicable Interest Rate over its
remaining term;
(5) Fully amortizing Mortgage Loans
with a fixed Interest Rate and level
monthly payments, or payments of
interest only, during the early
years of the term, followed by
periodically increasing monthly
payments of principal and interest
for the duration of the term or for
a specified number of years, as
described in the related Prospectus
Supplement;
(6) Fixed Interest Rate Mortgage
Loans providing for level payments
of principal and interest on the
basis of an
8
<PAGE>
assumed amortization schedule and a
balloon payment at the end of a
specified term; and
(7) Another type of Mortgage Loan
described in the related Prospectus
Supplement.
All of the Mortgage Loans will be
covered by standard hazard insurance
policies insuring against losses due
to fire and various other causes.
Certain of the Mortgage Loans will
be covered by primary mortgage
insurance policies to the extent
provided herein and in the related
Prospectus Supplement and if so
provided in the related Prospectus
Supplement, certain of the Mortgage
Loans will be insured or guaranteed
by the Federal Housing
Administration (the "FHA") or the
United States Department of Veterans
Affairs (the "VA"). See "Description
of Primary Insurance Policies".
B. Agency Securities......................The Agency Securities evidenced by a
series of Certificates will consist
of (i) Mortgage Participation
Certificates issued and guaranteed
as to timely payment of interest
and, unless otherwise specified in
the related Prospectus Supplement,
ultimate payment of principal by the
Federal Home Loan Mortgage
Corporation ("FHLMC Certificates"),
(ii) Guaranteed Mortgage
Pass-Through Certificates issued and
guaranteed as to timely payment of
principal and interest by the
Federal National Mortgage
Association ("FNMA Certificates"),
(iii) fully modified pass- through
mortgage-backed certificates
guaranteed as to timely payment of
principal and interest by the
Government National Mortgage
Association ("GNMA Certificates"),
(iv) stripped mortgage-backed
securities representing an undivided
interest in all or a part of either
the principal distributions (but not
the interest distributions) or the
interest distributions (but not the
principal distributions) or in some
specified portion of the principal
and interest distributions (but not
all of such distributions) on
certain FHLMC, FNMA or GNMA
Certificates and, unless otherwise
specified in the Prospectus
Supplement, guaranteed to the same
extent as the underlying securities,
(v) another type of guaranteed
pass-through certificate issued or
guaranteed by GNMA, FNMA or FHLMC
and described in the related
Prospectus Supplement or (vi) a
combination of such Agency
Securities. All GNMA Certificates
will be backed by the full faith and
credit of the United States. No
FHLMC or FNMA Certificates will be
backed, directly or indirectly, by
the full faith and credit of the
United States.
The Agency Securities may consist of
pass-through securities issued under
FHLMC's Cash or Guarantor Program,
the GNMA I Program, the GNMA II
Program or
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<PAGE>
another program specified in the
Prospectus Supplement. The payment
characteristics of the Mortgage
Loans underlying the Agency
Securities will be described in the
related Prospectus Supplement.
C. Private Mortgage-Backed
Securities..........................Private Mortgage-Backed Securities
may include (a) mortgage
participations or pass-through
certificates representing beneficial
interests in certain mortgage loans
or (b) collateralized mortgage
obligations secured by such mortgage
loans. Although individual mortgage
loans underlying a Private
Mortgage-Backed Security may be
insured or guaranteed by the United
States or an agency or
instrumentality thereof, they need
not be, and the Private
Mortgage-Backed Securities
themselves will not be so insured or
guaranteed. See "The Trust
Funds-Private Mortgage-Backed
Securities" herein.
D. Funding Agreements.....................Funding Agreements are obligations
of a Finance Company (as defined
herein) which are secured by
Mortgage Loans, Agency Securities or
Private Mortgage- Backed Securities.
See "The Trust Funds-Funding
Agreements" herein.
Pre-Funding Account.........................If so specified in the related
Prospectus Supplement, a portion of
the proceeds of the sale of one or
more Classes of Securities of a
series may be deposited in a
segregated account to be applied to
acquire additional Mortgage Loans
from the Mortgage Loan Seller,
subject to the limitations set forth
herein under "Description of the
Securities--Pre-Funding Account."
Monies on deposit in the Pre-Funding
Account and not applied to acquire
such additional Mortgage Loans
within the time set forth in the
related Agreement (as defined
herein) may be treated as principal
and applied in the manner described
in the related Prospectus
Supplement.
Certificate Account.........................Each Trust Fund will include one or
more accounts (collectively, the
"Certificate Account") established
and maintained on behalf of the
Securityholders into which the
Master Servicer will, to the extent
described herein and in the related
Prospectus Supplement, deposit all
payments and collections received or
advanced with respect to the related
Trust Fund Assets. A Certificate
Account may be maintained as an
interest bearing or a non-interest
bearing account, or funds held
therein may be invested in certain
short-term high-quality obligations.
See "Description of the
Securities--Deposits to Certificate
Account".
Credit Support..............................If so specified in the related
Prospectus Supplement, one or more
classes of Securities of a series
evidencing interests in a Trust Fund
that includes Mortgage Loans or
Private Mortgage-Backed Securities
may be provided
10
<PAGE>
partial or full protection against
certain defaults and losses on such
assets in the form of subordination
of one or more other classes of
Securities in such series or by one
or more other types of credit
support, such as a letter of credit,
reserve fund, insurance policy or a
combination thereof (any such
coverage, "Credit Support"), and
currency or interest rate exchange
agreements and other financial
assets, or any combination thereof
(with respect to any series,
collectively, "Cash Flow
Agreements"). With respect to any
series of Notes, the related Equity
Certificates, insofar as they
represent the beneficial ownership
interest in the Issuer, will be
subordinate to the related Notes.
The amount and types of coverage,
the identification of the entity
providing the coverage (if
applicable) and related information
with respect to each type of Credit
Support, if any, will be described
in the Prospectus Supplement for a
series of Securities. See
"Description of Credit Support".
Interest on Securities......................Interest on each class of Securities
(other than certain classes of Strip
Securities) of each series will
accrue at the applicable Security
Interest Rate on the outstanding
Principal Balance thereof and will
be distributed to Securityholders as
provided in the related Prospectus
Supplement (each of the specified
dates on which distributions are to
be made, a "Distribution Date").
Distributions with respect to
interest on Strip Securities with no
or, in certain cases, a nominal
Principal Balance will be made on
each Distribution Date on the basis
of a notional amount as described
herein and in the related Prospectus
Supplement. Distributions of
interest with respect to one or more
classes of Securities may be reduced
to the extent of certain
delinquencies and other
contingencies described herein and
in the related Prospectus
Supplement. See "Yield
Considerations" and "Description of
the Securities--Interest on the
Securities".
Principal of Securities.....................The Securities of each series (other
than certain Strip Securities)
initially will have an aggregate
Principal Balance equal to the
outstanding principal balance of the
Trust Fund Assets as of, unless the
related Prospectus Supplement
provides otherwise, the close of
business on the first day of the
month of formation of the related
Trust Fund (the "Cut-off Date"),
after application of scheduled
payments due on or before such date,
whether or not received. The
Principal Balance of a Security
represents the maximum amount that
the holder thereof is entitled to
receive in respect of principal from
future cash flow on the assets in
the related Trust Fund. The
Prospectus Supplement will include
the initial Principal Balance of
each class of Securities offered
thereby. Unless otherwise
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<PAGE>
provided in the related Prospectus
Supplement, distributions of
principal will be made on each
Distribution Date to the class or
classes of Securities entitled
thereto until the Principal Balance
of such class has been reduced to
zero. Distributions of principal of
any class of Securities will be made
on a pro rata basis among all of the
Securities of such class. Strip
Securities with no Principal Balance
will not receive distributions in
respect of principal. See
"Description of the
Securities--Principal of the
Securities".
Advances....................................The Master Servicer, directly or
through sub-servicers, will service
and administer the Mortgage Loans
included in a Trust Fund and, unless
the related Prospectus Supplement
provides otherwise, in connection
therewith will be obligated to make
certain advances with respect to
delinquent scheduled payments on the
Mortgage Loans. Advances made by the
Master Servicer are reimbursable to
the extent described herein and in
the related Prospectus Supplement.
The Prospectus Supplement with
respect to any series may provide
that the Master Servicer will obtain
a cash advance surety bond, or
maintain a cash advance reserve
fund, to cover any obligation of the
Master Servicer to make advances.
The obligor on any such surety bond
will be named, and the terms
applicable to any such cash advance
reserve fund will be described in
the related Prospectus Supplement.
See "Description of the
Securities--Advances in respect of
Delinquencies".
Optional Termination........................If so specified in the related
Prospectus Supplement, a series of
Securities may be subject to
optional early termination through
the repurchase of the assets in the
related Trust Fund by the party
specified therein, subject to the
aggregate principal balance of the
outstanding Trust Fund Assets for
such series at the time of purchase
being less than the percentage of
the aggregate principal balance of
the Trust Fund Assets at the Cut-off
Date for that series specified in
the related Prospectus Supplement,
which percentage will be between 25%
and 0% (the "Clean-up Call"). In
addition to the repurchase of the
assets in the related Trust Fund at
the Clean-up Call, if so specified
in the related Prospectus
Supplement, a holder of a
non-offered class of Securities (the
"Call Class") will have the right,
solely at its discretion, to
terminate the related Trust Fund on
any Distribution Date after the 12th
Distribution Date following the date
of initial issuance of the related
series of Securities and until such
date as the Clean-up Call becomes
exercisable and thereby effect early
retirement of the Securities of such
series. Any such call will be of the
entire Trust Fund at one time;
multiple calls with respect to any
series of Securities will not be
permitted. In such case, the holders
of the Securities
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<PAGE>
offered hereby will be paid a price
equal to 100% of the Principal
Balance of the Securities offered
hereby as of the day of such
purchase plus accrued interest
thereon at the applicable Security
Interest Rate to the first day of
the month following such purchase
(the "Call Price"). Further, the
Call Class must remit to the related
Trustee for distribution to the
Securityholders funds equal to the
Call Price. If such funds are not
deposited with the related Trustee,
the Securities will remain
outstanding. There will not be any
additional remedies available to
Securityholders. In addition, in the
case of a Trust Fund for which a
REMIC election or elections have
been made, such termination will
constitute a "qualified liquidation"
under Section 860F of the Code. In
connection with a call by the Call
Class, the final payment to the
Securityholders will be made upon
surrender of the related Securities
to the Trustee. Once the Securities
have been surrendered and paid in
full, there will not be any
continuing liability from the
Securityholders or from the Trust
Fund to Securityholders. See
"Description of the
Securities--Termination".
Tax Status of the Securities................Each series of Certificates offered
hereby will constitute either (i)
"regular interests" ("REMIC Regular
Certificates") and "residual
interests" ("REMIC Residual
Certificates") in a Trust Fund
treated as a REMIC under Sections
860A through 860G of the Code, (ii)
interests ("Grantor Trust
Certificates") in a Trust Fund
treated as a grantor trust under
applicable provisions of the Code,
(iii) interests ("Partnership
Certificates") in a Trust Fund
treated as a partnership under
applicable provisions of the Code or
(iv) evidences of indebtedness
("Debt Certificates") of a Trust
Fund treated as debt instruments for
federal income tax purposes. Each
series of Notes offered hereby will
represent indebtedness of the
related Trust Fund.
In general, to the extent the assets
and income of the Trust Fund are
treated as qualifying assets and
income under the following sections
of the Code, REMIC Regular
Certificates and REMIC Residual
Certificates (i) owned by a
"domestic building and loan
association" will be treated as
"loans secured by an interest in
real property" within the meaning of
Code Section 7701(a)(19)(C) and (ii)
owned by a real estate investment
trust will be treated as "real
estate assets" for purposes of
Section 856(c)(4)(A) of the Code and
interest income therefrom will be
treated as "interest on obligations
secured by mortgages on real
property" for purposes of Section
856(c)(3)(B) of the Code. In
addition, REMIC Regular Certificates
will be "obligation[s]. . .which. .
.[are] principally secured by an
interest in real property" within
the meaning of Section 860G(a)(3)(C)
of the Code. Moreover, if 95% or
more of the assets and the income of
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<PAGE>
the Trust Fund qualify for any of
the foregoing treatments, the REMIC
Regular Certificates and (with the
exception of Section 860G(a)(3)(C)
of the Code) REMIC Residual
Certificates will qualify for the
foregoing treatments in their
entirety.
REMIC Residual Certificates
generally will be treated as
representing an interest in
qualifying assets and income to the
same extent described above for
institutions subject to Sections
7701(a)(19)(C), 856(c)(4)(A) and
856(c)(3)(B) of the Code. A portion
(or, in certain cases, all) of the
income from REMIC Residual
Certificates (i) may not be offset
by any losses from other activities
of the holder of such REMIC Residual
Certificates, (ii) may be treated as
unrelated business taxable income,
for holders of REMIC Residual
Certificates that are subject to tax
on unrelated business taxable income
(as defined in Section 511 of the
Code), and (iii) may be subject to
foreign withholding rules. In
addition, transfers of certain REMIC
Residual Certificates may be
disregarded under some circumstances
for all federal income tax purposes.
See "Federal Income Tax
Consequences--REMICs--Taxation of
Owners of REMIC Residual
Certificates--Excess Inclusions,"
and "--Noneconomic REMIC Residual
Certificates" herein.
Unless otherwise provided in the
related Prospectus Supplement,
Grantor Trust Certificates may be
either Certificates having a
Principal Balance and a Pass-
Through Rate ("Grantor Trust
Fractional Interest Certificates")
or Strip Securities ("Grantor Trust
Strip Certificates"). Holders of
Grantor Trust Fractional Interest
Certificates generally will be
treated as owning an interest in
qualifying assets and income under
Sections 7701(a)(19)(C),
856(c)(4)(A), 856(c)(3)(B) and
860G(a)(3)(A) of the Code. It is
unclear whether Grantor Trust Strip
Certificates will be treated as
representing an ownership interest
in qualifying assets and income
under Sections 7701(a)(19)(C),
856(c)(4)(A) and 856(c)(3)(B) of the
Code, although the policy
considerations underlying those
Sections suggest that such treatment
should be available. Partnership
Certificates will be treated as
partnership interests for purposes
of federal income taxation, and
accordingly, will not represent an
interest in qualifying assets for
purposes of Section 7701(a)(19)(C)
of the Code, but will represent
qualifying assets and income under
Sections 856(c)(4)(A) and
856(c)(3)(B) of the Code to the
extent their proportionate share of
the assets of the related Trust Fund
so qualify. Debt Certificates will
not represent qualifying assets or
income for purposes of any of the
preceding Sections.
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Investors are advised to consult
their tax advisors and to review
"Federal Income Tax Consequences"
herein and in the related Prospectus
Supplement.
Rating......................................At the date of issuance, as to each
series, each class of Securities
offered hereby will be rated in one
of the four highest rating
categories by one or more nationally
recognized statistical rating
agencies. See "Rating" in the
related Prospectus Supplement.
Legal Investment............................The Prospectus Supplement for each
series of Securities will specify
which classes of Securities of such
series, if any, will constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984
("SMMEA"). Any class of Securities
that is not rated in one of the two
highest rating categories by one or
more nationally recognized
statistical rating agencies or that
represents an interest in a Trust
Fund that includes junior mortgage
loans will not constitute "mortgage
related securities" for purposes of
SMMEA. See "Legal Investment".
ERISA Considerations........................A fiduciary of an employee benefit
plan and certain other retirement
plans and arrangements, including
individual retirement accounts,
annuities, Keogh plans, and bank
collective investment funds and
insurance company general and
separate accounts in which such
plans, accounts, annuities or
arrangements are invested, that are
subject to the Employee Retirement
Income Security Act of 1974, as
amended ("ERISA"), or Section 4975
of the Code (each, a "Plan") should
carefully review with its legal
advisors whether the purchase or
holding of Securities could give
rise to a transaction that is
prohibited or is not otherwise
permissible either under ERISA or
Section 4975 of the Code. The U.S.
Department of Labor has issued an
individual exemption, Prohibited
Transaction Exemption 91-23 (the
"Exemption"), to Salomon Smith
Barney Inc. ("Salomon Smith Barney")
that generally exempts from the
application of certain of the
prohibited transaction provisions of
Section 406 of ERISA and the excise
taxes imposed on such prohibited
transactions by Section 4975(a) and
(b) of the Code, transactions
relating to the purchase, sale and
holding of pass-through certificates
underwritten by Salomon Smith Barney
and the servicing and operation of
asset pools such as certain of the
Trust Funds, provided that certain
conditions are satisfied. If the
conditions of the Exemption will not
be satisfied, the Securities may not
be acquired by or on behalf of, or
with the assets of, a Plan unless
the party acquiring such Securities
provides the Depositor, the Trustee
and the Master Servicer with an
opinion of counsel or a
certification in lieu of such
opinion of counsel as described
herein. See "ERISA Considerations"
herein.
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities offered hereby:
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Securities of any
series will develop or, if it does develop, that it will provide Securityholders
with liquidity of investment or that it will continue for the life of the
Securities of any series. The Prospectus Supplement for any series of Securities
may indicate that an underwriter specified therein intends to establish a
secondary market in such Securities, however no underwriter will be obligated to
do so. The Securities offered hereby will not be listed on any securities
exchange.
LIMITED OBLIGATIONS
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their respective affiliates. The only
obligations of the foregoing entities with respect to the Securities, any
Mortgage Loan or any other Trust Fund Asset will be the obligations (if any) of
the Depositor pursuant to certain limited representations and warranties made
with respect to the Mortgage Loans or other Trust Fund Asset, the Master
Servicer's servicing obligations under the related Pooling and Servicing
Agreement or Servicing Agreement, as applicable (including, if and to the extent
described in the related Prospectus Supplement, its limited obligation to make
certain advances in the event of delinquencies on the Mortgage Loans) and
pursuant to the terms of any other Trust Fund Assets, and, if and to the extent
expressly described in the related Prospectus Supplement, certain limited
obligations of the Master Servicer in connection with a purchase obligation or
an agreement to purchase. Unless otherwise specified in the related Prospectus
Supplement, neither the Securities nor the underlying Mortgage Loans or other
Trust Fund Assets will be guaranteed or insured by any governmental agency or
instrumentality, by the Depositor, the Master Servicer or any of their
respective affiliates or by any other person. Proceeds of the assets included in
the related Trust Fund for each series of Securities (including the Mortgage
Loans or other Trust Fund Assets and any form of credit enhancement) will be the
sole source of payments on the Securities, and there will be no recourse to the
Depositor, the Master Servicer or any other entity in the event that such
proceeds are insufficient or otherwise unavailable to make all payments provided
for under the Securities.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT SUPPORT
With respect to each series of Securities, Credit Support will be provided
in limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit Support will be provided in one or more of the forms referred to
herein. See "Description of Credit Support" herein. Regardless of the form of
Credit Support provided, the amount of coverage will be limited in amount and in
most cases will be subject to periodic reduction in accordance with a schedule
or formula. Furthermore, such Credit Support may provide only very limited
coverage as to certain types of losses or risks, and may provide no coverage as
to certain other types of losses or risks. In the event losses exceed the amount
of coverage provided by any Credit Support or losses of a type not covered by
any Credit Support occur, such losses will be borne by the holders of the
related Securities (or certain classes thereof). The Depositor, the Master
Servicer or other specified person will generally be permitted to reduce,
terminate or substitute all or a portion of the Credit Support for any series of
Securities, if each applicable Rating Agency indicates that the then-current
rating(s) thereof will not be adversely affected. The rating(s) of any series of
Securities by any applicable Rating Agency may be lowered following the initial
issuance thereof as a result of the downgrading of the obligations of any
applicable credit support provider, or as a result of losses on the related
Mortgage Loans in excess of the levels contemplated by such Rating Agency at the
time of its initial rating analysis. Neither the Depositor, the Master Servicer
nor any of their
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<PAGE>
respective affiliates will have any obligation to replace or supplement any
Credit Support, or to take any other action to maintain any rating(s) of any
series of Securities.
RISKS OF DECLINING PROPERTY VALUES AND HIGH LOAN-TO-VALUE RATIOS
An investment in securities such as the Securities which generally
represent interests in mortgage loans and/or manufactured housing, conditional
sales contracts and installment loan agreements may be affected by, among other
things, a decline in real estate values and changes in the borrowers' financial
condition. No assurance can be given that values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding balances of the
Mortgage Loans, and any secondary financing on the Mortgaged Properties, in a
particular Mortgage Pool become equal to or greater than the value of the
Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. Mortgaged Properties subject to high Loan-to-Value Ratios are at
greater risk since such properties initially have less equity than Mortgaged
Properties with low Loan-to-Value ratios and therefore a decline in property
values could dissipate equity more quickly. Delinquencies, foreclosures and
losses due to declining values of Mortgaged Properties, especially those with
high Loan-to-Value Ratios, would cause losses to the Trust Fund and, to the
extent not covered by Credit Support, would adversely affect the yield to
maturity on the Securities.
RISKS OF NEGATIVELY AMORTIZING LOANS
In the case of Mortgage Loans that are subject to negative amortization,
the principal balances of such Mortgage Loans could be increased to an amount
equal to or in excess of the value of the underlying Mortgaged Properties,
thereby increasing the likelihood of default. To the extent that such losses are
not covered by any reserve fund or instrument of Credit Support in the related
Trust Fund, holders of Securities of the series evidencing interests in the
related Mortgage Pool will bear all risk of loss resulting from default by
mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans. Certain of the types of loans which may be included in
the Mortgage Pools may involve additional uncertainties not present in
traditional types of loans.
RISKS OF BUYDOWN MORTGAGE LOANS
Certain of the Mortgage Loans contained in a Mortgage Pool may be subject
to temporary buydown plans ("Buydown Mortgage Loans") pursuant to which the
monthly payments made by the Mortgagor during the early years of the Mortgage
Loan (the "Buydown Period") will be less than the scheduled monthly payments on
the Mortgage Loan, the resulting difference to be made up from (i) an amount
(such amount, exclusive of investment earnings thereon, being hereinafter
referred to as "Buydown Funds") contributed by the borrower, the seller of the
Mortgaged Property or another source and placed in a custodial account (the
"Buydown Account"), (ii) if the Buydown Funds are contributed on a present value
basis, investment earnings on such Buydown Funds or (iii) additional buydown
funds to be contributed over time by the mortgagor's employer or another source.
See "Description of the Securities--Deposits to Certificate Account" herein.
Generally, the mortgagor under each Buydown Mortgage Loan will be qualified at
the applicable lower monthly payment. Accordingly, the repayment of a Buydown
Mortgage Loan is dependent on the ability of the Mortgagor to make larger level
monthly payments after the Buydown Funds have been depleted and, for certain
Buydown Mortgage Loans, during the Buydown Period. The inability of a Mortgagor
to make such larger monthly payments could lead to losses on the Mortgage Loans,
and to the extent not covered by Credit Support, may adversely affect the yield
to maturity on the Securities.
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<PAGE>
GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency than will be
experienced on mortgage loans generally. For example, a region's economic
condition and housing market may be directly, or indirectly, adversely affected
by natural disasters or civil disturbances such as earthquakes, hurricanes,
floods, eruptions or riots. The economic impact of any of these types of events
may also be felt in areas beyond the region immediately affected by the disaster
or disturbance. The Mortgage Loans underlying certain series of Securities may
be concentrated in these regions, and such concentration may present risk
considerations in addition to those generally present for similar
mortgage-backed securities without such concentration. Moreover, as described
below, any Mortgage Loan for which a breach of a representation or warranty
exists will remain in the related Trust Fund in the event that a Mortgage Loan
Seller is unable, or disputes its obligation, to repurchase such Mortgage Loan
and such a breach does not also constitute a breach of any representation made
by any other person. In such event, any resulting losses will be borne by the
related form of Credit Support, to the extent available.
RISKS OF LOANS WITH BALLOON PAYMENTS
Certain of the Mortgage Loans included in a Trust Fund, particularly those
secured by Multifamily Properties, may not be fully amortizing (or may not
amortize at all) over their terms to maturity and, thus, will require
substantial payments of principal and interest (that is, balloon payments) at
their stated maturity. Mortgage Loans of this type involve a greater degree of
risk than self-amortizing loans because the ability of a Mortgagor to make a
balloon payment typically will depend upon its ability either to fully refinance
the loan or to sell the related Mortgaged Property at a price sufficient to
permit the mortgagor to make the balloon payment. The ability of a mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the value of the related Mortgaged Property, the level of available
mortgage rates at the time of sale or refinancing, the mortgagor's equity in the
related Mortgaged Property, prevailing general economic conditions, the
availability of credit for loans secured by comparable real properties and, in
the case of Multifamily Properties, the financial condition and operating
history of the mortgagor and the related Mortgaged Property, tax laws and rent
control laws.
RISKS OF LENDING ON NON-OWNER-OCCUPIED PROPERTIES
It is anticipated that some or all of the Mortgage Loans included in any
Trust Fund, particularly Mortgage Loans secured by Multifamily Properties, will
be nonrecourse loans or loans for which recourse may be restricted or
unenforceable. As to those Mortgage Loans, recourse in the event of mortgagor
default will be limited to the specific real property and other assets, if any,
that were pledged to secure the Mortgage Loan. However, even with respect to
those Mortgage Loans that provide for recourse against the mortgagor and its
assets generally, there can be no assurance that enforcement of such recourse
provisions will be practicable, or that the other assets of the mortgagor will
be sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property.
Mortgage Loans made on the security of Multifamily Properties may entail
risks of delinquency and foreclosure, and risks of loss in the event thereof,
that are greater than similar risks associated with loans made on the security
of Single Family Properties. The ability of a borrower to repay a loan secured
by an income-producing property typically is dependent primarily upon the
successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an
income-producing property is directly related to the net operating income
derived from such property. If the net operating income of the property is
reduced (for example, if rental or occupancy rates decline or real estate tax
rates or other operating expenses increase), the borrower's ability to repay the
loan may be impaired. In addition, the concentration
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<PAGE>
of default, foreclosure and loss risk for a pool of Mortgage Loans secured by
Multifamily Properties may be greater than for a pool of Mortgage Loans secured
by Single Family Properties of comparable aggregate unpaid principal balance
because the pool of Mortgage Loans secured by Multifamily Properties is likely
to consist of a smaller number of higher balance loans.
RISKS OF NON-CONFORMING LOANS
Mortgage Loans to be included in a Mortgage Pool may be non-conforming
Mortgage Loans. Non-conforming Mortgage Loans are Mortgage Loans that do not
qualify for purchase by government sponsored agencies such as FNMA and FHLMC due
to credit characteristics that to not satisfy such FNMA and FHLMC guidelines,
including mortgagors whose creditworthiness and repayment ability do not satisfy
such FNMA and FHLMC underwriting guidelines and mortgagors who may have a record
of credit write-offs, outstanding judgments, prior bankruptcies and other
derogatory credit items. Accordingly, non-conforming Mortgage Loans are likely
to experience rates of delinquency, foreclosure and loss that are higher, and
that may be substantially higher, than mortgage loans originated in accordance
with FNMA or FHLMC underwriting guidelines. The principal differences between
conforming Mortgage Loans and non-conforming Mortgage Loans include the
applicable Loan-to-Value Ratios, the credit and income histories of the related
Mortgagors, the documentation required for approval of the related Mortgage
Loans, the types of properties securing the Mortgage Loans, the loan sizes and
the Mortgagors' occupancy status with respect to the Mortgaged Properties. As a
result of these and other factors, the interest rates charged on non-conforming
Mortgage Loans are often higher than those charged for conforming Mortgage
Loans. The combination of different underwriting criteria and higher rates of
interest may also lead to higher delinquency, foreclosure and losses on
non-conforming Mortgage Loans as compared to conforming Mortgage Loans.
RISKS OF HIGH LTV LOANS
Some or all of the Mortgage Loans included in any Trust Fund may be High
LTV Loans. High LTV Loans with combined Loan-to-Value Ratios in excess of 100%
may have been originated with a limited expectation of recovering any amounts
from the foreclosure of the related Mortgaged Property and are underwritten with
an emphasis on the creditworthiness of the related borrower. If such Mortgage
Loans go into foreclosure and are liquidated, there may be no amounts recovered
from the related Mortgaged Property unless the value of the property increases
or the principal amount of the related senior liens have been reduced such as to
reduce the current combined Loan-to-Value Ratio of the related Mortgage Loan to
below 100%. Any such losses, to the extent not covered by credit enhancement,
may affect the yield to maturity of the Securities.
RISKS OF UNDERWRITING STANDARDS OF UNAFFILIATED MORTGAGE LOAN SELLERS
Mortgage Loans to be included in a Mortgage Pool will have been purchased
by the Depositor, either directly or indirectly from Mortgage Loan Sellers. Such
Mortgage Loans will generally have been originated in accordance with
underwriting standards acceptable to the Depositor and generally described
herein under "Mortgage Loan Program--Underwriting Standards" as more
particularly described in the underwriting criteria included in the related
Prospectus Supplement. Nevertheless, in some cases, particularly those involving
unaffiliated Mortgage Loan Sellers, the Depositor may not be able to establish
the underwriting standards used in the origination of the related Mortgage
Loans. In those cases, the related Prospectus Supplement will include a
statement to such effect and will reflect what, if any, re-underwriting of the
related Mortgage Loans was completed by the Depositor or any of its affiliates.
To the extent the Mortgage Loans cannot be re-underwritten or the underwriting
criteria cannot be verified, the Mortgage Loans might suffer losses greater than
they would had they been directly underwritten by the Depositor or an affiliate
thereof. Any such losses, to the extent not covered by Credit Support, may
adversely affect the yield to maturity of the Securities.
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<PAGE>
RISKS ASSOCIATED WITH JUNIOR LIEN MORTGAGE LOANS
Certain of the Mortgage Pools may contain Mortgage Loans secured by junior
liens and the related senior liens may not be included in the Mortgage Pool. An
overall decline in the residential real estate market could adversely affect the
values of the Mortgaged Properties securing the Mortgage Loans with junior liens
such that the outstanding principal balances, together with any senior financing
thereon, exceeds the value of the Mortgaged Properties. Since Mortgage Loans
secured by junior liens are subordinate to the rights of the beneficiaries under
the related senior deeds of trust or senior mortgages, such a decline would
adversely affect the position of the related junior beneficiary or junior
mortgagee before having such an effect on the position of the related senior
beneficiaries or senior mortgagees. A rise in interest rates over a period of
time, the general condition of the Mortgaged Property and other factors may also
have the effect of reducing the value of the Mortgaged Property from the value
at the time the junior lien Mortgage Loan was originated. As a result, the
Loan-to-Value Ratio may exceed the ratio in effect at the time the Mortgage Loan
was originated. Such an increase may reduce the likelihood that, in the event of
a default by the related mortgagor, liquidation or other proceeds will be
sufficient to satisfy the junior lien Mortgage Loan after satisfaction of any
senior liens and the payment of any liquidation expenses.
Other factors may affect the prepayment rate of junior lien Mortgage Loans,
such as the amounts of, and interest on, the related senior mortgage loans and
the use of senior lien mortgage loans as long-term financing for home purchases
and junior lien mortgage loans as shorter-term financing for a variety of
purposes, such as home improvement, educational expenses and purchases of
consumer durable such as automobiles. Accordingly, junior lien Mortgage Loans
may experience a higher rate of prepayments that traditional senior lien
mortgage loans. In addition, any future limitations on the rights of borrowers
to deduct interest payments on junior lien Mortgage Loans for federal income tax
purposes may further increase the rate of prepayments on such junior lien
Mortgage Loans.
RISKS OF NONPERFECTION OF SECURITY INTERESTS
Any Contract included in a Mortgage Pool will be secured by a security
interest in a Manufactured Home. Perfection of security interests in
Manufactured Homes and enforcement of rights to realize upon the value of the
Manufactured Homes as collateral for the Contracts are subject to a number of
federal and state laws, including the UCC as adopted in each state and each
state's certificate of title statutes. The steps necessary to perfect the
security interest in a Manufactured Home will vary from state to state. In the
event the Master Servicer fails, due to clerical errors or otherwise, to take
the appropriate steps to perfect such a security interest, the Trustee may not
have a first priority security interest in the Manufactured Home securing a
Contract. Additionally, courts in many states have held that manufactured homes
may, under certain circumstances, become subject to real estate title and
recording laws. As a result, a security interest in a manufactured home could be
rendered subordinate to the interests of other parties claiming an interest in
the home under applicable state real estate law. The failure to properly perfect
a valid, first priority security interest in a Manufactured Home securing a
Contract could lead to losses that may adversely affect the yield to maturity of
the Securities.
RISKS RELATING TO LIQUIDATION OF MORTGAGED PROPERTIES
Substantial delays can be encountered in connection with the liquidation of
defaulted Mortgage Loans and corresponding delays in the receipt of related
proceeds by the Securityholders could occur. An action to foreclose on a
Mortgaged Property securing a Mortgage Loan is regulated by state statutes,
rules and judicial decisions and is subject to many of the delays and expenses
of other lawsuits if defenses or counterclaims are interposed, sometimes
requiring several years to complete. Furthermore, in some states an action to
obtain a deficiency judgment is not permitted following a nonjudicial sale of a
Mortgaged Property. In the event of a default by a Mortgagor, these
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restrictions, among other things, may impede the ability of the Master Servicer
to foreclose on or sell the Mortgaged Property or to obtain Liquidation Proceeds
sufficient to repay all amounts due on the related Mortgage Loan. The Master
Servicer will be entitled to deduct from Liquidation Proceeds all expenses
reasonably incurred in attempting to recover amounts due on the related
Liquidated Mortgage Loan and not yet repaid, including payments to prior
lienholders, accrued Servicing Fees, legal fees and costs of legal action, real
estate taxes, and maintenance and preservation expenses. In the event that any
Mortgaged Properties fail to provide adequate security for the related Mortgage
Loans and insufficient funds are available from any applicable Credit Support,
Securityholders could experience a loss on their investment.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
ENVIRONMENTAL RISKS
The Mortgaged Properties are subject to certain environmental risks. Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner of real property may be liable for the costs of
removal or remediation of hazardous or toxic substances on, under or in such
property. Such laws often impose liability whether or not the owner or operation
knew of, or was responsible for, the presence of such hazardous or toxic
substances. A lender also risks such liability on foreclosure of the mortgage on
such property. In addition, the presence of hazardous or toxic substances, or
the failure to properly remediate such property, may adversely affect the
owner's or operator's ability to sell such property. Although the incidence of
environmental contamination of residential properties is less common than that
for commercial properties, Mortgage Loans contained in a Mortgage Pool may be
secured by Mortgaged Properties in violation of environmental laws, ordinances
or regulations. The Master Servicer is generally prohibited from foreclosing on
a Mortgaged Property unless it has taken adequate steps to ensure environmental
compliance with respect to such Mortgaged Property. However, to the extent the
Master Servicer errs and forecloses on Mortgaged Property that is subject to
environmental law violations, and to the extent a Mortgage Loan Seller does not
provide adequate representations and warranties against such violations, or is
unable to honor such obligations, including the obligation to repurchase a
Mortgage Loan upon the breach of a representation or warranty, a Mortgage Pool
could experience losses.
LIMITED NATURE OF RATINGS
It is a condition to the issuance of the Securities that each series of
Securities be rated in one of the four highest rating categories by a nationally
recognized statistical rating agency. A security rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time. No person is obligated to maintain the rating on any Security, and
accordingly, there can be no assurance that the ratings assigned to any Security
on the date on which such Security is originally issued will not be lowered or
withdrawn by a Rating Agency at any time thereafter. In the event any rating is
revised or withdrawn, the liquidity or the market value of the related Security
may be adversely affected. See "Rating" in the related Prospectus Supplement.
LIMITED REPRESENTATIONS BY AND AGAINST THE MORTGAGE LOAN SELLER
Each Mortgage Loan Seller will have made representations and warranties in
respect of the Mortgage Loans sold by such Mortgage Loan Seller and evidenced by
a series of Securities. In the event of a breach of a Mortgage Loan Seller's
representation or warranty that materially adversely
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<PAGE>
affects the interests of the Securityholders in a Mortgage Loan, unless
otherwise specified in the related Prospectus Supplement, the related Mortgage
Loan Seller will be obligated to cure the breach or repurchase or, if permitted,
replace such Mortgage Loan as described below. However, there can be no
assurance that a Mortgage Loan Seller will honor its obligation to cure,
repurchase or, if permitted, replace any Mortgage Loan as to which such a breach
of a representation or warranty arises. A Mortgage Loan Seller's failure or
refusal to honor its repurchase obligation could lead to losses that, to the
extent not covered by Credit Enhancement, may adversely affect the yield to
maturity of the Securities.
In instances where a Mortgage Loan Seller is unable, or disputes its
obligation, to purchase affected Mortgage Loans, the Master Servicer may
negotiate and enter into one or more settlement agreements with such Mortgage
Loan Seller that could provide for, among other things, the purchase of only a
portion of the affected Mortgage Loans. Any such settlement could lead to losses
on the Mortgage Loans which would be borne by the related Securities. Neither
the Depositor nor the Master Servicer will be obligated to purchase a Mortgage
Loan if a Mortgage Loan Seller defaults on its obligation to do so, and no
assurance can be given that the Mortgage Loan Sellers will carry out such
purchase obligations. Such a default by a Mortgage Loan Seller is not a default
by the Depositor or by the Master Servicer. Any Mortgage Loan not so purchased
or substituted for shall remain in the related Trust Fund and any losses related
thereto shall be allocated to the related Credit Support, to the extent
available, and otherwise to one or more classes of the related series of
Securities.
All of the representations and warranties of a Mortgage Loan Seller in
respect of a Mortgage Loan will have been made as of the date on which such
Mortgage Loan was purchased from the Mortgage Loan Seller by or on behalf of the
Depositor; the date as of which such representations and warranties were made
will be a date prior to the date of initial issuance of the related series of
Securities. A substantial period of time may have elapsed between the date as of
which the representations and warranties were made and the later date of initial
issuance of the related series of Securities. Accordingly, the Mortgage Loan
Seller's purchase obligation (or, if specified in the related Prospectus
Supplement, limited replacement option) will not arise if, during the period
commencing on the date of sale of a Mortgage Loan by the Mortgage Loan Seller,
an event occurs that would have given rise to such an obligation had the event
occurred prior to sale of the affected Mortgage Loan. The occurrence of events
during this period that are not covered by a Mortgage Loan Seller's purchase
obligation could lead to losses that, to the extent not covered by Credit
Support, may adversely affect the yield to maturity of the Securities.
SUBORDINATION OF CERTAIN CLASSES OF SECURITIES
Credit Support for a particular series of Securities may be provided in the
form of subordination of one or more classes of Securities in a series under
which losses are first allocated to any Subordinate Securities up to a specified
limit. Losses not covered by any form of Credit Support will be borne by the
holders of the related Securities (or certain classes thereof). Therefore, in
the event of substantial losses in any Mortgage Pool, such losses may be borne
by such holders.
BOOK-ENTRY REGISTRATION MAY AFFECT LIQUIDITY
Because transfers and pledges of DTC Registered Securities can be effected
only through book entries at DTC through participants, the liquidity of the
secondary market for DTC Registered Securities may be reduced to the extent that
some investors are unwilling to hold Securities in book entry form in the name
of DTC and the ability to pledge DTC Registered Securities may be limited due to
the lack of a physical certificate. Beneficial owners of DTC Registered
Securities may, in certain cases experience delay in the receipt of payments of
principal and interest such payments will be forwarded by the related Trustee to
DTC who will then forward payment to the participants who will thereafter
forward payment to beneficial owners. In the event of the insolvency of DTC or
a participant in whose name DTC Registered Securities are recorded, the ability
of beneficial
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owners to obtain timely payment and (if the limits of applicable insurance
coverage is otherwise unavailable) ultimate payment of principal and interest on
DTC Registered Securities may be impaired.
YIELD CONSIDERATIONS
The yield to maturity of the Securities of each series offered hereby will
depend on, among other things, the rate and timing of principal payments
(including prepayments, liquidations due to defaults and repurchases) on the
related Mortgage Loans and the price paid by Securityholders. Such yield may be
adversely affected by a higher or lower than anticipated rate of prepayments on
the related Mortgage Loans. In addition, if a party exercises its right to
repurchase the Trust Fund Assets and effect early retirement of the Securities
of that Series (including the right to repurchase the Trust Fund Assets after
the 12th Distribution Date following the date of the initial issuance of the
related series of Securities and until such date as the Clean-up Call becomes
exercisable), the yield to maturity of such Securities will be affected by the
occurrence of such termination. The yield to maturity on Strip Securities will
be extremely sensitive to the rate of prepayments on the related Mortgage Loans
and, if applicable, to the occurrence of an early retirement of the Securities.
In addition, the yield to maturity on certain other types of classes of
Securities, including Accrual Securities, Securities with a Security Interest
Rate which fluctuates inversely with an index or certain other classes in a
series including more than one class of Securities, may be relatively more
sensitive to the rate of prepayment on the related Mortgage Loans than other
classes of Securities and, if applicable, to the occurrence of an early
retirement of the Securities. Prepayments are influenced by a number of factors,
including prevailing mortgage market interest rates, local and regional economic
conditions and homeowner mobility. In addition, to the extent amounts in any
Pre-Funding Account have not been used to purchase additional Mortgage Loans,
holders of the Securities may receive an additional prepayment. See "Yield
Considerations" and "Maturity and Prepayment Considerations" herein.
ERISA CONSIDERATIONS
Generally, ERISA applies to investments made by employee benefit plans and
transactions involving the assets of such plans. Due to the complexity of
regulations that govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of the Securities of any series
offered hereby. See "ERISA Considerations."
FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their receipt
of cash payments, as described under "Federal Income Tax Consequences--REMICs"
herein. Accordingly, under certain circumstances, holders of Certificates
offered hereby that constitute REMIC Residual Certificates may have taxable
income and tax liabilities arising from such investment during a taxable year in
excess of the cash received during such period. The requirement that holders of
REMIC Residual Certificates report their pro rata share of the taxable income
and net loss of the REMIC will continue until the principal balances of all
classes of Certificates of the related series have been reduced to zero, even
though holders of REMIC Residual Certificates have received full payment of
their stated interest and principal. A portion (or, in certain circumstances,
all) of such Certificateholder's share of the REMIC taxable income may be
treated as "excess inclusion" income to such holder, which (i) generally will
not be subject to offset by losses from other activities, (ii) for a tax-exempt
holder, will be treated as unrelated business taxable income and (iii) for a
foreign holder, will not qualify for exemption from withholding tax. Individual
holders of REMIC Residual Certificates may be limited in their ability to deduct
servicing fees and other expenses of the REMIC. In addition, REMIC Residual
Certificates are subject to certain restrictions on transfer. Because of the
special tax treatment of
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REMIC Residual Certificates, the taxable income arising in a given year on a
REMIC Residual Certificate will not be equal to the taxable income associated
with investment in a corporate bond or stripped instrument having similar cash
flow characteristics and pre-tax yield. Therefore, the after-tax yield on a
REMIC Residual Certificate may be significantly less than that of a corporate
bond or stripped instrument having similar cash flow characteristics.
RISKS OF OPTIONAL TERMINATION
If so specified in the related Prospectus Supplement, certain parties will
have the option to purchase, in whole but not in part, the Securities specified
in the related Prospectus Supplement in the manner set forth in the related
Prospectus Supplement. Upon the purchase of such Securities or at any time
thereafter, at the option of the party entitled to such termination, the assets
of the Trust Fund may be sold, thereby effecting a retirement of the Securities
and the termination of the Trust Fund, or the Securities so purchased may be
held or resold.
Any such purchase of Mortgage Loans and underlying property subject to the
Mortgage Loans evidenced by a series of Securities shall be made at the option
of the party and at the price specified in the related Prospectus Supplement.
The exercise of such right will effect early retirement of the Securities of
that series, and will be subject to the aggregate principal balance of the
Mortgage Loans and/or other Trust Fund Assets in the Trust Fund for that series
as of the Distribution Date on which the purchase proceeds are to be distributed
to Securityholders being less than the percentage specified in the related
Prospectus Supplement of the aggregate principal balance of such Mortgage Loans
and/or other Trust Fund Assets at the Cut-off Date for that series (the
"Clean-up Call"). Such percentage will be between 25% and 0%. The Prospectus
Supplement for each series of Securities will set forth the amounts that the
holders of such Securities will be entitled to receive upon such early
retirement.
In addition to the repurchase of the assets in the related Trust Fund
at the Clean-up Call, if so specified in the related Prospectus Supplement, a
holder of a non-offered class of Securities (the "Call Class") will have the
right, solely at its discretion, to terminate the related Trust Fund on any
Distribution Date after the 12th Distribution Date following the date of initial
issuance of the related series of Securities and until such date as the Clean-up
Call becomes exercisable and thereby effect early retirement of the Securities
of such series. Any such call will be of the entire Trust Fund at one time;
multiple calls with respect to any series of Securities will not be permitted.
In such case, the holders of the Securities offered hereby will be paid a price
equal to 100% of the Principal Balance of the Securities offered hereby as of
the day of such purchase plus accrued interest thereon at the applicable
Security Interest Rate to the first day of the month following such purchase
(the "Call Price"). Further, the Call Class must remit to the related Trustee
for distribution to the Securityholders funds equal to the Call Price. If such
funds are not deposited with the related Trustee, the Securities will remain
outstanding. There will not be any additional remedies available to
Securityholders. In addition, in the case of a Trust Fund for which a REMIC
election or elections have been made, such termination will constitute a
"qualified liquidation" under Section 860F of the Code. In connection with a
call by the Call Class, the final payment to the Securityholders will be made
upon surrender of the related Securities to the Trustee. Once the Securities
have been surrendered and paid in full, there will not be any continuing
liability from the Securityholders or from the Trust Fund to Securityholders.
A Trust Fund may also be terminated and the Certificates retired upon
the Master Servicer's determination, based upon an opinion of counsel, that the
REMIC status of the Trust Fund has been lost or that a substantial risk exists
that such status will be lost for the then current taxable year.
The termination of a Trust Fund and the early retirement of Securities by
any party may adversely affect the yield to holders of certain classes of such
Securities.
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THE TRUST FUNDS
THE MORTGAGE LOANS
GENERAL
The Mortgage Loans may consist of mortgage loans secured by first or junior
liens on by one- to four-family residential properties ("Single Family
Properties" and the related loans, "Single Family Loans"), mortgage loans
secured by rental apartments or projects (including apartment buildings owned by
cooperative housing corporations) containing five or more dwelling units
("Multifamily Properties" and the related loans, "Multifamily Loans"), mortgage
loans secured by shares in a private cooperative housing corporation (a
"Cooperative" and the related loans, "Cooperative Loans") that give the owner
thereof the right to occupy a particular dwelling unit (each, a "Cooperative
Unit") in the Cooperative or conditional sales contracts and installment loan
agreements with respect to new or used Manufactured Homes (as defined herein,
and the related contracts or agreements, the "Contracts"), or beneficial
interests therein, or real property acquired upon foreclosure or comparable
conversion of such Mortgage Loans. The Single-Family Properties, Cooperative
shares (together with the right to occupy a particular Cooperative Unit
evidenced thereby) and Manufactured Homes (collectively, the "Mortgaged
Properties") may be located in any one of the fifty states or the District of
Columbia. The Mortgaged Properties may include leasehold interests in
residential properties, the title to which is held by third party lessors. The
term of any such leasehold will exceed the term of the Mortgage Note by at least
five years. Each Mortgage Loan will have been originated by a person (the
"Originator") not affiliated with Salomon Brothers Mortgage Securities VII, Inc.
(the "Depositor"). Each Mortgage Loan will be selected by the Depositor for
inclusion in a Mortgage Pool from among those purchased, either directly or
indirectly, from a prior holder thereof (a "Mortgage Loan Seller"), which prior
holder may not be the Originator thereof and may be an affiliate of the
Depositor. See "Mortgage Loan Program--Underwriting Standards".
Unless otherwise specified below or in the related Prospectus Supplement,
all of the Mortgage Loans in a Mortgage Pool will (i) have individual principal
balances at origination of not less than $25,000 or more than $5,000,000, (ii)
have monthly payments due on the first day of each month, (iii) have original
terms to maturity of not more than 40 years and (iv) be one of the following
types of mortgage loans:
(1) Fully amortizing Mortgage Loans with a fixed rate of interest (an
"Interest Rate") and level monthly payments to maturity;
(2) Fully amortizing Mortgage Loans with an Interest Rate adjusted
periodically (with corresponding adjustments in the amount of monthly
payments) to equal the sum (which may be rounded) of a fixed percentage
amount and an index ("ARM Loans"), as described in the related Prospectus
Supplement;
(3) ARM Loans that provide for an election, at the borrower's option,
to convert the adjustable Interest Rate to a fixed interest rate, as
described in the related Prospectus Supplement;
(4) ARM Loans that provide for negative amortization or accelerated
amortization resulting from delays in or limitations on the payment
adjustments necessary to amortize fully the outstanding principal balance
of the loan at its then applicable Interest Rate over its remaining term;
(5) Fully amortizing Mortgage Loans with a fixed Interest Rate and
level monthly payments, or payments of interest only, during the early
years of the term, followed by periodically increasing monthly payments of
principal and interest for the duration of the term or for a specified
number of years, as described in the related Prospectus Supplement;
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(6) Fixed Interest Rate Mortgage Loans providing for level payment of
principal and interest on the basis of an assumed amortization schedule and
a balloon payment at the end of a specified term; and
(7) Another type of Mortgage Loan described in the related Prospectus
Supplement.
If provided in the related Prospectus Supplement, certain of the Mortgage
Pools may contain Mortgage Loans secured by junior liens, and the related senior
liens ("Senior Liens") may not be included in the Mortgage Pool. The primary
risk to holders of Mortgage Loans secured by junior liens is the possibility
that adequate funds will not be received in connection with a foreclosure of
the related Senior Liens to satisfy fully both the Senior Liens and the Mortgage
Loan. In the event that a holder of a Senior Lien forecloses on a Mortgaged
Property, the proceeds of the foreclosure or similar sale will be applied first
to the payment of court costs and fees in connection with the foreclosure,
second to real estate taxes, third in satisfaction of all principal, interest,
prepayment or acceleration penalties, if any, and any other sums due and owing
to the holder of the Senior Liens. The claims of the holders of the Senior Liens
will be satisfied in full out of proceeds of the liquidation of the Mortgage
Loan, if such proceeds are sufficient, before the Trust Fund as holder of the
junior lien receives any payments in respect of the Mortgage Loan. If the Master
Servicer were to foreclose on any Mortgage Loan, it would do so subject to any
related Senior Liens. In order for the debt related to the Mortgage Loan to be
paid in full at such sale, a bidder at the foreclosure sale of such Mortgage
Loan would have to bid an amount sufficient to pay off all sums due under the
Mortgage Loan and the Senior Liens or purchase the Mortgaged Property subject to
the Senior Liens. In the event that such proceeds from a foreclosure or similar
sale of the related Mortgaged Property are insufficient to satisfy all Senior
Liens and the Mortgage Loan in the aggregate, the Trust Fund, as the holder of
the junior lien, and, accordingly, holders of one or more classes of the
Securities bear (i) the risk of delay in distributions while a deficiency
judgment against the borrower is obtained and (ii) the risk of loss if the
deficiency judgment is not realized upon. Moreover, deficiency judgments may not
be available in certain jurisdictions. In addition, a junior mortgagee may not
foreclose on the property securing a junior mortgage unless it forecloses
subject to the senior mortgages.
Liquidation expenses with respect to defaulted junior mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that the Master Servicer took the same steps in
realizing upon a defaulted junior mortgage loan having a small remaining
principal balance as it would in the case of a defaulted junior mortgage loan
having a large remaining principal balance, the amount realized after expenses
of liquidation would be smaller as a percentage of the outstanding principal
balance of the small junior mortgage loan than would be the case with the
defaulted junior mortgage loan having a large remaining principal balance.
Because the average outstanding principal balance of the Mortgage Loans is
smaller relative to the size of the average outstanding principal balance of the
loans in a typical pool of first priority mortgage loans, liquidation proceeds
may also be smaller as a percentage of the principal balance of a Mortgage Loan
than would be the case in a typical pool of first priority mortgage loans.
Unless otherwise specified in the related Prospectus Supplement, the
following requirements as to the Loan-to-Value Ratio of each Mortgage Loan of
the type described above shall apply. The "Loan-to-Value Ratio" of a Mortgage
Loan at any given time is the ratio (expressed as a percentage) of the then
outstanding principal balance of the Mortgage Loan, plus, in the case of a
Mortgage Loan secured by a junior lien, the outstanding principal balance of the
related Senior Liens, to the Value of the related Mortgaged Property. The Value
of a Single-Family Property, Multifamily Property or Cooperative Unit, other
than with respect to Refinance Loans, is the lesser of (a) the appraised value
determined in an appraisal obtained by the originator at origination of such
loan and (b) the sales price for such property. Refinance Loans are loans made
to refinance existing loans. The Value of the Mortgaged Property securing a
Refinance Loan is the appraised value thereof determined in an appraisal
obtained at the time of origination of the Refinance Loan.
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Unless otherwise specified in the related Prospectus Supplement, for purposes of
calculating the Loan-to-Value Ratio of a Contract relating to a new Manufactured
Home, the Value is no greater than the sum of a fixed percentage of the list
price of the unit actually billed by the manufacturer to the dealer (exclusive
of freight to the dealer site) including "accessories" identified in the invoice
(the "Manufacturer's Invoice Price"), plus the actual cost of any accessories
purchased from the dealer, a delivery and set-up allowance, depending on the
size of the unit, and the cost of state and local taxes, filing fees and up to
three years prepaid hazard insurance premiums. Unless otherwise specified in the
related Prospectus Supplement, with respect to a used Manufactured Home, the
Value is the least of the sale price, the appraised value, and the National
Automobile Dealer's Association book value plus prepaid taxes and hazard
insurance premiums. The appraised value of a Manufactured Home is based upon the
age and condition of the manufactured housing unit and the quality and condition
of the mobile home park in which it is situated, if applicable.
A Mortgaged Property may have been subject to secondary financing at
origination of the Mortgage Loan, but, unless otherwise specified in the related
Prospectus Supplement, the total amount of primary and secondary financing at
the time of origination of the Mortgage Loan did not produce a combined
Loan-to-Value Ratio in excess of (i) 90% in the case of a Mortgage Loan secured
by an owner-occupied primary residence or (ii) 80% in the case of a Mortgage
Loan secured by a vacation or second home.
If so provided in the related Prospectus Supplement certain or all of the
Single Family Loans may have Loan-to-Value Ratios in excess of 80% and as high
as 125% that are not insured by primary mortgage insurance policies (such
Mortgage Loans, "High LTV Loans").
With respect to each Mortgaged Property, unless otherwise provided in the
related Prospectus Supplement, the borrower will have represented that the
dwelling is either (a) an owner-occupied primary residence or (b) a vacation or
second home that (i) is not part of a mandatory rental pool and (ii) is suitable
for year-round occupancy. With respect to a vacation or second home, no income
derived from the property will be considered for underwriting purposes.
Unless otherwise specified in the related Prospectus Supplement, the
aggregate principal balance on the Cut-off Date of Mortgage Loans secured by
condominium units will not exceed 30% of the aggregate principal balance of the
Mortgage Loans in the related Mortgage Pool. A Mortgage Loan secured by a
condominium unit will not be included in a Mortgage Pool unless, at the time of
sale of such Mortgage Loan by the Mortgage Loan Seller, certain representations
and warranties as to the condominium project are made by the Mortgage Loan
Seller or an affiliate thereof or by such other person acceptable to the
Depositor having knowledge regarding the subject matter of such representations
and warranties. Unless otherwise specified in the related Prospectus Supplement,
such Mortgage Loan Seller, or another party on its behalf, will have made the
following representations and warranties. If a condominium project is subject to
developer control or to incomplete phasing or add-ons, at least 70% of the units
have been sold to bona fide purchasers and are occupied as primary residences or
vacation or second homes. If a condominium project has been controlled by the
unit owners (other than the developer) for less than two years and is not
subject to incomplete phasing or add-ons, at least 70% of the units have been
sold to bona fide purchasers and at least 60% of the units are occupied as
primary residences or vacation or second homes. The foregoing percentages may be
modified in the case of a particular project upon proof of demonstrated market
acceptance but in no event will any such percentage be reduced below 51%. If a
condominium project has been controlled by the unit owners (other than the
developer) for at least two years, has all common elements completed and is not
subject to phasing or add-ons, the Mortgage Loan Seller, or another party on its
behalf, must represent and warrant, unless otherwise specified in the related
Prospectus Supplement, that the marketability of the project has been proven and
that at least 90% of the units have been sold to bona fide purchasers. See
"Mortgage Loan Program--Representations by or on behalf of Mortgage
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Loan Sellers; Repurchases" herein for a description of certain other
representations made by or on behalf of Mortgage Loan Sellers at the time
Mortgage Loans are sold.
If provided in the related Prospectus Supplement, certain of the Mortgage
Pools may contain Mortgage Loans subject to temporary buydown plans ("Buydown
Mortgage Loans"), pursuant to which the monthly payments made by the borrower in
the early years of the Mortgage Loan (the "Buydown Period") will be less than
the scheduled monthly payments on the Mortgage Loan, the resulting difference to
be made up from (i) an amount contributed by the borrower, the seller of the
Mortgaged Property, or another source (such amount, exclusive of investment
earnings thereon, being hereinafter referred to as "Buydown Funds") and placed
in a custodial account and (ii) unless otherwise specified in the Prospectus
Supplement, investment earnings on the Buydown Funds. See "Description of the
Securities--Payments on Mortgage Loans. Generally, the borrower under each
Buydown Mortgage Loan will be qualified at the applicable Buydown Mortgage Rate.
Accordingly, the repayment of a Buydown Mortgage Loan is dependent on the
ability of the borrower to make larger level monthly payments after the Buydown
Funds have been depleted and, for certain Buydown Mortgage Loans, during the
Buydown Period. See "Mortgage Loan Program--Underwriting Standards" for a
discussion of loss and delinquency considerations relating to Buydown Mortgage
Loans.
Except in the case of High LTV Loans and as otherwise specified in the
related Prospectus Supplement, each Mortgage Loan having a Loan-to-Value Ratio
at origination in excess of 80%, is required to be covered by a primary mortgage
guaranty insurance policy insuring against default on such Mortgage Loan as to
at least the principal amount thereof exceeding 75% of the Value of the
Mortgaged Property at origination of the Mortgage Loan. Such insurance must
remain in force at least until the Mortgage Loan amortizes to a level that would
produce a Loan-to-Value Ratio lower than 80%. See "Description of Primary
Insurance Policies--Primary Mortgage Insurance Policies".
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then specifically known to the
Depositor, with respect to the Mortgage Loans, Agency Securities, Private
Mortgage-Backed Securities or Funding Agreements contained in the related Trust
Fund, including (i) the aggregate outstanding principal balance, the largest,
smallest and average outstanding principal balance of the Trust Fund Assets as
of the applicable Cut-off Date, and, with respect to Mortgage Loans secured by a
junior lien, the amount of the related Senior Liens, (ii) the type of property
securing the Mortgage Loans (e.g., one- to four-family houses, multifamily
residential dwellings, shares in Cooperatives and the related proprietary leases
or occupancy agreements, condominium units and other attached units, new or used
Manufactured Homes and vacation and second homes), (iii) the original terms to
maturity of the Mortgage Loans, (iv) the earliest origination date and latest
maturity date, (v) the aggregate principal balance of Mortgage Loans having
Loan-to-Value Ratios at origination exceeding 80%, or, with respect to Mortgage
Loans secured by a junior lien, the aggregate principal balance of Mortgage
Loans having combined Loan-to-Value Ratios exceeding 80%, (vi) the Interest
Rates or range of Interest Rates borne by the Mortgage Loans or mortgage loans
underlying the Agency Securities, Private Mortgage-Backed Securities or Funding
Agreements, (vii) the geographical distribution of the Mortgage Loans on a
state-by-state basis, (viii) the number and aggregate principal balance of
Buydown Mortgage Loans, if any, (ix) the weighted average Retained Interest, if
any, (x) with respect to ARM Loans, the adjustment dates, the highest, lowest
and weighted average margin, and the maximum Interest Rate variation at the time
of any adjustment and over the life of the ARM Loan, and (xi) with respect to
Mortgage Loans of the type described in (5) above, whether such loans provide
for payments of interest only for any period and the frequency and amount by
which, and the term during which, monthly payments adjust. If specific
information respecting the Trust Fund Assets is not known to the Depositor at
the time Securities are initially offered, more general information of the
nature described above will be provided in the Prospectus Supplement, and
specific information will be set forth in a report which will be available to
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purchasers of the related Securities at or before the initial issuance thereof
and will be filed, together with the related Pooling and Servicing Agreement or
Trust Agreement, with respect to each series of Certificates, or the related
Servicing Agreement, Trust Agreement and Indenture, with respect to each series
of Notes, as part of a report on Form 8-K with the Securities and Exchange
Commission within fifteen days after such initial issuance.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the respective dates of origination
of the related Mortgage Loans. If the residential real estate market should
experience an overall decline in property values such that the outstanding
principal balances of the Mortgage Loans, and any secondary financing on the
Mortgaged Properties, in a particular Mortgage Pool become equal to or greater
than the value of the Mortgaged Properties, the rates of delinquencies,
foreclosures or repossessions and losses could be higher than those now
generally experienced by institutional lenders. Manufactured Homes are less
likely to experience appreciation in value and more likely to experience
depreciation in value over time than other types of housing properties. In
addition, adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by borrowers of scheduled payments of
principal and interest on the Mortgage Loans and, accordingly, the rates of
delinquencies, foreclosures or repossessions and losses with respect to any
Mortgage Pool. To the extent that such losses are not covered by Credit Support,
such losses will be borne, at least in part, by the holders of one or more
classes of the Securities of the related series offered hereby.
The Depositor will cause the Mortgage Loans comprising each Trust Fund to
be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Securities of the related series. The Master
Servicer named in the related Prospectus Supplement will service the Mortgage
Loans, either directly or through other loan servicing institutions pursuant to
a Pooling and Servicing Agreement or Servicing Agreement among the Depositor,
itself and the Trustee, and will receive a fee for such services. See "Mortgage
Loan Program" and "Description of the Securities". With respect to Mortgage
Loans serviced by the Master Servicer through a Sub- Servicer, the Master
Servicer will remain liable for its servicing obligations under the related
Pooling and Servicing Agreement or Servicing Agreement as if the Master Servicer
alone were servicing such Mortgage Loans.
The Depositor will make certain representations and warranties regarding
the Mortgage Loans, but its assignment of the Mortgage Loans to the Trustee will
be without recourse. See "Description of the Securities-Assignment of Trust Fund
Assets". The obligations of the Master Servicer with respect to the Mortgage
Loans will consist principally of its contractual servicing obligations under
the related Pooling and Servicing Agreement or Servicing Agreement (including
its obligation to enforce certain purchase and other obligations of
Sub-Servicers or Mortgage Loan Sellers, or both, as more fully described herein
under "Mortgage Loan Program--Representations by or on behalf of Mortgage Loan
Sellers; Repurchases" and "Description of the Securities--Sub-Servicing" and
"--Assignment of Trust Fund Assets") and, unless otherwise provided in the
related Prospectus Supplement, its obligation to make certain cash advances in
the event of delinquencies in payments on or with respect to the Mortgage Loans
in amounts described herein under "Description of the Securities--Advances in
respect of Delinquencies". Any obligation of the Master Servicer to make
advances may be subject to limitations, to the extent provided herein and in the
related Prospectus Supplement.
SINGLE-FAMILY LOANS
The Single-Family Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by first mortgages or first deeds of trust (the
"Mortgages") creating a first lien on the Single- Family Properties. The
Single-Family Properties will consist of one- to four-family residences,
including detached and attached dwellings, townhouses, rowhouses, individual
condominium units,
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individual units in planned-unit developments and individual units in de minimis
planned-unit developments. Single-Family loans may be conventional loans,
FHA-insured loans or VA- guaranteed loans as specified in the related Prospectus
Supplement.
MULTIFAMILY LOANS
The Multifamily Loans will be evidenced by Mortgage Notes secured by
Mortgages creating a first lien on the Multifamily Properties. The Multifamily
Properties will consist of rental apartments or projects (including apartment
buildings owned by cooperative housing cooperatives) containing five or more
dwelling units. Multifamily Properties may include high-rise, mid-rise and
garden apartments. Multifamily Loans may be conventional loans or FHA insured
loans as specified in the related Prospectus Supplement.
COOPERATIVE LOANS
The Cooperative Loans will be evidenced by promissory notes (the
"Cooperative Notes") secured by security interests in shares issued by
Cooperatives and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific Cooperative Units in the related
buildings.
CONTRACTS
The Contracts will consist of manufactured housing conditional sales
contracts and installment loan agreements each secured by a Manufactured Home.
The Manufactured Homes securing the Contracts will consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of this paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under this chapter."
AGENCY SECURITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
GNMA is a wholly-owned corporate instrumentality of the United States with
the United States Department of Housing and Urban Development. Section 306(g) of
Title II of the National Housing Act of 1934, as amended (the "Housing Act"),
authorizes GNMA to guarantee the timely payment of the principal of and interest
on certificates which represent an interest in a pool of mortgage loans insured
by FHA under the Housing Act, or Title V of the Housing Act of 1949 ("FHA
Loans"), or partially guaranteed by the VA under the Servicemen's Readjustment
Act of 1944, as amended, or Chapter 37 of Title 38, United States Code ("VA
Loans").
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guarantee under this subsection." In order to meet
its obligations under any such guarantee, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury in an amount which is at
anytime sufficient to enable GNMA, with no limitations as to amount, to perform
its obligations under its guarantee.
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GNMA CERTIFICATES
Each GNMA Certificate held in a Trust Fund (which may be issued under
either the GNMA I program or the GNMA II program) will be a "fully modified
pass-through" mortgaged-backed certificate issued and serviced by a mortgage
banking company or other financial concern ("GNMA Issuer") approved by GNMA or
approved by FNMA as a seller-servicer of FHA Loans and/or VA Loans. The mortgage
loans underlying the GNMA Certificates will consist of FHA Loans and/or VA
Loans. Each such mortgage loan is secured by a one- to four-family residential
property. GNMA will approve the issuance of each such GNMA Certificate in
accordance with a guaranty agreement (a "Guaranty Agreement") between GNMA and
the GNMA Issuer. Pursuant to its Guaranty Agreement, a GNMA Issuer will be
required to advance its own funds in order to make timely payments of all
amounts due on each such GNMA Certificate, even if the payments received by the
GNMA Issuer on the FHA Loans or VA Loans underlying each such GNMA Certificate
are less than the amounts due on each such GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties and will provide for the payment by or on behalf of the
GNMA Issuer to the registered holder of such GNMA Certificate of scheduled
monthly payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly principal and
interest payment on each FHA Loan or VA Loan underlying such GNMA Certificate,
less the applicable servicing and guarantee fee which together equal the
difference between the interest on the FHA Loan or VA Loan and the pass-through
rate on the GNMA Certificate. In addition, each payment will include
proportionate pass-through payments of any prepayments of principal on the FHA
Loans or VA Loans underlying such GNMA Certificate and liquidation proceeds in
the event of a foreclosure or other disposition of any such FHA Loans or VA
Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such GNMA Certificate. In the event no payment is made by a
GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered holder of
the GNMA Certificates held in a Trust Fund, will have the right to proceed
directly against GNMA under the terms of the Guaranty Agreements relating to
such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
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Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or "buydown" mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-"buydown"
mortgage loans are available in respect of graduated payment or "buydown"
mortgages. GNMA Certificates related to a series of Certificates may be held in
book-entry form.
If specified in a Prospectus Supplement, GNMA Certificates may be backed by
multifamily mortgage loans having the characteristics specified in such
Prospectus Supplement.
FEDERAL HOME LOAN MORTGAGE CORPORATION
FHLMC is a corporate instrumentality of the United States created pursuant
to Title III of the Emergency Home Finance Act of 1970, as amended (the "FHLMC
Act"). The common stock of FHLMC is owned by the Federal Home Loan Banks. FHLMC
was established primarily for the purpose of increasing the availability of
mortgage credit for the financing of urgently needed housing. It seeks to
provide an enhanced degree of liquidity for residential mortgage investments
primarily by assisting in the development of secondary markets for conventional
mortgages. The principal activity of FHLMC currently consists of the purchase of
first lien conventional mortgage loans or participation interests in such
mortgage loans and the sale of the mortgage loans or participations so purchased
in the form of mortgage securities, primarily FHLMC Certificates. FHLMC is
confined to purchasing, so far as practicable, mortgage loans that it deems to
be of such quality, type and class as to meet generally the purchase standards
imposed by private institutional mortgage investors.
FHLMC CERTIFICATES
Each FHLMC Certificate represents an undivided interest in a pool of
mortgage loans that may consist of first lien conventional loans, FHA Loans or
VA Loans (a "FHLMC Certificate group"). FHLMC Certificates are sold under the
terms of a Mortgage Participation Certificate Agreement. A FHLMC Certificate may
be issued under either FHLMC's Cash Program or Guarantor Program.
Mortgage loans underlying the FHLMC Certificates held in a Trust Fund will
consist of mortgage loans with original terms to maturity of between 10 and 30
years. Each such mortgage loan must meet the applicable standards set forth in
the FHLMC Act. A FHLMC Certificate group
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may include whole loans, participation interests in whole loans and undivided
interests in whole loans and/or participations comprising another FHLMC
Certificate group. Under the Guarantor Program, any such FHLMC Certificate group
may include only whole loans or participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
collection by such holder of all principal on the underlying mortgage loans,
without any offset or deduction, to the extent of such holder's pro rata share
thereof, but does not, except if and to the extent specified in the Prospectus
Supplement for a series of Certificates, guarantee the timely payment of
scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees the timely
payment of principal based on the difference between the pool factor, published
in the month preceding the month of distribution and the pool factor published
in such month of distribution. Pursuant to its guarantees, FHLMC indemnifies
holders of FHLMC Certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. FHLMC may remit the
amount due on account of its guarantee of collection of principal at any time
after default on an underlying mortgage loan, but not later than (i) 30 days
following foreclosure sale, (ii) 30 days following payment of the claim by any
mortgage insurer, or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial repayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, there is no limitation on the amount by which
interest rates on the mortgage loans underlying a FHLMC Certificate may exceed
the pass-through rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans from sellers at specified percentages
of their unpaid principal balances, adjusted for accrued or prepaid interest,
which when applied to the interest rate of the mortgage loans and participations
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purchased, results in the yield (expressed as a percentage) required by FHLMC.
The required yield, which includes a minimum servicing fee retained by the
servicer, is calculated using the outstanding principal balance. The range of
interest rates on the mortgage loans and participations in a FHLMC Certificate
group under the Cash Program will vary since mortgage loans and participations
are purchased and assigned to a FHLMC Certificate group based upon their yield
to FHLMC rather than on the interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC Certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the FHLMC Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
FEDERAL NATIONAL MORTGAGE ASSOCIATION
FNMA is a federally chartered and privately owned corporation organized and
existing under the Federal National Mortgage Association Charter Act (the
"Charter Act"). FNMA was originally established in 1938 as a United States
government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder-owned and privately-managed corporation by
legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA CERTIFICATES
FNMA Certificates are Guaranteed Mortgage Pass-Through Certificates
representing fractional undivided interests in a pool of mortgage loans formed
by FNMA. Each mortgage loan must meet the applicable standards of the FNMA
purchase program. Mortgage loans comprising a pool are either provided by FNMA
from its own portfolio or purchased pursuant to the criteria of the FNMA
purchase program.
Mortgage loans underlying FNMA Certificates held in a Trust Fund will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under a
regular servicing option (pursuant to which the mortgagee or other servicers
assumes the entire risk of foreclosure losses), the annual interest rates on the
mortgage loans underlying a
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FNMA Certificate will be between 50 basis points and 250 basis points greater
than in its annual pass-through rate and under a special servicing option
(pursuant to which FNMA assumes the entire risk for foreclosure losses), the
annual interest rates on the mortgage loans underlying a FNMA Certificate will
generally be between 55 basis points and 255 basis points greater than the
annual FNMA Certificate pass-through rate. If specified in the Prospectus
Supplement, FNMA Certificates may be backed by adjustable rate mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guarantees are obligations solely of FNMA and are not backed by, nor
entitled to, the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's operations or to assist
FNMA in any other manner. If FNMA were unable to satisfy its obligations,
distributions to holders of FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans formed on
or after May 1, 1985 (other than FNMA Certificates backed by pools containing
graduated payment mortgage loans or mortgage loans secured by multifamily
projects) are available in book-entry form only. Distributions of principal and
interest on each FNMA Certificate will be made by FNMA on the 25th day of each
month to the persons in whose name the FNMA Certificate is entered in the books
of the Federal Reserve Banks (or registered on the FNMA Certificate register in
the case of fully registered FNMA Certificates) as of the close of business on
the last day of the preceding month. With respect to FNMA Certificates issued in
book-entry form, distributions thereon will be made by wire, and with respect to
fully registered FNMA Certificates, distributions thereon will be made by check.
STRIPPED MORTGAGE-BACKED SECURITIES
Agency Securities may consist of one or more stripped mortgage-backed
securities, each as described herein and in the related Prospectus Supplement.
Each such Agency Security will represent an undivided interest in all or part of
either the principal distributions (but not the interest distributions) or the
interest distributions (but not the principal distributions), or in some
specified portion of the principal and interest distributions (but not all of
such distributions) on certain FHLMC, FNMA or GNMA Certificates. The underlying
securities will be held under a trust agreement by FHLMC, FNMA or GNMA, each as
trustee, or by another trustee named in the related Prospectus Supplement.
FHLMC, FNMA or GNMA will guarantee each stripped Agency Security to the same
extent as such entity guarantees the underlying securities backing such stripped
Agency Security, unless otherwise specified in the related Prospectus
Supplement.
OTHER AGENCY SECURITIES
If specified in the related Prospectus Supplement, a Trust Fund may include
other mortgage pass-through certificates issued or guaranteed by GNMA, FNMA or
FHLMC. The characteristics of any such mortgage pass-through certificates will
be described in such Prospectus Supplement. If so specified, a combination of
different types of Agency Securities may be held in a Trust Fund.
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PRIVATE MORTGAGE-BACKED SECURITIES
GENERAL
Private Mortgage-Backed Securities may consist of (a) mortgage pass-through
certificates evidencing an undivided interest in a pool of mortgage loans or (b)
collateralized mortgage obligations secured by mortgage loans. Private
Mortgage-Backed Securities will have been issued pursuant to a pooling and
servicing agreement, an indenture or similar agreement (a "PMBS Agreement"). The
seller/servicer of the underlying mortgage loans will have entered into the PMBS
Agreement with the trustee under such PMBS Agreement (the "PMBS Trustee"). The
PMBS Trustee or its agent, or a custodian, will possess the mortgage loans
underlying such Private Mortgage-Backed Security. Mortgage loans underlying a
Private Mortgage-Backed Security will be serviced by a servicer (the "PMBS
Servicer") directly or by one or more subservicers who may be subject to the
supervision of the PMBS Servicer. The PMBS Servicer will be a FNMA or FHLMC
approved servicer and, if FHA Loans underlie the Private Mortgage-Backed
Securities, approved by HUD as an FHA mortgagee.
The issuer of the Private Mortgage-Backed Securities (the "PMBS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for the
purpose of among other things, establishing trusts and acquiring and selling
housing loans to such trusts and selling beneficial interests in such trusts. If
so specified in the Prospectus Supplement, the PMBS Issuer may be an affiliate
of the Depositor. The obligations of the PMBS Issuer will generally be limited
to certain representations and warranties with respect to the assets conveyed by
it to the related trust. Unless otherwise specified in the related Prospectus
Supplement, the PMBS Issuer will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Mortgage-Backed Securities issued
under the PMBS Agreement. Additionally, although the mortgage loans underlying
the Private Mortgage-Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
UNDERLYING LOANS
The mortgage loans underlying the Private Mortgage-Backed Securities may
consist of fixed rate, level payment, fully amortizing loans or graduated
payment mortgage loans, buy-down loans, adjustable rate mortgage loans, or loans
having balloon or other special payment features. Such Mortgage Loans may be
secured by single family property, multifamily property, manufactured homes or
by an assignment of the proprietary lease or occupancy agreement relating to a
specific dwelling within a Cooperative and the related shares issued by such
Cooperative. Except as otherwise specified in the related Prospectus Supplement,
(i) no mortgage loan will have had a Loan-to-Value Ratio at origination in
excess of 95% (except in the case of High LTV Loans), (ii) each single family
loan secured by a mortgaged property having a loan-to-value ratio in excess of
80% at origination will be covered by a primary mortgage insurance policy
(except in the case of High LTV Loans), (iii) each mortgage loan will have had
an original term to stated maturity of not less than 5 years and not more than
40 years, (iv) no mortgage loan that was more than 30 days delinquent as to the
payment of principal or interest will have been eligible for inclusion in the
assets under the related PMBS Agreement, (v) each mortgage loan (other than a
cooperative loan)
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will be required to be covered by a standard hazard insurance policy (which may
be a blanket policy) and (vi) each mortgage loan (other than a cooperative loan
or a Contract secured by a manufactured home) will be covered by a title
insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE MORTGAGE-BACKED SECURITIES
Credit support in the form of reserve funds, subordination of other private
mortgage-backed securities issued under the PMBS Agreement, letters of credit,
insurance policies or other types of credit support may be provided with respect
to the mortgage loans underlying the Private Mortgage-Backed Securities or with
respect to the Private Mortgage-Backed Securities themselves.
ADDITIONAL INFORMATION
The Prospectus Supplement for a series for which the Trust Fund includes
Private Mortgage- Backed Securities will specify (i) the aggregate approximate
principal amount and type of the Private Mortgage-Backed Securities to be
included in the Trust Fund, (ii) certain characteristics of the mortgage loans
which comprise the underlying assets for the Private Mortgage-Backed Securities
including (A) the payment features of such mortgage loans, (B) the approximate
aggregate principal balance, if known, of underlying mortgage loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range of servicing
fees with respect to the mortgage loans and (D) the minimum and maximum stated
maturities of the underlying mortgage loans at origination, (iii) the maximum
original term-to-stated maturity of the Private Mortgage-Backed Securities, (iv)
the weighted average term-to-stated maturity of the Private Mortgage-Backed
Securities, (v) the pass-through or certificate rate of the Private
Mortgage-Backed Securities, (vi) the weighted average pass-through or
certificate rate of the Private Mortgage-Backed Securities, (vii) the PMBS
Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS Trustee
for such Private Mortgage-Backed Securities, (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies, letters of
credit or guarantees relating to the mortgage loans underlying the Private
Mortgage-Backed Securities or to such Private Mortgage-Backed Securities
themselves, (ix) the term on which the underlying mortgage loans for such
Private Mortgage-Backed Securities may, or are required to, be purchased prior
to their stated maturity or the stated maturity of the Private Mortgage-Backed
Securities and (x) the terms on which mortgage loans may be substituted for
those originally underlying the Private Mortgage-Backed Securities.
FUNDING AGREEMENTS
If specified in the Prospectus Supplement for a series, the Depositor may
enter into a funding agreement with a limited-purpose subsidiary or affiliate of
a Mortgage Loan Seller (a "Finance Company") pursuant to which (i) the Depositor
will lend the net proceeds of the sale of the Securities to such Finance
Company, (ii) the Finance Company will pledge Trust Fund Assets owned by it to
secure the loan from the Depositor, and (iii) the Depositor will assign the
Funding Agreement, as so secured, to the Trust Fund for a series (a "Funding
Agreement"). No Finance Company will be authorized to engage in any business
activities other than the financing and sale of Trust Fund Assets.
Pursuant to a Funding Agreement (i) the Depositor will lend a Finance
Company the proceeds from the sale of a series of Securities and such Finance
Company will pledge to the Depositor as security therefor Trust Fund Assets
having an aggregate unpaid principal balance as of any date of determination
equal to at least the amount of the loan, and (ii) the Finance Company will
agree to repay such loan by causing payments on the Trust Fund Assets to be made
to the Trustee as assignee of the Depositor in such amounts as are necessary
(together with payments from the related Reserve Fund or other funds or
accounts) to pay accrued interest on such loan and to amortize the entire
principal amount of such loan. A Finance Company is not obligated to provide
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additional collateral to secure the loan pursuant to a Funding Agreement
subsequent to the issuance of the Securities of the series by the Trust Fund.
Unless the Depositor, the Master Servicer or other entity designated in the
Prospectus Supplement exercises its option to terminate the Trust Fund and
retire the Securities of a series, or a Finance Company defaults under its
Funding Agreement, such Finance Company's loan may not be prepaid other than as
a result of prepayments on the pledged Trust Fund Assets. If the Finance
Company, nevertheless, were to attempt to prepay its loan, the loan would not be
deemed prepaid in full unless the Finance Company paid the Depositor an amount
sufficient to enable the Depositor to purchase other Trust Fund Assets
comparable in yield and maturity to the Finance Company's Trust Fund Assets
pledged under the Funding Agreement. The Trustee then could either (i) purchase
such other Trust Fund Assets and substitute them for the Trust Fund Assets
pledged by the Finance Company, to the extent that such purchase and
substitution did not adversely affect the tax treatment of the related series,
or (ii) deposit the amount of the Finance Company's prepayment in the
Certificate Account.
In the event of a default under a Funding Agreement, the Trustee will have
recourse to the related Finance Company for the benefit of the holders of the
Securities, including the right to foreclose upon the Trust Fund Assets securing
that Funding Agreement. The participating Finance Companies will be
limited-purpose finance entities and, therefore, it is unlikely that a
defaulting Finance Company will have any significant assets except those pledged
to the Trust Fund for the series and those that secure other mortgage-backed
securities and collateralized mortgage obligations. The Trustee has no recourse
to assets pledged to secure other securities except to the limited extent that
funds generated by such assets exceed the amount required to pay those
securities and are released from the lien securing such other securities and
returned to a Finance Company. For that reason, prospective purchasers of
Securities should make their investment decisions on the basis that the
Securities of a series have rights solely with respect to the assets transferred
to the Trust Fund for that series of Securities.
In the event of a default under a Funding Agreement and the sale by the
Trustee of the Trust Fund Assets securing the obligations of the Finance Company
under the Funding Agreement, the Trustee may distribute principal in an amount
equal to the unpaid principal balance of the Trust Fund Assets so liquidated
ratably among all classes of Securities within the series, or in such other
manner as may be specified in the related Prospectus Supplement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Trust Fund Assets or will be used by
the Depositor for general corporate purposes. The Depositor expects that it will
make additional sales of securities similar to the Securities from time to time,
but the timing and amount of offerings of Securities will depend on a number of
factors, including the volume of Trust Fund Assets acquired by the Depositor,
prevailing interest rates, availability of funds and general market conditions.
YIELD CONSIDERATIONS
Unless otherwise provided in the related Prospectus Supplement, each
monthly interest payment on a Trust Fund Asset is calculated as one-twelfth of
the applicable Interest Rate multiplied by the unpaid principal balance thereof.
Interest to be distributed on each Distribution Date to the holders of the
various classes of Securities (other than certain classes of Strip Securities)
of each series will be similarly calculated for the applicable period, as
one-twelfth of the applicable Security Interest Rate multiplied by the
outstanding Principal Balance thereof, except as provided below with respect to
prepayments. In the case of Strip Securities with no or, in certain
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cases, a nominal Principal Balance, such distributions of interest will be in an
amount (as to any Distribution Date, "Stripped Interest") described in the
related Prospectus Supplement.
The effective yield to Securityholders will be lower than the yield
otherwise produced by the applicable Security Interest Rate (or, as to a Strip
Security, the distributions of Stripped Interest thereon) and purchase price,
because although interest accrued on each Trust Fund Asset during each month is
due and payable on the first day of the following month (unless otherwise
provided in the related Prospectus Supplement), the distribution of interest on
the Securities will not be made until the Distribution Date occurring in the
month following the month of accrual of interest in the case of Mortgage Loans,
and in later months in the case of Agency Securities, Private Mortgage- Backed
Securities or Funding Agreements and in the case of a series of Securities
having Distribution Dates occurring at intervals less frequently than monthly.
Unless otherwise specified in the related Prospectus Supplement, when a
principal prepayment in full is made on a Mortgage Loan or a mortgage loan
underlying a Private Mortgage-Backed Security, the borrower is charged interest
only for the period from the due date of the preceding monthly payment up to the
date of such prepayment, instead of for a full month. Accordingly, the effect of
principal prepayments in full during any month will be to reduce the aggregate
amount of interest collected that is available for distribution to
Securityholders. If so provided in the related Prospectus Supplement, certain of
the Mortgage Loans or the mortgage loans underlying a Private Mortgage-Backed
Security may contain provisions limiting prepayments hereof or requiring the
payment of a prepayment penalty upon prepayment in full or in part. Unless
otherwise provided in the related Prospectus Supplement, any such penalty will
be applied to offset the above-described shortfalls in interest collections on
the related Distribution Date. Unless otherwise specified in the related
Prospectus Supplement, partial principal prepayments are applied on the first
day of the month following receipt, with no resulting reduction in interest
payable for the period in which the partial principal prepayment is made. Unless
specified otherwise in the related Prospectus Supplement, neither the Trustee,
the Master Servicer nor the Depositor will be obligated to fund shortfalls in
interest collections resulting from prepayments. Holders of Agency Securities
are entitled to a full month's interest in connection with prepayments in full
of the underlying mortgage loans. Full and partial principal prepayments
collected during the applicable Prepayment Period will be available for
distribution to Securityholders on the related Distribution Date. Unless
otherwise provided in the related Prospectus Supplement, a "Prepayment Period"
in respect of any Distribution Date will commence on the first day of the month
in which the preceding Distribution Date occurs (or, as to the first Prepayment
Period, the day after the Cut-off Date) and will end on the last day of the
month prior to the month in which the related Distribution Date occurs. See
"Maturity and Prepayment Considerations" and "Description of the
Securities--General".
In addition, if so specified in the related Prospectus Supplement, a
holder of a non-offered class of Securities (the "Call Class") will have the
right, solely at its discretion, to terminate the related Trust Fund on any
Distribution Date after the 12th Distribution Date following the date of initial
issuance of the related series of Securities and until such date as the Clean-up
Call becomes exercisable and thereby effect early retirement of the Securities
of such series. Any such call will be of the entire Trust Fund at one time;
multiple calls with respect to any series of Securities will not be permitted.
Such termination would result in the concurrent retirement of all outstanding
Securities of the related series and would decrease the average lives of such
Securities, perhaps significantly. The earlier after the Closing Date that such
termination occurs, the greater would be such effect.
The Prospectus Supplement for each series of Securities may set forth
additional information regarding yield considerations.
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MATURITY AND PREPAYMENT CONSIDERATIONS
The original terms to maturity of the Trust Fund Assets in a particular
Trust Fund will vary depending upon the type of mortgage loans underlying or
comprising the Trust Fund Assets in such Trust Fund. Each Prospectus Supplement
will contain information with respect to the type and maturities of the Trust
Fund Assets in the related Trust Fund. Unless otherwise specified in the related
Prospectus Supplement, all of the Single-Family Loans, Cooperative Loans and
Contracts and all of the mortgage loans underlying the Agency Securities,
Private Mortgage-Backed Securities and Funding Agreements may be prepaid without
penalty in full or in part at any time. If so provided in the related Prospectus
Supplement, certain of the Mortgage Loans may contain provisions prohibiting
prepayment for a specified period after the origination date (a "Lockout
Period"), prohibiting partial prepayments entirely or prohibiting prepayment in
full or in part without a prepayment penalty.
The prepayment experience on the mortgage loans underlying or comprising
the Trust Fund Assets in a Trust Fund will affect the weighted average life of
the related series of Securities. Weighted average life refers to the average
amount of time that will elapse from the date of issuance of a security until
each dollar of principal of such security will be repaid to the investor. The
weighted average life of the Securities of a series will be influenced by the
rate at which principal on the mortgage loans underlying or comprising the Trust
Fund Assets included in the related Trust Fund is paid, which payments may be in
the form of scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes prepayments, in whole or in part, and liquidations due to
default and hazard or condemnation losses). The rate of prepayment with respect
to fixed rate mortgage loans has fluctuated significantly in recent years. In
general, if interest rates fall below the Interest Rates on the mortgage loans
underlying or comprising the Trust Fund Assets, the rate of prepayment would be
expected to increase. There can be no assurance as to the rate of prepayment of
the mortgage loans underlying or comprising the Trust Fund Assets in any Trust
Fund. The Depositor is not aware of any publicly available statistics relating
to the principal prepayment experience of diverse portfolios of mortgage loans
over an extended period of time. All statistics known to the Depositor that have
been compiled with respect to prepayment experience on mortgage loans indicates
that while some mortgage loans may remain outstanding until their stated
maturities, a substantial number will be paid prior to their respective stated
maturities.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates, the terms
of the mortgage loans (as affected by the existence of lockout provisions,
due-on-sale and due-on-encumbrance clauses and prepayment fees), the quality of
management of the mortgaged properties, possible changes in tax laws and the
availability of mortgage funds, may affect prepayment experience. Unless
otherwise provided in the related Prospectus Supplement, all Mortgage Loans,
mortgage loans underlying Private Mortgage-Backed Securities or mortgage loans
secured by Funding Agreements will contain due-on-sale provisions permitting the
lender to accelerate the maturity of such mortgage loan upon sale or certain
transfers by the borrower of the underlying Mortgaged Property. The Multifamily
Loans may contain due-on-encumbrance provisions (permitting the lender to
accelerate the maturity of the Multifamily Loan upon further encumbrance by the
borrower of the underlying Multifamily Property). Conventional mortgage loans
that underlie FHLMC Certificates and FNMA Certificates may contain, and in
certain instances must contain, such due-on-sale provisions. FHA Loans, VA Loans
and other mortgage loans underlying GNMA Certificates contain no such clause and
may be assumed by the purchaser of the mortgaged property. Thus, the rate of
prepayments on FHA Loans, VA Loans and other mortgage loans underlying GNMA
Certificates may be lower than that of conventional Mortgage Loans bearing
comparable interest rates.
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With respect to a series of Securities evidencing interests in the Trust
Fund including Mortgage Loans, unless otherwise provided in the related
Prospectus Supplement, the Master Servicer generally will enforce any
due-on-sale clause or due-on-encumbrance clause, to the extent it has knowledge
of the conveyance or encumbrance or the proposed conveyance or encumbrance of
the underlying Mortgaged Property and reasonably believes that it is entitled to
do so under applicable law; provided, however, that the Master Servicer will not
take any enforcement action that would impair or threaten to impair any recovery
under any related insurance policy. See "Description of the
Securities--Collection and Other Servicing Procedures" and "Certain Legal
Aspects of Mortgage Loans--Enforceability of Certain Provisions" and
"--Prepayment Charges and Prepayments" for a description of certain provisions
of each Agreement and certain legal developments that may affect the prepayment
experience on the Mortgage Loans. See "Description of the
Securities--Termination" for a description of the possible early termination of
any series of Securities. See also "Mortgage Loan Program--Representations by or
on behalf of Mortgage Loan Sellers; Repurchases" and "Description of the
Securities--Assignment of Trust Fund Assets" for a description of the obligation
of the Mortgage Loan Sellers, the Master Servicer and the Depositor to
repurchase Mortgage Loans under certain circumstances. In addition, if the
applicable Agreement for a series of Securities provides for a Pre-Funding
Account or other means of funding the transfer of additional Mortgage Loans to
the related Trust Fund, as described under "Description of the
Securities--Pre-Funding Account" herein, and the Trust Fund is unable to acquire
such additional Mortgage Loans within any applicable time limit, the amounts set
aside for such purpose may be applied as principal payments on one or more
classes of Securities of such series.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on January 27, 1987
as an indirect wholly-owned subsidiary of Salomon Smith Barney Holdings Inc. The
Depositor was organized for the purpose of serving as a private secondary
mortgage market conduit. The Depositor maintains its principal office at Seven
World Trade Center, New York, New York 10048. Its telephone number is (212)
783-7228.
The Depositor does not have, nor is it expected in the future to have, any
significant assets.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will be purchased by the Depositor, either directly or
indirectly, from the Mortgage Loan Sellers. The Mortgage Loans so acquired by
the Depositor will have been originated by the Originators in accordance with
the underwriting criteria specified below under "Underwriting Standards".
UNDERWRITING STANDARDS
All Mortgage Loans will have been subject to underwriting standards
acceptable to the Depositor and applied as described below. Each Mortgage Loan
Seller, or another party on its behalf, will represent and warrant that Mortgage
Loans purchased by or on behalf of the Depositor from it have been originated by
the related Originators in accordance with such underwriting standards.
Unless otherwise specified in the related Prospectus Supplement, the
underwriting standards are applied by the Originators to evaluate the borrower's
credit standing and repayment ability, and the value and adequacy of the
Mortgaged Property as collateral. Initially, a prospective borrower is required
to fill out a detailed application regarding pertinent credit information. As
part of the
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description of the borrower's financial condition, the borrower is
required to provide a current balance sheet describing assets and liabilities
and a statement of income and expenses, as well as an authorization to apply for
a credit report that summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In addition, an employment
verification is obtained that reports the borrower's current salary and may
contain information regarding length of employment and whether it is expected
that the borrower will continue such employment in the future. If a prospective
borrower is self-employed, the borrower is required to submit copies of signed
tax returns. The borrower may also be required to authorize verification of
deposits at financial institutions where the borrower has demand or savings
accounts. In the case of a Multifamily Loan, the borrower is also required to
provide certain information regarding the related Multifamily Property,
including a current rent schedule, the type and length of leases and pro forma
operating income statements. In addition, the Depositor will consider the
location of the Multifamily Property, the availability of competitive lease
space and rental income of comparable properties in the relevant market area,
the overall economy and demographic features of the geographic area and the
mortgagor's prior experience in owning and operating properties similar to the
Multifamily Properties.
In determining the adequacy of the property as collateral, an appraisal is
made of each property considered for financing, except in the case of new
Manufactured Homes, as described under "The Trust Funds". Each appraiser is
selected in accordance with predetermined guidelines established for appraisers.
The appraiser is required to inspect the property and verify that it is in good
condition and that construction, if new, has been completed. With respect to
properties other than Multifamily Properties, the appraisal is based on the
market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the home. With respect to
Multifamily Properties, the appraisal must specify whether an income analysis, a
market analysis or a cost analysis was used. An appraisal employing the income
approach to value analyzes a property's cash flow, expenses, capitalization and
other operational information in determining the property's value. The market
approach to value analyzes the prices paid for the purchase of similar
properties in the property's area, with adjustments made for variations between
these other properties and the property being appraised. The cost approach
requires the appraiser to make an estimate of land value and then determine the
current cost of reproducing the building less any accrued depreciation. In any
case, the value of the property being financed, as indicated by the appraisal,
must be such that it currently supports, and is anticipated to support in the
future, the outstanding loan balance.
In the case of Single Family Loans and Contracts, once all applicable
employment, credit and property information is received, a determination is made
as to whether the prospective borrower has sufficient monthly income available
(i) to meet the borrower's monthly obligations on the proposed mortgage loan
(determined on the basis of the monthly payments due in the year of origination)
and other expenses related to the home (such as property taxes and hazard
insurance) and (ii) to meet monthly housing expenses and other financial
obligations and monthly living expenses. Unless otherwise provided in the
related Prospectus Supplement, the underwriting standards to be applied to the
Single Family Loans will be generally similar to the traditional underwriting
guidelines used by FNMA and FHLMC which are in effect at the time of origination
of each Single Family Loan, except that the ratios at origination of the amounts
described in (i) and (ii) above to the applicant's stable monthly gross income
may exceed in certain cases the then applicable FNMA and FHLMC guidelines, but
such ratios in general may not exceed 33% and 38%, respectively, of the
applicant's stable monthly gross income. Such underwriting standards may be
varied in appropriate cases.
High LTV Loans are underwritten with an emphasis on the creditworthiness of
the related mortgagor. Such Mortgage Loans are underwritten with a limited
expectation of recovering any amounts from the foreclosure of the related
Mortgaged Property.
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In the case of a Single Family Loan or Multifamily Loan secured by a
leasehold interest in a residential property, the title to which is held by a
third party lessor, the Mortgage Loan Seller, or another party on its behalf, is
required to warrant, among other things, that the remaining term of the lease
and any sublease be at least five years longer than the remaining term of the
Mortgage Loan.
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a residential property may not seek a deficiency
judgment against the mortgagor but rather must look solely to the property for
repayment in the event of foreclosure. The underwriting standards to be applied
to the Mortgage Loans in all states (including anti-deficiency states) require
that the value of the property being financed, as indicated by the appraisal,
currently supports and is anticipated to support in the future the outstanding
principal balance of the Mortgage Loan.
With respect to any FHA Loan the Mortgage Loan Seller is required to
represent that the FHA Loan complies with the applicable underwriting policies
of the FHA. See "Description of Primary Insurance Policies--FHA Insurance". With
respect to any VA Loan, the Mortgage Loan Seller is required to represent that
the VA Loan complies with the applicable underwriting policies of the VA. See
"Description of Primary Insurance Policies-VA Guarantee".
The recent foreclosure or repossession and delinquency experience with
respect to loans serviced by the Master Servicer or, if applicable, a
significant Sub-Servicer will be provided in the related Prospectus Supplement.
Certain of the types of loans that may be included in the Mortgage Pools
are recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such Mortgage Loans may
provide for escalating or variable payments by the borrower. These types of
Mortgage Loans are underwritten on the basis of a judgment that borrowers will
have the ability to make larger monthly payments in subsequent years. In some
instances, however, a borrower's income may not be sufficient to make loan
payments as such payments increase. Unless otherwise specified in the related
Prospectus Supplement, the Multifamily Loans will be nonrecourse loans, as to
which, in the event of mortgagor default, recourse may only be had against the
specific Multifamily Property pledged to secure that Multifamily Loan, and not
against the mortgagor's assets.
QUALIFICATIONS OF ORIGINATORS AND MORTGAGE LOAN SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Originator and Mortgage Loan Seller will be required to satisfy the
qualifications set forth herein. Each Originator must be an institution
experienced in originating and servicing conventional mortgage loans in
accordance with accepted practices and prudent guidelines, and must maintain
satisfactory facilities to originate and service those loans. Each Originator
and Mortgage Loan Seller must be a seller/servicer approved by either FNMA or
FHLMC. Each Originator and Mortgage Loan Seller must be a HUD-approved mortgagee
or an institution the deposit accounts in which are insured by the Bank
Insurance Fund ("BIF") or Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation (the "FDIC"). In addition, with respect to
FHA Loans or VA Loans, each Originator must be approved to originate such
Mortgage Loans by the FHA or VA, as applicable. In addition, each Originator and
Mortgage Loan Seller must satisfy certain criteria as to financial stability
evaluated on a case by case basis by the Depositor.
REPRESENTATIONS BY OR ON BEHALF OF MORTGAGE LOAN SELLERS; REPURCHASES
Each Mortgage Loan Seller, or a party on its behalf, will have made
representations and warranties in respect of the Mortgage Loans sold by such
Mortgage Loan Seller. Such representations and warranties include, among other
things: (i) that any required hazard insurance was effective at the origination
of each Mortgage Loan, and that each such policy remained in
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effect on the date of purchase of the Mortgage Loan from the Mortgage Loan
Seller by or on behalf of the Depositor; (ii) that, in the case of Single-Family
Loans and Multifamily Loans, either (A) title insurance insuring (subject only
to permissible title insurance exceptions) the lien status of the Mortgage was
effective at the origination of each Mortgage Loan and such policy remained in
effect on the date of purchase of the Mortgage Loan from the Mortgage Loan
Seller by or on behalf of the Depositor or (B) if the Mortgaged Property
securing any Mortgage Loan is located in an area where such policies are
generally not available, there is in the related mortgage file an attorney's
certificate of title indicating (subject to such permissible exceptions set
forth therein) the first lien status of the mortgage; (iii) that the Mortgage
Loan Seller had good title to each Mortgage Loan and each Mortgage Loan was
subject to no offsets, defenses, counterclaims or rights of rescission except to
the extent that any buydown agreement described herein may forgive certain
indebtedness of a borrower; (iv) that each Mortgage constituted a valid first
lien on, or security interest in, the Mortgaged Property (subject only to
permissible title insurance exceptions and Senior Liens, if any) and that the
Mortgaged Property was free from damage and was in good repair; (v) that there
were no delinquent tax or assessment liens against the Mortgaged Property; (vi)
that each Mortgage Loan was current as to all required payments; and (vii) that
each Mortgage Loan was made in compliance with, and is enforceable under, all
applicable local, state and federal laws and regulations in all material
respects. If a person other than a Mortgage Loan Seller makes any of the
foregoing representations and warranties on behalf of such Mortgage Loan Seller,
the identity of such person will be specified in the related Prospectus
Supplement. Any person making representations and warranties on behalf of a
Mortgage Loan Seller shall be an affiliate thereof or such other person
acceptable to the Depositor having knowledge regarding the subject matter of
such representations and warranties.
All of the representations and warranties made by or on behalf of a
Mortgage Loan Seller in respect of a Mortgage Loan will have been made as of the
date on which such Mortgage Loan Seller sold the Mortgage Loan to or on behalf
of the Depositor. A substantial period of time may have elapsed between such
date and the date of initial issuance of the series of Securities evidencing an
interest in such Mortgage Loan. Unless otherwise specified in the related
Prospectus Supplement, in the event of a breach of any such representation or
warranty, the Mortgage Loan Seller will be obligated to cure such breach or
repurchase or replace the affected Mortgage Loan as described below. Since the
representations and warranties made by or on behalf of such Mortgage Loan Seller
do not address events that may occur following the sale of a Mortgage Loan by
such Mortgage Loan Seller, it will have a cure, repurchase or substitution
obligation in connection with a breach of such a representation and warranty
only if the relevant event that causes such breach occurs prior to the date of
such sale. A Mortgage Loan Seller would have no such obligations if the relevant
event that causes such breach occurs after the date of such sale. However, the
Depositor will not include any Mortgage Loan in the Trust Fund for any series of
Securities if anything has come to the Depositor's attention that would cause it
to believe that the representations and warranties made in respect of such
Mortgage Loan will not be accurate and complete in all material respects as of
the date of initial issuance of the related series of Securities.
The only representations and warranties to be made for the benefit of
holders of Securities in respect of any Mortgage Loan relating to the period
commencing on the date of sale of such Mortgage Loan by the Mortgage Loan Seller
to or on behalf of the Depositor will be certain limited representations of the
Depositor and of the Master Servicer described below under "Description of the
Securities--Assignment of Trust Fund Assets". If the Master Servicer is also a
Mortgage Loan Seller with respect to a particular series, such representations
will be in addition to the representations and warranties made by the Master
Servicer in its capacity as a Mortgage Loan Seller.
The Master Servicer and/or Trustee will promptly notify the relevant
Mortgage Loan Seller of any breach of any representation or warranty made by or
on behalf of it in respect of a Mortgage Loan that materially and adversely
affects the value of such Mortgage Loan or the interests therein
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of the Securityholders. If such Mortgage Loan Seller cannot cure such breach
within 60 days from the date on which the Mortgage Loan Seller was notified of
such breach, then such Mortgage Loan Seller will be obligated to repurchase such
Mortgage Loan from the Trustee within 90 days from the date on which the
Mortgage Loan Seller was notified of such breach, at the Purchase Price
therefor. As to any Mortgage Loan, unless otherwise specified in the related
Prospectus Supplement, the "Purchase Price" is equal to the sum of (i) the
unpaid principal balance thereof, (ii) unpaid accrued interest on the Stated
Principal Balance (as defined below) at the Net Interest Rate from the date as
to which interest was last paid to the end of the calendar month in which the
relevant purchase is to occur, (iii) any unpaid servicing fees and certain
unreimbursed servicing expenses payable or reimbursable to the Master Servicer
with respect to such Mortgage Loan, (iv) any unpaid Retained Interest with
respect to such Mortgage Loan, (v) any Realized Losses, as described below under
"Description of the Securities--Allocation of Losses", incurred with respect to
such Mortgage Loan, and (vi) if applicable, any expenses reasonably incurred or
to be incurred by the Master Servicer or the Trustee in respect of the breach or
defect giving rise to a purchase obligation. Unless otherwise provided in the
related Prospectus Supplement, a Mortgage Loan Seller, rather than repurchase a
Mortgage Loan as to which a breach has occurred, will have the option, within a
specified period after initial issuance of the related series of Securities, to
cause the removal of such Mortgage Loan from the Trust Fund and substitute in
its place one or more other Mortgage Loans, in accordance with the standards
described below under "Description of the Securities--Assignment of the Mortgage
Loans". The Master Servicer will be required under the applicable Pooling and
Servicing Agreement or Servicing Agreement to use its best efforts to enforce
such obligations of the Mortgage Loan Seller for the benefit of the Trustee and
the holders of the Securities, following the practices it would employ in its
good faith business judgment were it the owner of such Mortgage Loan. This
repurchase or substitution obligation will constitute the sole remedy available
to holders of Securities or the Trustee for a breach of representation by a
Mortgage Loan Seller. See "Description of the Securities--General".
The "Stated Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts, including
advances by the Master Servicer, allocable to principal that are distributed to
Securityholders on or before the date of determination, and as further reduced
to the extent that any Realized Loss (as defined below) thereon has been (or, if
it had not been covered by any form of Credit Support, would have been)
allocated to one or more classes of Securities on or before the date of
determination.
Neither the Depositor nor the Master Servicer will be obligated to purchase
or substitute for a Mortgage Loan if a Mortgage Loan Seller defaults on its
obligation to do so, and no assurance can be given that Mortgage Loan Sellers
will carry out such obligations with respect to Mortgage Loans. To the extent
that a breach of the representations and warranties of a Mortgage Loan Seller
may also constitute a breach of a representation made by the Depositor, the
Depositor may have a repurchase or substitution obligation as described below
under "Description of the Securities--Assignment of Trust Fund Assets".
DESCRIPTION OF THE SECURITIES
The Securities will be issued in series. Each series of Certificates
evidencing interests in a Trust Fund consisting of Mortgage Loans will be issued
pursuant to a Pooling and Servicing Agreement among the Depositor, the Master
Servicer (if the Depositor is not acting as Master Servicer) and the Trustee
named in the Prospectus Supplement. Each series of Notes evidencing indebtedness
of a Trust Fund consisting of Mortgage Loans will be issued pursuant to an
Indenture
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between the related Issuer and the Trustee named in the Prospectus Supplement.
Such Trust Fund will be created pursuant to an Owner Trust Agreement between the
Depositor and the Owner Trustee. Each series of Securities evidencing interests
in a Trust Fund consisting exclusively of Agency Securities or Private
Mortgage-Backed Securities will be issued pursuant to a Trust Agreement between
the Depositor and the Trustee (each Trust Agreement, Owner Trust Agreement,
Indenture, Servicing Agreement or Pooling and Servicing Agreement, an
"Agreement"). The provisions of each Agreement will vary depending upon the
nature of the Securities to be issued thereunder and the nature of the related
Trust Fund. Various forms of Pooling and Servicing Agreement, Servicing
Agreement, Owner Trust Agreement, Trust Agreement and Indenture have been filed
as exhibits to the Registration Statement of which this Prospectus is a part.
The following summaries describe certain provisions which may appear in each
Agreement. The Prospectus Supplement for a series of Securities will describe
any provision of the Agreement relating to such series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the related Agreements for each Trust
Fund and the related Prospectus Supplement. As used herein with respect to any
series, the term "Certificate" or the term "Note" refers to all of the
Certificates or Notes of that series, whether or not offered hereby and by the
related Prospectus Supplement, unless the context otherwise requires.
GENERAL
The Certificates of each series (including any class of Certificates not
offered hereby) will be issued in fully registered form only and will represent
the entire beneficial ownership interest in the Trust Fund created pursuant to
the related Agreement. The Notes of each series (including any class of Notes
not offered hereby) will be issued in fully registered form only and will
represent indebtedness of the Trust Fund created pursuant to the related
Agreement. If so provided in the Prospectus Supplement, any class of Securities
of any series may be represented by a certificate or note (the "DTC Registered
Securities") registered in the name of a nominee of The Depository Trust Company
("DTC"). The interests of beneficial owners of such Securities will be
represented by such entries on the records of participating members of DTC.
Definitive certificates or notes will be available for such Securities only
under limited circumstances as provided in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, each Trust Fund
will consist of (i) such Trust Fund Assets, or interests therein, exclusive of
any portion of interest payments (the "Retained Interest") on a Trust Fund Asset
retained by the Depositor or any previous owner thereof, as from time to time
are subject to the related Agreement; (ii) such assets as from time to time are
identified as deposited in the Certificate Account or any other account
maintained for the benefit of the Securityholders; (iii) with respect to Trust
Funds that include Mortgage Loans, (a) property acquired on behalf of
Securityholders by foreclosure, deed in lieu of foreclosure or repossession and
any revenues received thereon; (b) the rights of the Depositor under any hazard
insurance policies, FHA insurance policies, VA guarantees and primary mortgage
insurance policies, as described under "Description of Primary Insurance
Policies"; (c) the rights of the Depositor under the agreement or agreements
pursuant to which it acquired the Mortgage Loans in such Trust Fund; and (d) the
rights of the Trustee in any cash advance reserve fund or surety bond as
described under "Advances in respect of Delinquencies" and (iv) any letter of
credit, mortgage pool insurance policy, special hazard insurance policy,
bankruptcy bond, reserve fund or other type of credit support provided with
respect to the related series, as described under "Description of Credit
Support". Subject to any limitations described in the related Prospectus
Supplement, the Securities will be transferable and exchangeable for like
Securities of the same class and series in authorized denominations at the
corporate trust office of the Trustee specified in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities, but the Depositor or the Trustee or any agent thereof
may require payment of a sum sufficient to cover any tax or other governmental
charge.
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Each series of Securities may consist of either (i) a single class of
Securities evidencing the entire beneficial ownership of or indebtedness of the
related Trust Fund; (ii) two or more classes of Securities evidencing the entire
beneficial ownership of or indebtedness of the related Trust Fund, one or more
classes of which ("Senior Securities") will be senior in right of payment to one
or more of the other classes ("Subordinate Securities") to the extent described
in the related Prospectus Supplement (any such series, a "Senior/Subordinate
Series"); or (iii) other types of classes of Securities, as described in the
related Prospectus Supplement. A series may include one or more classes of
Securities entitled to (i) principal distributions, with disproportionate,
nominal or no interest distributions or (ii) interest distributions, with
disproportionate, nominal or no principal distributions ("Strip Securities").
With respect to any series of Notes, the Equity Certificates, insofar as they
represent the beneficial ownership interest in the Issuer, will be subordinate
to the related Notes. If so specified in the related Prospectus Supplement,
partial or full protection against certain Mortgage Loan defaults and losses may
be provided to a series of Securities or to one or more classes of Securities in
such series in the form of subordination of one or more other classes of
Securities in such series or by one or more other types of credit support, such
as a letter of credit, reserve fund, insurance policy or a combination thereof
(any such coverage, "Credit Support"). See "Description of Credit Support".
Each class of Securities (other than certain Strip Securities) will have a
Principal Balance and, unless otherwise provided in the related Prospectus
Supplement, will be entitled to payments of interest thereon based on a
specified Security Interest Rate. See "Interest on the Securities" and
"Principal of the Securities" below. The specific percentage ownership interest
of each class of Securities and the minimum denomination for each Security will
be set forth in the related Prospectus Supplement.
As to each series of Certificates, one or more elections may be made to
treat the related Trust Fund or designated portions thereof as a "real estate
mortgage investment conduit" or "REMIC" as defined in the Internal Revenue Code
of 1986 (the "Code"). The related Prospectus Supplement will specify whether a
REMIC election is to be made and the terms and conditions applicable to the
making of a REMIC election, as well as any material federal income tax
consequences to Securityholders not otherwise described herein. If such an
election is made with respect to a series of Certificates, one of the classes of
Certificates comprising such series will be designated as evidencing all
"residual interests" in the related REMIC as defined under the Code. All other
classes of Certificates in such a series will constitute "regular interests" in
the related REMIC as defined in the Code. As to each series of Certificates with
respect to which a REMIC election is to be made, the Master Servicer or the
Trustee will be obligated to take all actions required in order to comply with
applicable laws and regulations and, unless otherwise provided in the related
Prospectus Supplement, will be obligated to pay any Prohibited Transaction Taxes
or Contribution Taxes arising out of a breach of its obligations with respect to
such compliance without any right of reimbursement therefor from the Trust Fund
or from any Securityholder. Unless otherwise provided in the related Prospectus
Supplement, a Prohibited Transaction Tax or Contribution Tax resulting from any
other cause will be charged against the related Trust Fund, resulting in a
reduction in amounts otherwise distributable to Securityholders. See "Federal
Income Tax Consequences--REMICs--Prohibited Transactions Tax and Other Taxes".
As to each series, the Securities of each class offered hereby will be
rated in one of the four highest rating categories by one or more nationally
recognized statistical rating organizations (each, a "Rating Agency").
ASSIGNMENT OF TRUST FUND ASSETS
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of any series of Securities, the Depositor will
cause the Mortgage Loans comprising the Mortgage Pool included in the related
Trust Fund to be assigned to the Trustee,
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together with all principal and interest received by or on behalf of the
Depositor on or with respect to such Mortgage Loans after the Cut-off Date,
other than principal and interest due on or before the Cut-off Date and other
than any Retained Interest. The Trustee will, concurrently with such assignment,
deliver the Securities to the Depositor in exchange for the Trust Fund. Each
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
related Pooling and Servicing Agreement or Servicing Agreement. Such schedule
will include information as to the outstanding principal balance of each
Mortgage Loan after application of payments due on the Cut-off Date, as well as
information regarding the Interest Rate, the Net Interest Rate, the Retained
Interest, if any, the current scheduled monthly payment of principal and
interest, the maturity of the Mortgage Note, the Value of the Mortgaged
Property, the Loan-to-Value Ratio at origination and certain other information
with respect to the Mortgage Loans. As to any Mortgage Loan, the "Net Interest
Rate" is equal to the Interest Rate minus the sum of the rates at which the
servicing fees and the Retained Interest, if any, are calculated.
In addition, the Depositor will, with respect to each Mortgage Loan,
deliver or cause to be delivered to the Trustee (or to the custodian hereinafter
referred to):
(1) With respect to each Single-Family Loan and Multifamily Loan, the
Mortgage Note endorsed, without recourse, to the order of the Trustee, the
Mortgage with evidence of recording indicated thereon (except for any
Mortgage not returned from the public recording office, in which case the
Depositor will deliver or cause to be delivered a copy of such Mortgage
together with its certificate that the original of such Mortgage was
delivered to such recording office) and an assignment of the Mortgage to
the Trustee in recordable form. Unless otherwise provided in the related
Prospectus Supplement, the Depositor will promptly cause the assignment of
each related Mortgage Loan to be recorded in the appropriate public office
for real property records, except in the State of California or in other
states where, in the opinion of counsel acceptable to the Trustee, such
recording is not required to protect the Trustee's interest in the Mortgage
Loan against the claim of any subsequent transferee or any successor to or
creditor of the Depositor, the Master Servicer, the relevant Mortgage Loan
Seller or any other prior holder of the Mortgage Loan.
(2) With respect to each Cooperative Loan, the Cooperative Note, the
original security agreement, the proprietary lease or occupancy agreement,
the related stock certificate and related stock powers endorsed in blank,
and a copy of the original filed financing statement together with an
assignment thereof to the Trustee in a form sufficient for filing. Unless
otherwise provided in the related Prospectus Supplement, the Depositor will
promptly cause the assignment and financing statement of each related
Cooperative Loan to be filed in the appropriate public office, except in
states where in the opinion of counsel acceptable to the Trustee, such
filing is not required to protect the Trustee's interest in the Cooperative
Loan against the claim of any subsequent transferee or any successor to or
creditor of the Depositor, the Master Servicer, the relevant Mortgage Loan
Seller or any prior holder of the Cooperative Loan.
(3) With respect to each Contract, the original Contract endorsed,
without recourse, to the order of the Trustee and copies of documents and
instruments related to the Contract and the security interest in the
Manufactured Home securing the Contract, together with a blanket assignment
to the Trustee of all Contracts in the related Trust Fund and such
documents and instruments. In order to give notice of the right, title and
interest of the Securityholders to the Contracts, the Depositor will cause
to be executed and delivered to the Trustee a UCC-1 financing statement
identifying the Trustee as the secured party and identifying all Contracts
as collateral.
The Trustee (or the custodian hereinafter referred to) will review such
Mortgage Loan documents within 45 days after receipt thereof, and the Trustee
(or such custodian) will hold such documents in trust for the benefit of the
Securityholders. Unless otherwise specified in the related
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Prospectus Supplement, if any such document is found to be missing or defective
in any material respect, the Trustee (or such custodian) shall immediately
notify the Master Servicer and the Depositor, and the Master Servicer shall
immediately notify the relevant Mortgage Loan Seller. If the Mortgage Loan
Seller cannot cure the omission or defect within 60 days after receipt of such
notice, the Mortgage Loan Seller will be obligated, within 90 days of receipt of
such notice, to repurchase the related Mortgage Loan from the Trustee at the
Purchase Price or substitute for such Mortgage Loan. There can be no assurance
that a Mortgage Loan Seller will fulfill this repurchase or substitution
obligation. Although the Master Servicer is obligated to use its best efforts to
enforce such obligation to the extent described above under "Mortgage Loan
Program-Representations by or on behalf of Mortgage Loan Sellers; Repurchases",
neither the Master Servicer nor the Depositor will be obligated to repurchase or
substitute for such Mortgage Loan if the Mortgage Loan Seller defaults on its
obligation. Unless otherwise specified in the related Prospectus Supplement,
this repurchase or substitution obligation constitutes the sole remedy available
to the Securityholders or the Trustee for omission of, or a material defect in,
a constituent document.
With respect to the Mortgage Loans in a Mortgage Pool, the Depositor will
make representations and warranties as to the types and geographical
concentration of such Mortgage Loans and as to the accuracy in all material
respects of certain identifying information furnished to the Trustee in respect
of each such Mortgage Loan (e.g., original Loan-to-Value Ratio, principal
balance as of the Cut-off Date, Interest Rate, Net Interest Rate and maturity).
In addition, unless otherwise specified in the related Prospectus Supplement,
the Depositor will represent and warrant that, as of the Cut-off Date for the
related series of Securities, no Mortgage Loan was currently more than 30 days
delinquent as to payment of principal and interest and no Mortgage Loan was more
than 30 days delinquent more than once during the previous 12 months. Upon a
breach of any such representation of the Depositor that materially and adversely
affects the value of a Mortgage Loan or the interests of the Securityholders
therein, the Depositor will be obligated either to cure the breach in all
material respects, repurchase the Mortgage Loan at the Purchase Price or
substitute for such Mortgage Loan as described below.
Unless otherwise provided in the related Prospectus Supplement, if the
Depositor discovers or receives notice of any breach of its representations or
warranties with respect to a Mortgage Loan, the Depositor may, rather than
repurchase the Mortgage Loan as provided above, remove such Mortgage Loan from
the Trust Fund (a "Deleted Mortgage Loan") and substitute in its place one or
more Mortgage Loans (each, a "Substitute Mortgage Loan"), but only if (i) with
respect to a Trust Fund for which a REMIC election is to be made, such
substitution is effected within two years of the date of initial issuance of the
Certificates (plus permissible extensions) or (ii) with respect to a Trust Fund
for which no REMIC election is to be made, such substitution is effected within
120 days of the date of initial issuance of the Securities. Except as otherwise
provided in the related Prospectus Supplement, any Substitute Mortgage Loan
will, on the date of substitution, (i) have an outstanding principal balance,
after deduction of all scheduled payments due in the month of substitution, not
in excess of (and not more than $10,000 less than) the outstanding principal
balance, after deduction of all unpaid scheduled payments due as of the date of
substitution, of the Deleted Mortgage Loan, (ii) have an Interest Rate not less
than (and not more than 1% greater than) the Interest Rate of the Deleted
Mortgage Loan, (iii) have a Net Interest Rate equal to the Net Interest Rate of
the Deleted Mortgage Loan, (iv) have a remaining term to maturity not greater
than (and not more than one year less than) that of the Deleted Mortgage Loan
(v) have a Lockout Date, if applicable, not earlier than the Lockout Date on the
Deleted Mortgage Loan and (vi) comply with all of the representations and
warranties set forth in the Agreement as of the date of substitution. In
connection with any substitution, an amount equal to the difference between the
Purchase Price of the Deleted Mortgage Loan and the outstanding principal
balance of the Substitute Mortgage Loan (after deduction of all scheduled
payments due in the month of substitution), together with one month's interest
at the applicable Net Mortgage Rate on such balance, will be deposited in the
Certificate Account and distributed to Securityholders on the first Distribution
Date following the
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Prepayment Period in which the substitution occurred. In the event that one
mortgage loan is substituted for more than one Deleted Mortgage Loan, or more
than one mortgage loan is substituted for one or more Deleted Mortgage Loans,
then the amount described in clause (i) will be determined on the basis of
aggregate principal balances, the rates described in clauses (ii) and (iii) with
respect to Deleted Mortgage Loans will be determined on the basis of weighted
average Interest Rates and Net Interest Rates, as the case may be, and the terms
described in clause (iv) will be determined on the basis of weighted average
remaining terms to maturity and the Lockout Dates described in clause (v) will
be determined on the basis of weighted average Lockout Dates.
With respect to any series as to which credit support is provided by means
of a mortgage pool insurance policy, in addition to making the representations
and warranties described above, the Depositor or the related Mortgage Loan
Seller (or another party on behalf of the related Mortgage Loan Seller), as
specified in the related Prospectus Supplement, will represent and warrant to
the Trustee that no action has been taken or failed to be taken, no event has
occurred and no state of facts exists or has existed on or prior to the date of
the initial issuance of the Securities which has resulted or will result in the
exclusion from, denial of or defense to coverage under any applicable primary
mortgage insurance policy, FHA insurance policy, mortgage pool insurance policy,
special hazard insurance policy or bankruptcy bond, irrespective of the cause of
such failure of coverage but excluding any failure of an insurer to pay by
reason of the insurer's own breach of its insurance policy or its financial
inability to pay (such representation being referred to herein as the
"insurability representation"). See "Description of Primary Insurance Policies"
and "Description of Credit Support" herein and in the related Prospectus
Supplement for information regarding the extent of coverage under the
aforementioned insurance policies. Upon a breach of the insurability
representation which materially and adversely affects the interests of the
Securityholders in a Mortgage Loan, the Depositor or the Mortgage Loan Seller,
as the case may be, will be obligated either to cure the breach in all material
respects or to purchase such Mortgage Loan at the Purchase Price, subject to the
limitations specified in the related Prospectus Supplement. The related
Prospectus Supplement may provide that the performance of an obligation to
repurchase Mortgage Loans following a breach of an insurability representation
will be ensured in the manner specified therein.
The obligation to repurchase or, other than with respect to the
insurability representation if applicable, to substitute Mortgage Loans as
described above constitutes the sole remedy available to the Securityholders or
the Trustee for any breach of the above described representations.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Pooling and Servicing Agreement or Servicing Agreement.
Upon a breach of any such representation of the Master Servicer which materially
and adversely affects the interests of the Securityholders, the Master Servicer
will be obligated to cure the breach in all material respects.
ASSIGNMENT OF AGENCY SECURITIES
The Depositor will cause the Agency Securities to be registered in the name
of the Trustee or its nominee, and the Trustee concurrently will execute,
countersign and deliver the Securities. Each Agency Security will be identified
in a schedule appearing as an exhibit to the related Agreement, which will
specify as to each Agency Security the original principal amount and outstanding
principal balance as of the Cut-off Date, the annual pass-through rate (if any)
and the maturity date.
ASSIGNMENT OF PRIVATE MORTGAGE-BACKED SECURITIES
The Depositor will cause Private Mortgage-Backed Securities to be
registered in the name of the Trustee. The Trustee (or the custodian) will have
possession of any certificated Private Mortgage-Backed Securities. Unless
otherwise specified in the related Prospectus Supplement,
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the Trustee will not be in possession of or be assignee of record of any
underlying assets for a Private Mortgage-Backed Security. See "The Trust
Funds--Private Mortgage-Backed Securities" herein. Each Private Mortgage-Backed
Security will be identified in a schedule appearing as an exhibit to the related
Agreement which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date for each Private Mortgage-Backed Security conveyed to the
Trustee.
ASSIGNMENT OF FUNDING AGREEMENTS
The Depositor will cause Funding Agreements to be registered in the name of
the Trustee. The Trustee (or the custodian) will have possession of any Funding
Agreement. Unless otherwise specified in the related Prospectus Supplement, the
Trustee will be in possession of or be assignee of record of any underlying
assets for Funding Agreements. See "The Trust Funds--Funding Agreements" herein.
Each Funding Agreement will be identified in a schedule appearing as an exhibit
to the related Agreement which will specify the original principal amount,
outstanding principal balance as of the Cut-off Date, annual pass-through rate
or interest rate and maturity date for each underlying asset secured by the
Funding Agreements.
DEPOSITS TO CERTIFICATE ACCOUNT
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Trust Fund
Assets (collectively, the "Certificate Account"), which must be either (i)
maintained with a bank or trust company, and in a manner, satisfactory to the
Rating Agency or Agencies rating any class of Securities of such series or (ii)
an account or accounts the deposits in which are insured by the BIF or the SAIF
(to the limits established by the FDIC) and the uninsured deposits in which are
otherwise secured such that the Securityholders have a claim with respect to the
funds in the Certificate Account or a perfected first priority security interest
against any collateral securing such funds that is superior to the claims of any
other depositors or general creditors of the institution with which the
Certificate Account is maintained. The collateral eligible to secure amounts in
the Certificate Account is limited to United States government securities and
other high-quality investments specified in the related Pooling and Servicing
Agreement or the related Servicing Agreement and Indenture ("Permitted
Investments"). A Certificate Account may be maintained as an interest bearing or
a non-interest bearing account, or the funds held therein may be invested
pending each succeeding Distribution Date in Permitted Investments. Unless
otherwise provided in the related Prospectus Supplement, any interest or other
income earned on funds in the Certificate Account will be paid to the Master
Servicer or the Trustee or their designee as additional compensation. The
Certificate Account may be maintained with an institution that is an affiliate
of the Master Servicer or the Trustee, provided that such institution meets the
standards set forth above. If permitted by the Rating Agency or Agencies and so
specified in the related Prospectus Supplement, a Certificate Account may
contain funds relating to more than one series of pass-through certificates and
may, if applicable, contain other funds respecting payments on mortgage loans
belonging to the Master Servicer or serviced or master serviced by it on behalf
of others.
Each Sub-Servicer servicing a Mortgage Loan pursuant to a Sub-Servicing
Agreement will establish and maintain one or more separate accounts which may be
interest bearing and which will comply with the standards with respect to
Certificate Accounts set forth above or such other standards as may be
acceptable to the Master Servicer (collectively, the "Sub-Servicing Account").
The Sub-Servicer is required to credit to the related Sub-Servicing Account on a
daily basis the amount of all proceeds of Mortgage Loans received by the
Sub-Servicer, less its servicing compensation. The Sub-Servicer shall remit to
the Master Servicer by wire transfer of immediately
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available funds all funds held in the Sub-Servicing Account with respect to each
Mortgage Loan on the monthly remittance date or dates specified in the related
Agreement.
PAYMENTS ON MORTGAGE LOANS
The Master Servicer will deposit or cause to be deposited in the
Certificate Account for each Trust Fund including Mortgage Loans on a daily
basis, unless otherwise provided in the related Pooling and Servicing Agreement
or the related Servicing Agreement and Indenture and described in the related
Prospectus Supplement, the following payments and collections received, or
advances made, by the Master Servicer or on its behalf subsequent to the Cut-off
Date (other than payments due on or before the Cut-off Date, and exclusive of
any amounts representing a Retained Interest):
(i) all payments on account of principal, including principal
prepayments, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, net
of any portion thereof retained by the Master Servicer or by a Sub-Servicer
as its servicing compensation and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies and any special
hazard insurance policy (to the extent such proceeds are not applied to the
restoration of the property or released to the mortgagor in accordance with
the normal servicing procedures of the Master Servicer or the related
Sub-Servicer, subject to the terms and conditions of the related Mortgage
and Mortgage Note), any primary mortgage insurance policy, any FHA
insurance policy, any VA guarantee, any bankruptcy bond and any mortgage
pool insurance policy (collectively, "Insurance Proceeds") and all other
amounts received and retained in connection with the liquidation of
defaulted Mortgage Loans, by foreclosure or otherwise ("Liquidation
Proceeds"), together with the net proceeds on a monthly basis with respect
to any Mortgaged Properties acquired for the benefit of Securityholders by
foreclosure or by deed in lieu of foreclosure or otherwise;
(iv) any amounts required to be paid under any letter of credit, as
described below under "Description of Credit Support--Letter of Credit";
(v) any advances made as described below under "Advances in respect
of Delinquencies";
(vi) if applicable, all amounts required to be transferred to the
Certificate Account from a reserve fund, as described below under
"Description of Credit Support--Reserve Funds";
(vii) any Buydown Funds (and, if applicable, investment earnings
thereon) required to be deposited in the Certificate Account as described
below;
(viii) all proceeds of any Mortgage Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any Sub-Servicer or any
Mortgage Loan Seller as described under "Mortgage Loan
Program-Representations by or on behalf of Mortgage Loan Sellers;
Repurchases" or "--Assignment of Trust Fund Assets" above, exclusive of the
Retained Interest, if any, in respect of such Mortgage Loan, and all
proceeds of any Mortgage Loan repurchased as described under "Termination"
below;
(ix) all payments required to be deposited in the Certificate Account
with respect to any deductible clause in any blanket insurance policy
described under "Description of Primary Insurance Policies--Primary Hazard
Insurance Policies"; and
(x) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Certificate Account.
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With respect to each Buydown Mortgage Loan, the Master Servicer, or a
Sub-Servicer, will deposit related Buydown Funds in a custodial account, which
may be interest bearing, and that otherwise meets the standards for Certificate
Accounts set forth above (a "Buydown Account"). Unless otherwise specified in
the related Prospectus Supplement, the terms of all Buydown Mortgage Loans
provide for the contribution of Buydown Funds in an amount not less than either
(i) the total payments to be made from such funds pursuant to the related
buydown plan or (ii) if such Buydown Funds are present valued, that amount that,
together with investment earnings thereon at a specified rate, compounded
monthly, will support the scheduled level of payments due under the Buydown
Mortgage Loan. Neither the Master Servicer, the Sub-Servicer nor the Depositor
will be obligated to add to such Buydown Funds any of its own funds should
investment earnings prove insufficient to maintain the scheduled level of
payments. To the extent that any such insufficiency is not recoverable from the
borrower, distributions to Securityholders will be affected. With respect to
each Buydown Mortgage Loan, the Master Servicer will deposit in the Certificate
Account the amount, if any, of the Buydown Funds (and, if applicable, investment
earnings thereon) for each Buydown Mortgage Loan that, when added to the amount
due from the borrower on such Buydown Mortgage Loan, equals the full monthly
payment which would be due on the Buydown Mortgage Loan if it were not subject
to the buydown plan.
Unless otherwise specified in the related Prospectus Supplement, in the
event a Buydown Mortgage Loan is prepaid in full or liquidated, the related
Buydown Funds will be applied as follows. If the mortgagor on a Buydown Mortgage
Loan prepays such loan in its entirety during the Buydown Period, the Master
Servicer will withdraw from the Buydown Account and remit to the mortgagor in
accordance with the related buydown plan any Buydown Funds remaining in the
Buydown Account. If a prepayment by a mortgagor during the Buydown Period
together with Buydown Funds will result in a prepayment in full, the Master
Servicer will withdraw from the Buydown Account for deposit in the Certificate
Account the Buydown Funds and investment earnings thereon, if any, which
together with such prepayment will result in a prepayment in full. If the
mortgagor defaults during the Buydown Period with respect to a Buydown Mortgage
Loan and the Mortgaged Property is sold in liquidation (either by the Master
Servicer or the insurer under any related insurance policy), the Master Servicer
will withdraw from the Buydown Account the Buydown Funds and all investment
earnings thereon, if any, for deposit in the Certificate Account or remit the
same to the insurer if the Mortgaged Property is transferred to such insurer and
such insurer pays all of the loss incurred in respect of such default. In the
case of any such prepaid or defaulted Buydown Mortgage Loan the Buydown Funds in
respect of which were supplemented by investment earnings, the Master Servicer
will withdraw from the Buydown Account and either deposit in the Certificate
Account or remit to the borrower, depending upon the terms of the buydown plan,
any investment earnings remaining in the related Buydown Account.
Any Buydown Funds, and any investment earnings thereon, deposited in the
Certificate Account in connection with a full prepayment of the related Mortgage
Loan will be deemed to reduce the amount that would be required to be paid by
the borrower to repay fully the related Mortgage Loan if the Mortgage Loan were
not subject to the buydown plan.
PAYMENTS ON AGENCY SECURITIES AND PRIVATE MORTGAGE-BACKED SECURITIES
The Agency Securities and Private Mortgage-Backed Securities included in a
Trust Fund will be registered in the name of the Trustee so that all
distributions thereon will be made directly to the Trustee. The Trustee will
deposit or cause to be deposited into the Certificate Account for each Trust
Fund including Agency Securities and Private Mortgage-Backed Securities as and
when received, unless otherwise provided in the related Agreement, all
distributions received by the Trustee with respect to the related Agency
Securities and Private Mortgage-Backed Securities (other than payments due on or
before the Cut-off Date and exclusive of any trust administration fee and
amounts representing the Retained Interest, if any).
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DISTRIBUTIONS
Distributions allocable to principal and interest on the Securities of each
series will be made by or on behalf of the Trustee on each Distribution Date as
specified in the related Prospectus Supplement. Except as otherwise specified in
the related Prospectus Supplement, distributions will be made to the persons in
whose names the Securities are registered at the close of business on the last
business day of the month preceding the month in which the Distribution Date
occurs (the "Record Date"), and the amount of each distribution will be
determined as of the close of business on the date specified in the related
Prospectus Supplement (the "Determination Date"). All distributions with respect
to each class of Securities on each Distribution Date will be allocated pro rata
among the outstanding Securities in such class. Payments to the holders of
Securities of any class on each Distribution Date will be made to the
Securityholders of the respective class of record on the next preceding Record
Date (other than in respect of the final distribution), based on the aggregate
fractional undivided interests in that class represented by their respective
Securities. Payments will be made either by wire transfer in immediately
available funds to the account of a Securityholder at a bank or other entity
having appropriate facilities therefor, if such Securityholder has so notified
the Depositor or its designee no later than the date specified in the related
Prospectus Supplement (and, if so provided in the related Prospectus Supplement,
holds Securities in the requisite amount specified therein), or by check mailed
to the address of the person entitled thereto as it appears on the Security
Register (the "Security Register"); provided, however, that the final
distribution in retirement of the Securities will be made only upon presentation
and surrender of the Securities at the office or agency of the Depositor or its
agent specified in the notice to Securityholders of such final distribution.
With respect to each series of Certificate or Notes, the Security Register will
be referred to as the "Certificate Register" or "Note Register", respectively.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement. Unless
provided otherwise in the related Prospectus Supplement, the "Available
Distribution Amount" for each Distribution Date equals the sum of the following
amounts:
(i) the total amount of all cash on deposit in the related
Certificate Account as of the corresponding Determination Date, exclusive
of:
(a) all scheduled payments of principal and interest collected
but due on a date subsequent to the related Due Period (unless the
related Prospectus Supplement provides otherwise, a "Due Period" with
respect to any Distribution Date will commence on the second day of the
month in which the immediately preceding Distribution Date occurs, or
the day after the Cut-off Date in the case of the first Due Period, and
will end on the first day of the month of the related Distribution
Date),
(b) all prepayments, together with related payments of the
interest thereon, Liquidation Proceeds, Insurance Proceeds and other
unscheduled recoveries received subsequent to the related Prepayment
Period, and
(c) all amounts in the Certificate Account that are due or
reimbursable to the Depositor, the Trustee, a Mortgage Loan Seller, a
Sub-Servicer or the Master Servicer or that are payable in respect of
certain expenses of the related Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Certificate Account;
(iii) all advances with respect to such Distribution Date;
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(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid with respect to interest shortfalls resulting from
prepayments during the related Prepayment Period; and
(v) to the extent not on deposit in the related Certificate Account
as of the corresponding Determination Date, any amounts collected under,
from or in respect of any Credit Support with respect to such Distribution
Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
INTEREST ON THE SECURITIES
Each class of Securities (other than certain classes of Strip Securities)
may have a different Security Interest Rate, which may be a fixed, variable or
adjustable Security Interest Rate. The related Prospectus Supplement will
specify the Security Interest Rate for each class, or, in the case of a variable
or adjustable Security Interest Rate, the method for determining the Security
Interest Rate. Unless otherwise specified in the related Prospectus Supplement,
interest on the Securities will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
With respect to each series of Securities and each Distribution Date, the
"Accrued Security Interest" distributable on each Security, other than certain
classes of Strip Securities, will be equal to one month's interest on the
outstanding Principal Balance thereof immediately prior to the Distribution
Date, at the applicable Security Interest Rate, subject to the following. With
respect to each series of Certificates or Notes, the Accrued Security Interest
will be referred to as the "Accrued Certificate Interest" or "Accrued Note
Interest", respectively. As to each Strip Security with no or, in certain cases,
a nominal Principal Balance, the Accrued Security Interest with respect to any
Distribution Date will equal one month's Stripped Interest. Unless otherwise
specified in the related Prospectus Supplement, the Accrued Security Interest on
each Security of a series will be reduced in the event of shortfalls in
collections of interest resulting from prepayments on Mortgage Loans, with that
shortfall allocated among all of the Securities of that series in the manner
specified in the related Prospectus Supplement. See "Yield Considerations".
PRINCIPAL OF THE SECURITIES
Unless the related Prospectus Supplement provides otherwise, each Security
will have a "Principal Balance" which, at any time, will equal the maximum
amount that the holder will be entitled to receive in respect of principal out
of the future cash flow on the Trust Fund Assets and other assets included in
the related Trust Fund. The Principal Balance of each Security offered hereby
will be stated in the related Prospectus Supplement as the "Certificate
Principal Balance" with respect to a Certificate and the "Note Balance" with
respect to a Note. With respect to each such Security, distributions generally
will be applied to undistributed accrued interest thereon, and thereafter to
principal. The outstanding Principal Balance of a Security will be reduced to
the extent of distributions of principal thereon, and in the case of Securities
evidencing an interest in Mortgage Loans, by the amount of any Realized Losses,
as defined below, allocated thereto. Unless the related Prospectus Supplement
provides otherwise, the initial aggregate Principal Balance of all classes of
Securities of a series will equal the outstanding aggregate principal balance of
the related Trust Fund Assets as of the applicable Cut-off Date. The initial
aggregate Principal Balance of a series and each class thereof will be specified
in the related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, distributions of principal will be made on each
Distribution Date to the class or classes of Securities entitled thereto until
the Principal Balance of such class has been reduced to zero. With respect to a
Senior/Subordinate Series, unless otherwise provided in the related Prospectus
Supplement, distributions allocable to principal
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of a class of Securities will be based on the percentage interest in the related
Trust Fund evidenced by such class (with respect to the Senior Securities, the
"Senior Percentage"), which in turn will be based on the Principal Balance of
such class as compared to the Principal Balance of all classes of Securities of
such series. Distributions of principal of any class of Securities will be made
on a pro rata basis among all of the Securities of such class. Strip Securities
with no Principal Balance will not receive distributions of principal.
PRE-FUNDING ACCOUNT
If so specified in the related Prospectus Supplement, the related Agreement
may provide for the transfer by the Mortgage Loan Seller of additional Mortgage
Loans to the related Trust Fund after the Closing Date. Such additional Mortgage
Loans will be required to conform to the requirements set forth in the related
Agreement or other agreement providing for such transfer, and will generally be
underwritten to the same standards as the Mortgage Loans initially included in
the Trust Fund. As specified in the related Prospectus Supplement, such transfer
may be funded by the establishment of a Pre-Funding Account (a "Pre-Funding
Account"). If a Pre-Funding Account is established, all or a portion of the
proceeds of the sale of one or more classes of Securities of the related series
will be deposited in such account to be released as additional Mortgage Loans
are transferred. A Pre-Funding Account will be required to be maintained as an
eligible account under the related agreement, all amounts therein will be
required to be invested in Permitted Investments and the amount held therein
shall at no time exceed 25% of the aggregate outstanding principal balance of
the Securities. The related Agreement or other agreement providing for the
transfer of additional Mortgage Loans will generally provide that all such
transfers must be made within 3 months after the Closing Date, and that amounts
set aside to fund such transfers (whether in a Pre-Funding Account or otherwise)
and not so applied within the required period of time will be deemed to be
principal prepayments and applied in the manner set forth in such Prospectus
Supplement.
The Depositor will be required to provide data regarding the additional
Mortgage Loans to the Rating Agencies and the security insurer, if any,
sufficiently in advance of the scheduled transfer to permit review by such
parties. Transfer of the additional Mortgage Loans will be further conditioned
upon confirmation by the Rating Agencies that the addition of such Mortgage
Loans to the Trust Fund will not result in the downgrading of the Securities or,
in the case of a series guaranteed or supported by a security insurer, will not
adversely affect the capital requirements of such security insurer. Finally, a
legal opinion to the effect that the conditions to the transfer of the
additional Mortgage Loans have been satisfied.
ALLOCATION OF LOSSES
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale or otherwise (a "Liquidated Loan"), the amount of the
Realized Loss incurred in connection with such liquidation will equal the
excess, if any, of the unpaid principal balance of the Liquidated Loan
immediately prior to liquidation, over the aggregate amount of Liquidation
Proceeds derived from such liquidation remaining after application of such
proceeds to unpaid accrued interest on the Liquidated Loan and to reimburse the
Master Servicer or any Sub-Servicer for related unreimbursed servicing expenses.
With respect to certain Mortgage Loans the principal balances of which have been
reduced in connection with bankruptcy proceedings, the amount of such reduction
(a "Deficient Valuation") also will be treated as a Realized Loss. As to any
series of Securities other than a Senior/Subordinate Series, unless specified
otherwise in the related Prospectus Supplement, any Realized Loss not covered as
described under "Description of Credit Support" will be allocated among all of
the Securities on a pro rata basis.
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ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Securities evidencing interests in a Trust
Fund consisting of Mortgage Loans, other than a Senior/Subordinate Series,
unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will advance on or before each Distribution Date its own funds or funds
held in the Certificate Account that are not included in the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of payments of principal and interest (net of related servicing fees
and Retained Interest) that were due during the related Due Period and were
delinquent on the related Determination Date, subject to the Master Servicer's
good faith determination that such advances will be reimbursable from Related
Proceeds (as defined below). See "Description of Primary Insurance Policies" and
"Description of Credit Support".
With respect to any Senior/Subordinate Series, unless otherwise provided in
the related Prospectus Supplement, the Master Servicer will advance on each
Distribution Date its own funds or funds held in the Certificate Account which
are not included in the Available Distribution Amount for such Distribution
Date, in an aggregate amount equal to the lesser of (a) the total of all amounts
required to be distributed on each class of Senior Securities and Strip
Securities, if any, on such Distribution Date which remain after applying
towards such payment the entire Available Distribution Amount, including funds
otherwise payable to the Subordinate Securityholders but excluding such advance,
and (b) the aggregate of payments of principal and interest (net of related
servicing fees and Retained Interest) that were due during the related Due
Period and were delinquent on the related Determination Date. Alternatively, for
a Senior/Subordinate Series, the Master Servicer may be obligated to make
advances in the manner provided in the preceding paragraph. In either case, the
Master Servicer will, unless the related Prospectus Supplement provides
otherwise, be obligated to make such advances regardless of recoverability from
the related Mortgage Loans to the extent that the Principal Balance of the
Subordinate Securities is greater than zero. Thereafter, such advances are
required to be made only to the extent they are deemed by the Master Servicer to
be recoverable from Related Proceeds, unless otherwise specified in the related
Prospectus Supplement. See "Description of Primary Insurance Policies" and
"Description of Credit Support".
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Securities entitled
thereto, rather than to guarantee or insure against losses. Unless otherwise
provided in the related Prospectus Supplement, advances of the Master Servicer's
funds will be reimbursable only out of related recoveries on the Mortgage Loans
(including amounts received under any form of Credit Support) respecting which
such advances were made (as to any Mortgage Loan, "Related Proceeds") and, in
the case of a Senior/Subordinate Series, out of any amounts otherwise
distributable on the Subordinate Securities of such series; provided, however,
that any such advance will be reimbursable from any amounts in the Certificate
Account to the extent that the Master Servicer shall determine that such advance
(a "Nonrecoverable Advance") is not ultimately recoverable from Related Proceeds
and, in the case of a Senior/Subordinate Series, the Principal Balance of the
Subordinate Securities has been reduced to zero. If advances have been made by
the Master Servicer from excess funds in the Certificate Account, the Master
Servicer will replace such funds in the Certificate Account on any future
Distribution Date to the extent that funds in the Certificate Account on such
Distribution Date are less than payments required to be made to Securityholders
on such date. If so specified in the related Prospectus Supplement, the
obligations of the Master Servicer to make advances may be secured by a cash
advance reserve fund or a surety bond. If applicable, information regarding the
characteristics of, and the identity of any obligor on, any such surety bond,
will be set forth in the related Prospectus Supplement.
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REPORTS TO SECURITYHOLDERS
With each distribution to holders of any class of Securities (the
"Securityholders") of a series, the Master Servicer or the Trustee, will forward
or cause to be forwarded to each such holder, to the Depositor and to such other
parties as may be specified in the related Agreement, a statement setting forth:
(i) the amount of such distribution to holders of Securities of
such class applied to reduce the Principal Balance thereof;
(ii) the amount of such distribution to holders of Securities of
such class allocable to Accrued Security Interest;
(iii) the amount of related administration or servicing
compensation received by the Trustee or the Master Servicer and any
Sub-Servicer and such other customary information as the Master Servicer
deems necessary or desirable, or that a Securityholder reasonably requests,
to enable Securityholders to prepare their tax returns;
(iv) if applicable, the aggregate amount of advances included in
such distribution, and the aggregate amount of unreimbursed advances at the
close of business on such Distribution Date;
(v) the aggregate Stated Principal Balance of the Mortgage Loans
at the close of business on such Distribution Date;
(vi) the number and aggregate Stated Principal Balance of
Mortgage Loans (a) delinquent one month, (b) delinquent two or more months,
and (c) as to which foreclosure proceedings have been commenced;
(vii) with respect to any Mortgaged Property acquired on behalf of
Securityholders through foreclosure or deed in lieu of foreclosure during
the preceding calendar month, the Stated Principal Balance of the related
Mortgage Loan as of the close of business on the Distribution Date in such
month;
(viii) the book value of any Mortgaged Property acquired on behalf
of Securityholders through foreclosure or deed in lieu of foreclosure as of
the close of business on the last business day of the calendar month
preceding the Distribution Date;
(ix) the aggregate Principal Balance of each class of Securities
(including any class of Securities not offered hereby) at the close of
business on such Distribution Date, separately identifying any reduction in
such Principal Balance due to the allocation of any Realized Loss;
(x) the Special Hazard Subordination Amount, if any, at the
close of business on such Distribution Date;
(xi) the aggregate amount of principal prepayments made and
Realized Losses incurred during the related Prepayment Period;
(xii) the amount deposited in the Reserve Fund, if any, on such
Distribution Date;
(xiii) the amount remaining in the Reserve Fund, if any, as of the
close of business on such Distribution Date;
(xiv) the aggregate unpaid Accrued Security Interest, if any, on
each class of Securities at the close of business on such Distribution
Date;
(xv) in the case of Securities with a variable Security Interest
Rate, the Security Interest Rate applicable to such Distribution Date, as
calculated in accordance with the method specified in the related
Prospectus Supplement;
(xvi) in the case of Securities with an adjustable Security
Interest Rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable
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Security Interest Rate applicable to the next succeeding Distribution Date
as calculated in accordance with the method specified in the related
Prospectus Supplement; and
(xvii) as to any series which includes Credit Support, the amount
of coverage of each instrument of Credit Support included therein as of the
close of business on such Distribution Date.
In the case of information furnished pursuant to subclauses (i)-(iii)
above, the amounts shall be expressed as a dollar amount per minimum
denomination of Securities or for such other specified portion thereof. With
respect to each series of Certificates or Notes, Securityholders will be
referred to as the "Certificateholders" or the "Noteholders", respectively.
Within a reasonable period of time after the end of each calendar year, the
Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Security a statement containing the information set forth
in subclauses (i)-(iii) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Securityholder. Such
obligation of the Master Servicer or the Trustee shall be deemed to have been
satisfied to the extent that substantially comparable information shall be
provided by the Master Servicer or the Trustee pursuant to any requirements of
the Code as are from time to time in force.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Sub-Servicers, will make
reasonable efforts to collect all scheduled payments under the Mortgage Loans
and will follow or cause to be followed such collection procedures as it would
follow with respect to mortgage loans that are comparable to the Mortgage Loans
and held for its own account, provided such procedures are consistent with the
related Pooling and Servicing Agreement or Servicing Agreement and any related
insurance policy, bankruptcy bond, letter of credit or other instrument
described under "Description of Primary Insurance Policies" or "Description of
Credit Support" (any such instrument providing coverage as to losses resulting
from physical damage, a "Hazard Insurance Instrument", any such instrument
providing coverage as to credit or other risks, a "Credit Insurance Instrument",
and collectively, the "Insurance Instruments"). Consistent with the above, the
Master Servicer may, in its discretion, waive any late payment charge in respect
of a late Mortgage Loan payment and, only upon determining that the coverage
under any related Insurance Instrument will not be affected, extend or cause to
be extended the due dates for payments due on a Mortgage Note for a period not
greater than 180 days.
In certain instances in which a Mortgage Loan is in default (or if default
is reasonably foreseeable), and if determined by the Master Servicer to be in
the best interests of the related Securityholders, the Master Servicer may
permit certain modifications of the Mortgage Loan rather than proceeding with
foreclosure. In making such determination, the estimated Realized Loss that
might result if such Mortgage Loan were liquidated would be taken into account.
Such modifications may have the effect of reducing the Mortgage Rate, forgiving
the payment of principal or interest or extending the final maturity date of the
Mortgage Loan. Any such modified Mortgage Loan may remain in the related Trust
Fund, and the reduction in collections resulting from such modification may
result in reduced distributions of interest (or other amounts) on, or may extend
the final maturity of, one or more classes of the related Securities.
In connection with any significant partial prepayment of a Mortgage Loan,
the Master Servicer, to the extent not inconsistent with the terms of the
Mortgage Note and local law and practice, may permit the Mortgage Loan to be
reamortized such that the monthly payment is recalculated as an amount that will
fully amortize the remaining principal amount thereof by the original maturity
date based on the original Mortgage Rate, provided that such reamortization
shall not be permitted if it would constitute a modification of the Mortgage
Loan for federal income tax purposes.
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In any case in which property securing a Mortgage Loan, other than an ARM
Loan (as described below) or a Multifamily Loan, has been, or is about to be,
conveyed by the borrower, or in any case in which property securing a
Multifamily Loan has been, or is about to be encumbered by the borrower, the
Master Servicer will, to the extent it has knowledge of such conveyance,
encumbrance, proposed conveyance or encumbrance, exercise or cause to be
exercised on behalf of the related Trust Fund the lender's rights to accelerate
the maturity of such Mortgage Loan under any due-on-sale or due-on-encumbrance
clause applicable thereto, but only if the exercise of any such rights is
permitted by applicable law and will not impair or threaten to impair any
recovery under any related Insurance Instrument. If these conditions are not met
or if the Master Servicer reasonably believes it is unable under applicable law
to enforce such due-on-sale or due-on-encumbrance clause, the Master Servicer
will enter into or cause to be entered into an assumption and modification
agreement with the person to whom such property has been or is about to be
conveyed or encumbered, pursuant to which such person becomes liable under the
Mortgage Note, Cooperative Note or Contract and, to the extent permitted by
applicable law, the borrower remains liable thereon. The original Mortgagor may
be released from liability on a Mortgage Loan if the Master Servicer shall have
determined in good faith that such release will not adversely affect the
collectability of the Mortgage Loan. An ARM Loan may be assumed if such ARM Loan
is by its terms assumable and if, in the reasonable judgment of the Master
Servicer, the proposed transferee of the related Mortgaged Property establishes
its ability to repay the loan and the security for such ARM Loan would not be
impaired by the assumption. If a Mortgagor transfers the Mortgaged Property
subject to an ARM Loan without consent, such ARM Loan may be declared due and
payable. Any fee collected by or on behalf of the Master Servicer for entering
into an assumption agreement will be retained by or on behalf of the Master
Servicer as additional servicing compensation. See "Certain Legal Aspects of
Mortgage Loans--Enforceability of Certain Provisions". In connection with any
such assumption, the terms of the related Mortgage Loan may not be changed.
With respect to Multifamily Loans, the related mortgagor's failure to make
required payments may reflect inadequate operating income or the diversion of
that income from the service of payments due under the Multifamily Loan, and may
call into question such mortgagor's ability to make timely payment of taxes and
to pay for necessary maintenance of the related Mortgaged Property. The Master
Servicer will monitor any Multifamily Loan which is in default, contact the
mortgagor concerning the default, evaluate whether the causes of the default can
be cured over a reasonable period without significant impairment of the value of
the Mortgaged Property, initiate corrective action in cooperation with the
mortgagor if cure is likely, inspect the Mortgaged Property and take such other
actions as it would normally take with respect to similar loans serviced for its
own portfolio. A significant period of time may elapse before the Master
Servicer is able to assess the success of such corrective action or the need for
additional initiatives. Alternatively, the Master Servicer may determine to
institute foreclosure proceedings with respect to a Multifamily Loan soon after
default.
SUB-SERVICING
Any Master Servicer may delegate its servicing obligations in respect of
the Mortgage Loans to third-party servicers (each, a "Sub-Servicer"), but such
Master Servicer will remain obligated under the related Pooling and Servicing
Agreement or Servicing Agreement. Each Sub-Servicer will be required to perform
the customary functions of a servicer of comparable loans, including collecting
payments from borrowers and remitting such collections to the Master Servicer;
maintaining primary hazard insurance as described herein and in any related
Prospectus Supplement, and filing and settling claims thereunder, subject in
certain cases to the right of the Master Servicer to approve in advance any such
settlement; maintaining escrow or impoundment accounts of borrowers for payment
of taxes, insurance and other items required to be paid by any borrower pursuant
to the Mortgage Loan; processing assumptions or substitutions, although,
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unless otherwise specified in the related Prospectus Supplement, the Master
Servicer is generally required to exercise due-on-sale clauses to the extent
such exercise is permitted by law and would not adversely affect insurance
coverage; attempting to cure delinquencies; supervising foreclosures or
repossessions; inspecting and managing Mortgaged Properties under certain
circumstances; and maintaining accounting records relating to the Mortgage
Loans. Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will be responsible for filing and settling claims in respect of
Mortgage Loans in a particular Mortgage Pool under any applicable mortgage pool
insurance policy, bankruptcy bond, special hazard insurance policy or letter of
credit. See "Description of Credit Support".
The sub-servicing agreement between any Master Servicer and a Sub-Servicer
(a "Sub- Servicing Agreement") will be consistent with the terms of the related
Pooling and Servicing Agreement or Servicing Agreement and will not result in a
withdrawal or downgrading of any class of Securities issued pursuant to such
Agreement. Although each Sub-Servicing Agreement will be a contract solely
between the Master Servicer and the Sub-Servicer, the Agreement pursuant to
which a series of Securities is issued will provide that, if for any reason the
Master Servicer for such series of Securities is no longer acting in such
capacity, the Trustee or any successor Master Servicer must recognize the
Sub-Servicer's rights and obligations under such Sub-Servicing Agreement.
The Master Servicer will be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of whether the Master Servicer's compensation
pursuant to the related Agreement is sufficient to pay such fees. However, a
Sub-Servicer may be entitled to a Retained Interest in certain Mortgage Loans.
Each Sub-Servicer will be reimbursed by the Master Servicer for certain
expenditures which it makes, generally to the same extent the Master Servicer
would be reimbursed under the related Pooling and Servicing Agreement or
Servicing Agreement. See "Description of the Securities--Retained Interest,
Servicing Compensation and Payment of Expenses".
The Master Servicer may require any Sub-Servicer to agree to indemnify the
Master Servicer for any liability or obligation sustained by the Master Servicer
in connection with any act or failure to act by the Sub-Servicer in its
servicing capacity. Unless otherwise provided in the related Prospectus
Supplement, each Sub-Servicer is required to maintain a fidelity bond and an
errors and omissions policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the Master Servicer.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
As servicer of the Mortgage Loans, the Master Servicer, on behalf of
itself, the Trustee and the Securityholders, will present claims to the insurer
under each Insurance Instrument, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Mortgage Loans. As set forth above, all collections by or on behalf of
the Master Servicer under any Insurance Instrument, other than amounts to be
applied to the restoration of a Mortgaged Property or released to the mortgagor,
are to be deposited in the Certificate Account for the related Trust Fund,
subject to withdrawal as heretofore described. Unless otherwise provided in the
Prospectus Supplement relating to a series of Securities, the Master Servicer or
its designee will not receive payment under any letter of credit included as an
Insurance Instrument with respect to a defaulted Mortgage Loan unless all
Liquidation Proceeds and Insurance Proceeds which it deems to be finally
recoverable have been realized; however, the Master Servicer will be entitled to
reimbursement for any unreimbursed advances and reimbursable expenses
thereunder.
If any property securing a defaulted Mortgage Loan is damaged and proceeds,
if any, from the related Hazard Insurance Instrument are insufficient to restore
the damaged property to a condition sufficient to permit recovery under the
related Credit Insurance Instrument, if any, the Master Servicer is not required
to expend its own funds to restore the damaged property unless it
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determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Mortgage Loan after reimbursement of the
Master Servicer for its expenses and (ii) that such expenses will be recoverable
by it from related Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted Mortgage Loan under any related Credit Insurance
Instrument is not available for the reasons set forth in the preceding
paragraph, the Master Servicer nevertheless will be obligated to follow or cause
to be followed such normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted Mortgage Loan. If the proceeds of any
liquidation of the property securing the defaulted Mortgage Loan are less than
the outstanding principal balance of the defaulted Mortgage Loan plus interest
accrued thereon at the Interest Rate plus the aggregate amount of expenses
incurred by the Master Servicer in connection with such proceedings and which
are reimbursable under the Agreement, the Trust Fund will realize a loss in the
amount of such difference. The Master Servicer will be entitled to withdraw or
cause to be withdrawn from the Certificate Account out of the Liquidation
Proceeds recovered on any defaulted Mortgage Loan, prior to the distribution of
such Liquidation Proceeds to Securityholders, amounts representing its normal
servicing compensation on the Mortgage Loan, unreimbursed servicing expenses
incurred with respect to the Mortgage Loan and any unreimbursed advances of
delinquent monthly payments made with respect to the Mortgage Loan.
If the Master Servicer or its designee recovers Insurance Proceeds with
respect to any defaulted Mortgage Loan, the Master Servicer will be entitled to
withdraw or cause to be withdrawn from the Certificate Account out of such
proceeds, prior to distribution thereof to Securityholders, amounts representing
its normal servicing compensation on such Mortgage Loan, unreimbursed servicing
expenses incurred with respect to the Mortgage Loan and any unreimbursed
advances of delinquent monthly payments made with respect to the Mortgage Loan.
In the event that the Master Servicer has expended its own funds to restore
damaged property and such funds have not been reimbursed under any Insurance
Instrument, it will be entitled to withdraw from the Certificate Account out of
related Liquidation Proceeds or Insurance Proceeds an amount equal to such
expenses incurred by it, in which event the Trust Fund may realize a loss up to
the amount so charged. Because Insurance Proceeds cannot exceed deficiency
claims and certain expenses incurred by the Master Servicer, no such payment or
recovery will result in a recovery to the Trust Fund which exceeds the principal
balance of the defaulted Mortgage Loan together with accrued interest thereon at
the Net Interest Rate. In addition, when property securing a defaulted Mortgage
Loan can be resold for an amount exceeding the outstanding principal balance of
the related Mortgage Loan together with accrued interest and expenses, it may be
expected that, if retention of any such amount is legally permissible, the
insurer will exercise its right under any related mortgage pool insurance policy
to purchase such property and realize for itself any excess proceeds. See
"Description of Primary Insurance Policies" and "Description of Credit Support".
With respect to collateral securing a Cooperative Loan, any prospective
purchaser will generally have to obtain the approval of the board of directors
of the relevant Cooperative before purchasing the shares and acquiring rights
under the proprietary lease or occupancy agreement securing the Cooperative
Loan. See "Certain Legal Aspects of Mortgage Loans-Foreclosure on Cooperatives".
This approval is usually based on the purchaser's income and net worth and
numerous other factors. The necessity of acquiring such approval could limit the
number of potential purchasers for those shares and otherwise limit the Master
Servicer's ability to sell, and realize the value of, those shares.
RETAINED INTEREST; SERVICING OR ADMINISTRATION COMPENSATION AND PAYMENT OF
EXPENSES
The Prospectus Supplement for a series of Securities will specify whether
there will be any Retained Interest in the Trust Fund Assets, and, if so, the
owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related Agreement.
A Retained Interest in a Trust Fund Asset represents a specified portion of the
interest
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payable thereon. The Retained Interest will be deducted from borrower payments
as received and will not be part of the related Trust Fund. Any partial recovery
of interest on a Mortgage Loan, after deduction of all applicable servicing
fees, will be allocated between Retained Interest (if any) and interest at the
Net Interest Rate on a pari passu basis.
The Master Servicer's (or in the case of a Trust Fund consisting of Agency
Securities or Private Mortgage-Backed Securities if specified in the related
Prospectus Supplement, the Trustee's) primary compensation with respect to a
series of Securities will come from the monthly payment to it, with respect to
each interest payment on a Trust Fund Asset, of an amount equal to one-twelfth
of the difference between the Interest Rate (minus the rate at which the
Retained Interest, if any, is calculated) and the Net Interest Rate times the
scheduled principal balance of such Trust Fund Asset. Since any Retained
Interest and the Master Servicer's (or the Trustee's) primary compensation are
percentages of the scheduled principal balance of each Trust Fund Asset, such
amounts will decrease in accordance with the amortization schedule of the Trust
Fund Assets. As additional compensation in connection with a series of
Securities relating to Mortgage Loans, the Master Servicer or the Sub-Servicers
will retain all assumption fees, prepayment penalties and late payment charges,
to the extent collected from mortgagors. Unless otherwise specified in the
related Prospectus Supplement, any interest or other income which may be earned
on funds held in the Certificate Account or any Sub-Servicing Account may be
paid as additional compensation to the Trustee, the Master Servicer or the
Sub-Servicers, as the case may be. Any Sub-Servicer will receive a portion of
the Master Servicer's primary compensation as its sub-servicing compensation.
With respect to a series of Securities consisting of Mortgage Loans, in
addition to amounts payable to any Sub-Servicer, the Master Servicer will pay
from its servicing compensation certain expenses incurred in connection with its
servicing of the Mortgage Loans, including, without limitation, payment of the
fees and disbursements of the Trustee and independent accountants, payment of
expenses incurred in connection with distributions and reports to
Securityholders, and payment of any other expenses described in the related
Prospectus Supplement.
The Master Servicer is entitled to reimbursement for certain expenses
incurred by it in connection with the liquidation of defaulted Mortgage Loans,
including under certain circumstances reimbursement of expenditures incurred by
it in connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Securityholders to receive any
related Liquidation Proceeds. The Master Servicer is also entitled to
reimbursement from the Certificate Account for Advances. With respect to a
series of Securities relating to Agency Securities, the Trustee shall pay all
expenses incurred in administration thereof, subject to the limitations
described in the related Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Pooling and Servicing Agreement and each Servicing Agreement with
respect to a series of Securities consisting of Mortgage Loans, will provide
that on or before a specified date in each year, beginning with the first such
date at least six months after the related Cut-off Date, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that,
on the basis of the examination by such firm conducted substantially in
compliance with either the Uniform Single Program for Mortgage Bankers or the
Audit Program for Mortgages serviced for FHLMC, the servicing by or on behalf of
the Master Servicer of mortgage loans under servicing agreements substantially
similar to each other (including the related Pooling and Servicing Agreement or
Servicing Agreement) was conducted in compliance with the terms of such
agreements except for any significant exceptions or errors in records that, in
the opinion of the firm, either the Audit Program for Mortgages serviced for
FHLMC, or paragraph 4 of the Uniform Single Program for Mortgage Bankers,
requires it to report. In rendering its statement such firm may rely, as to
matters relating to the direct servicing of mortgage loans by Sub-Servicers,
upon comparable statements
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for examinations conducted substantially in compliance with the Uniform Single
Attestation Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for FHLMC (rendered within one year of such statement) of firms of
independent public accountants with respect to the related Sub-Servicer.
Each Pooling and Servicing Agreement and each Servicing Agreement will also
provide for delivery to the Trustee, on or before a specified date in each year,
of an annual statement signed by two officers of the Master Servicer to the
effect that the Master Servicer has fulfilled its obligations under the related
Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of the Master Servicer may be obtained by Securityholders without charge upon
written request to the Master Servicer at the address set forth in the related
Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under each Pooling and Servicing Agreement and each
Servicing Agreement will be named in the related Prospectus Supplement. The
entity serving as Master Servicer may be an affiliate of the Depositor and may
have other normal business relationships with the Depositor or the Depositor's
affiliates.
Each Pooling and Servicing Agreement and each Servicing Agreement will
provide that the Master Servicer may resign from its obligations and duties
under the related Agreement only if such resignation, and the appointment of a
successor, will not result in a downgrading of any class of Securities or upon a
determination that its duties under the related Agreement are no longer
permissible under applicable law. No such resignation will become effective
until the Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the related Agreement.
Each Pooling and Servicing Agreement and each Servicing Agreement will
further provide that neither the Master Servicer, the Depositor nor any
director, officer, employee, or agent of the Master Servicer or the Depositor
will be under any liability to the related Trust Fund or Securityholders for any
action taken, or for refraining from the taking of any action, in good faith
pursuant to the related Agreement, or for errors in judgment; provided, however,
that neither the Master Servicer, the Depositor nor any such person will be
protected against any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. Each Pooling and Servicing Agreement and each Servicing Agreement
will further provide that the Master Servicer, the Depositor and any director,
officer, employee or agent of the Master Servicer or the Depositor will be
entitled to indemnification by the related Trust Fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the related Agreement or the Securities, other than any loss,
liability or expense is related to any specific Mortgage Loan or Mortgage Loans
(unless any such loss, liability or expense otherwise reimbursable pursuant to
the related Agreement) and any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Pooling and Servicing Agreement and each Servicing
Agreement will provide that neither the Master Servicer nor the Depositor will
be under any obligation to appear in, prosecute or defend any legal action which
is not incidental to its respective responsibilities under the related Agreement
and which in its opinion may involve it in any expense or liability. The Master
Servicer or the Depositor may, however, in its discretion undertake any such
action which it may deem necessary or desirable with respect to the related
Agreement and the rights and duties of the parties thereto and the interests of
the Securityholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Securityholders, and the Master Servicer or the Depositor, as
the case may be, will
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be entitled to be reimbursed therefor and to charge the Certificate Account.
Except in the case of a series of Senior/Subordinate Securities, any such
obligation of the Securityholders will be borne among them on a pro rata basis
in proportion to the Accrued Security Interest payable thereto, and,
notwithstanding any other provision, their respective distributions will be
reduced accordingly.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement,
provided that such person is qualified to sell mortgage loans to, and service
mortgage loans on behalf of, FNMA or FHLMC.
EVENTS OF DEFAULT AND RIGHTS UPON EVENTS OF DEFAULT
POOLING AND SERVICING AGREEMENT
Unless otherwise provided in the related Prospectus Supplement for a series
of Certificates that includes Mortgage Loans, Events of Default under each
Pooling and Servicing Agreement will consist of (i) any failure by the Master
Servicer to distribute or cause to be distributed to Securityholders, or to
remit to the Trustee for distribution to Certificateholders, any required
payment that continues unremedied for five days after the giving of written
notice of such failure to the Master Servicer by the Trustee or the Depositor,
or to the Master Servicer, the Depositor and the Trustee by the holders of
Certificates evidencing not less than 25% of the Voting Rights; (ii) any failure
by the Master Servicer duly to observe or perform in any material respect any of
its other covenants or obligations under the Agreement which continues
unremedied for thirty days (fifteen days in the case of a failure to pay the
premium for any insurance instrument required to be maintained pursuant to the
Agreement) after the giving of written notice of such failure to the Master
Servicer by the Trustee or the Depositor, or to the Master Servicer, the
Depositor and the Trustee by the holders of Certificates evidencing not less
than 25% of the Voting Rights; and (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings and certain actions by or on behalf of the Master Servicer
indicating its insolvency or inability to pay its obligations.
So long as an Event of Default under a Pooling and Servicing Agreement
remains unremedied, the Depositor or the Trustee may, and at the direction of
holders of Certificates evidencing not less than 51% of the Voting Rights, the
Trustee shall, terminate all of the rights and obligations of the Master
Servicer under the Pooling and Servicing Agreement relating to such Trust Fund
and in and to the Mortgage Loans (other than any Retained Interest of the Master
Servicer), whereupon the Trustee will succeed to all of the responsibilities,
duties and liabilities of the Master Servicer under such Agreement (except that
if the Trustee is prohibited by law from obligating itself to make advances
regarding delinquent mortgage loans, then the Trustee will not be so obligated)
and will be entitled to similar compensation arrangements. In the event that the
Trustee is unwilling or unable so to act, it may or, at the written request of
the holders of Certificates entitled to at least 51% of the Voting Rights, it
shall appoint, or petition a court of competent jurisdiction for the appointment
of, a housing loan servicing institution acceptable to the Rating Agency with a
net worth at the time of such appointment of at least $15,000,000 (or such other
amount as may be provided in the related Prospectus Supplement) to act as
successor to the Master Servicer under the Agreement. Pending such appointment,
the Trustee is obligated to act in such capacity. The Trustee and any such
successor may agree upon the servicing compensation to be paid, which in no
event may be greater than the compensation payable to the Master Servicer under
the related Agreement.
No Certificateholder will have the right under any Pooling and Servicing
Agreement to institute any proceeding with respect thereto unless such holder
previously has given to the Trustee written notice of default and unless the
holders of Certificates evidencing not less than 25% of the Voting Rights have
made written request upon the Trustee to institute such proceeding in its own
name
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as Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for fifteen days has neglected or refused to institute any such
proceeding. The Trustee, however, is under no obligation to exercise any of the
trusts or powers vested in it by any Pooling and Servicing Agreement or to make
any investigation of matters arising thereunder or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of Certificates covered by such Agreement,
unless such Certificateholders have offered to the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
SERVICING AGREEMENT
Unless otherwise provided in the related Prospectus Supplement for a series
of Notes, a "Servicing Default" under the related Servicing Agreement generally
will include: (i) any failure by the Master Servicer to make a required deposit
to the Certificate Account or, if the Master Servicer is so required, to
distribute to the holders of any class of Notes or Equity Certificates of such
series any required payment which continues unremedied for five business days
(or other period of time described in the related Prospectus Supplement) after
the giving of written notice of such failure to the Master Servicer by the
Trustee or the Issuer; (ii) any failure by the Master Servicer duly to observe
or perform in any material respect any other of its covenants or agreements in
the Servicing Agreement with respect to such series of Notes which continues
unremedied for 45 days after the giving of written notice of such failure to the
Master Servicer by the Trustee or the Issuer; (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings regarding the Master Servicer and certain actions by the
Master Servicer indicating its insolvency or inability to pay its obligations
and (iv) any other Servicing Default as set forth in the Servicing Agreement.
So long as a Servicing Default remains unremedied, either the Depositor or
the Trustee may, by written notification to the Master Servicer and to the
Issuer or the Trustee or Trust Fund, as applicable, terminate all of the rights
and obligations of the Master Servicer under the Servicing Agreement (other than
any right of the Master Servicer as Noteholder or as holder of the Equity
Certificates and other than the right to receive servicing compensation and
expenses for servicing the Mortgage Loans during any period prior to the date of
such termination), whereupon the Trustee will succeed to all responsibilities,
duties and liabilities of the Master Servicer under such Servicing Agreement
(other than the obligation to purchase Mortgage Loans under certain
circumstances) and will be entitled to similar compensation arrangements. In the
event that the Trustee would be obligated to succeed the Master Servicer but is
unwilling so to act, it may appoint (or if it is unable so to act, it shall
appoint) or petition a court of competent jurisdiction for the appointment of an
approved mortgage servicing institution with a net worth of at least $15,000,000
to act as successor to the Master Servicer under the Servicing Agreement (unless
otherwise set forth in the Servicing Agreement). Pending such appointment, the
Trustee is obligated to act in such capacity. The Trustee and such successor may
agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the initial Master Servicer under the Servicing
Agreement.
INDENTURE
Unless otherwise provided in the related Prospectus Supplement for a series
of Notes, an Event of Default under the Indenture generally will include: (i) a
default for five days or more (or other period of time described in the related
Prospectus Supplement) in the payment of any principal of or interest on any
Note of such series; (ii) failure to perform any other covenant of the Depositor
or the Trust Fund in the Indenture which continues for a period of thirty days
after notice thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iii) any representation or warranty made by the
Depositor or the Trust Fund in the Indenture or in any certificate or other
writing delivered pursuant thereto or in connection therewith with respect to or
affecting such series having been incorrect in a material respect as of the time
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made, and such breach is not cured within thirty days after notice thereof is
given in accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or (v) any other Event of
Default provided with respect to Notes of that series.
If an Event of Default with respect to the Notes of any series at the time
outstanding occurs and is continuing, the Trustee or the holders of a majority
of the then aggregate outstanding amount of the Notes of such series may declare
the principal amount (or, if the Notes of that series are Accrual Securities,
such portion of the principal amount as may be specified in the terms of that
series, as provided in the related Prospectus Supplement) of all the Notes of
such series to be due and payable immediately. Such declaration may, under
certain circumstances, be rescinded and annulled by the holders of a majority in
aggregate outstanding amount of the related Notes.
If following an Event of Default with respect to any series of Notes, the
Notes of such series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such series and to continue
to apply payments on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a series following an Event of Default, unless (a) the holders of 100% of the
then aggregate outstanding amount of the Notes of such series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the outstanding Notes
of such series at the date of such sale or (c) the Trustee determines that such
collateral would not be sufficient on an ongoing basis to make all payments on
such Notes as such payments would have become due if such Notes had not been
declared due and payable, and the Trustee obtains the consent of the holders of
66 2/3% of the then aggregate outstanding amount of the Notes of such series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default, the Indenture provides that the Trustee will have a prior
lien on the proceeds of any such liquidation for unpaid fees and expenses. As a
result, upon the occurrence of such an Event of Default, the amount available
for payments to the Noteholders would be less than would otherwise be the case.
However, the Trustee may not institute a proceeding for the enforcement of its
lien except in connection with a proceeding for the enforcement of the lien of
the Indenture for the benefit of the Noteholders after the occurrence of such an
Event of Default.
In the event the principal of the Notes of a series is declared due and
payable, as described above, the holders of any such Notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount that is unamortized.
No Noteholder or holder of an Equity Certificate generally will have any
right under an Owner Trust Agreement or Indenture to institute any proceeding
with respect to such Agreement unless (a) such holder previously has given to
the Trustee written notice of default and the continuance thereof, (b) the
holders of Notes or Equity Certificates of any class evidencing not less than
25% of the aggregate Percentage Interests constituting such class (i) have made
written request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and (ii) have offered to the Trustee reasonable indemnity,
(c) the Trustee has neglected or refused to institute any such proceeding for 60
days after receipt of such request and indemnity and (d) no direction
inconsistent with such written request has been given to the Trustee during such
60 day period by the Holders of a majority of the Note Balances of such class.
However, the Trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the applicable Agreement or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of Notes or Equity Certificates covered by such
Agreement, unless
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such holders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
AMENDMENT
With respect to each series of Certificates, each related Pooling and
Servicing Agreement or Trust Agreement may be amended by the Depositor, the
Master Servicer, if any, and the Trustee, without the consent of any of the
holders of Certificates covered by the Agreement, to cure any ambiguity, to
correct, modify or supplement any provision therein, or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions thereof, provided that such
action will not adversely affect in any material respect the interests of any
holder of Certificates covered by the Agreement. Each Agreement may also be
amended by the Depositor, the Master Servicer, if any, and the Trustee, with the
consent of the holders of Certificates evidencing not less than 66% of the
Voting Rights, for any purpose; provided, however, that no such amendment may
(i) reduce in any manner the amount of or delay the timing of, payments received
on Trust Fund Assets which are required to be distributed on any Certificate
without the consent of the holder of such Certificate, (ii) adversely affect in
any material respect the interests of the holders of any class of Certificates
in a manner other than as described in (i), without the consent of the holders
of Certificates of such class evidencing not less than 66% of the aggregate
Voting Rights of such class or (iii) reduce the aforesaid percentage of Voting
Rights required for the consent to any such amendment without the consent of the
holders of all Certificates covered by such Agreement then outstanding. However,
with respect to any series of Certificates as to which a REMIC election is to be
made, the Trustee will not consent to any amendment of the Agreement unless it
shall first have received an opinion of counsel to the effect that such
amendment will not cause the Trust Fund to fail to qualify as a REMIC at any
time that the related Certificates are outstanding. The Voting Rights evidenced
by any Certificate will be the portion of the voting rights of all of the
Certificates in the related series allocated in the manner described in the
related Prospectus Supplement.
With respect to each series of Notes, each related Servicing Agreement or
Indenture may be amended by the parties thereto without the consent of any of
the holders of the Notes covered by such Agreement, to cure any ambiguity, to
correct, modify or supplement any provision therein, or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions thereof, provided that such
action will not adversely affect in any material respect the interests of any
holder of Notes covered by the Agreement. Each Agreement may also be amended by
the parties thereto with the consent of the holders of Notes evidencing not less
than 66% of the Voting Rights, for any purpose; provided, however, that no such
amendment may (i) reduce in any manner the amount of or delay the timing of,
payments received on Trust Fund Assets which are required to be distributed on
any Note without the consent of the holder of such Note, (ii) adversely affect
in any material respect the interests of the holders of any class of Notes in a
manner other than as described in (i), without the consent of the holders of
Notes of such class evidencing not less than 66% of the aggregate Voting Rights
of such class or (iii) reduce the aforesaid percentage of Voting Rights required
for the consent to any such amendment without the consent of the holders of all
Notes covered by such Agreement then outstanding. The Voting Rights evidenced by
any Note will be the portion of the voting rights of all of the Notes in the
related series allocated in the manner described in the related Prospectus
Supplement.
TERMINATION
The obligations created by the related Agreements for each series of
Securities will terminate upon the payment to Securityholders of that series of
all amounts held in the Certificate Account or by the Master Servicer and
required to be paid to them pursuant to such Agreements following the earlier of
(i) the final payment or other liquidation of the last Trust Fund Asset subject
thereto or the disposition of all underlying property subject to the Trust Fund
Assets acquired upon
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foreclosure of any such Trust Fund Asset and (ii) the purchase of all of the
assets of the Trust Fund by the party entitled to effect such termination, under
the circumstances and in the manner set forth in the related Prospectus
Supplement. In no event, however, will the trust created by the related
Agreements continue beyond the date specified in the related Prospectus
Supplement. Written notice of termination of the related Agreements will be
given to each Securityholder, and the final distribution will be made only upon
surrender and cancellation of the Securities at an office or agency appointed by
the Trustee which will be specified in the notice of termination.
Any such purchase of assets of the Trust Fund shall be made at a price
approximately equal to (A) in the case of a series of Securities evidencing
interests in a Trust Fund that includes Mortgage Loans, the greater of (i) the
sum of (a) 100% of the Stated Principal Balance of each Mortgage Loan as of the
day of such purchase plus accrued interest thereon at the applicable Net
Interest Rate to the first day of the month following such purchase plus (b) the
appraised value of any underlying property subject to the Mortgage Loans
acquired for the benefit of Securityholders, and (ii) the aggregate fair market
value of all of the assets in the Trust Fund (as determined by the Trustee, the
Master Servicer, and, if different than both such persons, the person entitled
to effect such termination), in each case taking into account accrued interest
at the applicable Net Interest Rate to the first day of the month following such
purchase and (B) in the case of a series of Securities evidencing interests in a
Trust Fund that includes Agency Securities or Private Mortgage-Backed
Securities, the sum of 100% of the unpaid principal balance of each outstanding
Trust Fund Asset as of the day of such purchase plus accrued interest thereon at
the Net Interest Rate to the first day of the month of such purchase, or at such
other price as may be specified in the related Prospectus Supplement. The
exercise of such right will effect early retirement of the Securities of that
series, but the right of the person entitled to effect such termination is
subject to the aggregate principal balance of the outstanding Trust Fund Assets
for such series at the time of purchase being less than the percentage of the
aggregate principal balance of the Trust Fund Assets at the Cut-off Date for
that series specified in the related Prospectus Supplement, which percentage
will be between 25% and 0% (the "Clean-up Call").
In addition to the repurchase of the assets in the related Trust Fund
at the Clean-up Call, if so specified in the related Prospectus Supplement, a
holder of a non-offered class of Securities (the "Call Class") will have the
right, solely at its discretion, to terminate the related Trust Fund on any
Distribution Date after the 12th Distribution Date following the date of initial
issuance of the related series of Securities and until such date as the Clean-up
Call becomes exercisable and thereby effect early retirement of the Securities
of such series. Any such call will be of the entire Trust Fund at one time;
multiple calls with respect to any series of Securities will not be permitted.
In such case, the holders of the Securities offered hereby will be paid a price
equal to 100% of the Principal Balance of the Securities offered hereby as of
the day of such purchase plus accrued interest thereon at the applicable
Security Interest Rate to the first day of the month following such purchase
(the "Call Price"). Further, the Call Class must remit to the related Trustee
for distribution to the Securityholders funds equal to the Call Price. If such
funds are not deposited with the related Trustee, the Securities will remain
outstanding. There will not be any additional remedies available to
Securityholders. In addition, in the case of a Trust Fund for which a REMIC
election or elections have been made, such termination will constitute a
"qualified liquidation" under Section 860F of the Code. In connection with a
call by the Call Class, the final payment to the Securityholders will be made
upon surrender of the related Securities to the Trustee. Once the Securities
have been surrendered and paid in full, there will not be any continuing
liability from the Securityholders or from the Trust Fund to Securityholders.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer has the option to purchase from the Trust Fund any Mortgage Loan 90
days or more delinquent at a
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purchase price generally equal to the outstanding principal balance of such
Mortgage Loan as of the date of purchase, plus all accrued and unpaid interest
on such principal balance computed at the Interest Rate.
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
any Agreement, the Securities or any Mortgage Loan or related document and is
not accountable for the use or application by or on behalf of the Master
Servicer of any funds paid to the Master Servicer or its designee in respect of
the Securities or the Mortgage Loans, or deposited into or withdrawn from the
Certificate Account or any other account by or on behalf of the Master Servicer.
If no Event of Default has occurred and is continuing, the Trustee is required
to perform only those duties specifically required under the related Agreement.
However, upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the Trustee is required to examine such
documents and to determine whether they conform to the requirements of the
related Agreement.
THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement, Trust Agreement or
Indenture will be named in the related Prospectus Supplement. The commercial
bank, national banking association or trust company serving as Trustee may have
normal banking relationships with the Depositor and its affiliates and with the
Master Servicer and its affiliates.
DESCRIPTION OF CREDIT SUPPORT
If so provided in the related Prospectus Supplement, the Trust Fund for a
series of Securities may include Credit Support for such series or for one or
more classes of Securities comprising such Series, which Credit Support may
consist of any combination of the following separate components, any of which
may be limited to a specified percentage of the aggregate principal balance of
the Mortgage Loans covered thereby or a specified dollar amount: (i) coverage
with respect to Realized Losses incurred on Liquidated Loans (the "Defaulted
Mortgage Amount"); (ii) coverage with respect to Special Hazard Realized Losses,
as defined below (the "Special Hazard Amount"); and (iii) coverage with respect
to certain actions that may be taken by a bankruptcy court in connection with a
Mortgage Loan, including a Deficient Valuation or a reduction by a bankruptcy
court of the Interest Rate on a Mortgage Loan or an extension of its maturity
(collectively, the "Bankruptcy Amount"). As set forth below and in the related
Prospectus Supplement, such coverage may be provided by subordination of one or
more other classes of Securities, one or more insurance policies, a bankruptcy
bond, a letter of credit, a reserve fund or any combination of the foregoing.
The amount and type of any Credit Support with respect to a series of Securities
or with respect to one or more classes of Securities comprising such series, and
the obligors on such Credit Support, will be set forth in the related Prospectus
Supplement. See "Description of the Securities".
SUBORDINATION
With respect to any Senior/Subordinate Series, in the event of any Realized
Losses on Mortgage Loans not in excess of the limitations described below, the
rights of the Subordinate Securityholders to receive distributions with respect
to the Mortgage Loans will be subordinate to the rights of the Senior
Securityholders to the extent described in the related Prospectus Supplement.
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All Realized Losses will be allocated to the Subordinate Securities of the
related series (or, if such series includes more than one class of Subordinated
Securities, to the outstanding class of Subordinate Securities having the first
priority for allocation of Realized Losses and then to additional outstanding
classes of Subordinate Securities, if any), until the Principal Balance thereof
has been reduced to zero. Any additional Realized Losses will be allocated to
the Senior Securities (or, if such series includes more than one class of Senior
Securities, either on a pro rata basis among all of the Senior Securities in
proportion to their respective outstanding Principal Balances or as otherwise
provided in the related Prospectus Supplement). However, with respect to
Realized Losses that are attributable to physical damage to Mortgaged Properties
of a type that is not covered by standard hazard insurance policies ("Special
Hazard Realized Losses"), the amount thereof that may be allocated to the
Subordinate Securities of the related series may be limited to an amount (the
"Special Hazard Subordination Amount") specified in the related Prospectus
Supplement. If so, any Special Hazard Realized Losses in excess of the Special
Hazard Subordination Amount will be allocated among all outstanding classes of
Securities of the related series, on a pro rata basis in proportion to their
respective outstanding Principal Balances, regardless of whether any Subordinate
Securities remain outstanding, or as otherwise provided in the related
Prospectus Supplement.
Any allocation of a Realized Loss to a Security will be made by reducing
the Principal Balance thereof as of the Distribution Date following the
Prepayment Period in which such Realized Loss was incurred. Unless otherwise
provided in the related Prospectus Supplement, the "Scheduled Principal Balance"
of any Mortgage Loan as of any date of determination is equal to the unpaid
principal balance thereof as of the date of determination, reduced by the
principal portion of all monthly payments due but unpaid as of the date of
determination.
As set forth under "Description of the Securities--Principal of the
Securities", the rights of holders of the various classes of Securities of any
series to receive distributions of principal and interest is determined by the
aggregate Principal Balance of each such class. The Principal Balance of any
Security will be reduced by all amounts previously distributed on such Security
in respect of principal, and by any Realized Losses allocated thereto. If there
were no Realized Losses or prepayments of principal on any of the Mortgage
Loans, the respective rights of the holders of Securities of any series to
future distributions would not change. However, to the extent so provided in the
related Prospectus Supplement, holders of Senior Securities may be entitled to
receive a disproportionately larger amount of prepayments received, which will
have the effect of accelerating the amortization of the Senior Securities and
increasing the respective percentage interest in future distributions evidenced
by the Subordinate Securities in the related Trust Fund (with a corresponding
decrease in the Senior Percentage), as well as preserving the availability of
the subordination provided by the Subordinate Securities. In addition, as set
forth above, Realized Losses will be first allocated to Subordinate Securities
by reduction of the Principal Balance thereof, which will have the effect of
increasing the respective interest in future distributions evidenced by the
Senior Securities in the related Trust Fund.
If so provided in the related Prospectus Supplement, certain amounts
otherwise payable on any Distribution Date to holders of Subordinate Securities
may be deposited into a reserve fund. Amounts held in any reserve fund may be
applied as described below under "Reserve Funds" and in the related Prospectus
Supplement.
With respect to any Senior/Subordinate Series, the terms and provisions of
the subordination may vary from those described above; any such variation will
be described in the related Prospectus Supplement.
If so provided in the related Prospectus Supplement, the Credit Support for
the Senior Securities of a Senior/Subordinate Series may include, in addition to
the subordination of the Subordinate Securities of such series and the
establishment of a reserve fund, any of the other forms of Credit Support
described below. If any of such other forms of Credit Support described
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below is maintained solely for the benefit of the Senior Securities of a
Senior/Subordinate Series, then the coverage described below as being provided
by such Credit Support with respect to a series of Securities may be limited to
the extent necessary to make required distributions on such Senior Securities or
as otherwise specified in the related Prospectus Supplement. If so provided in
the related Prospectus Supplement, the obligor on any such other forms of Credit
Support maintained for the benefit of the Senior Securities of a
Senior/Subordinate Series may be reimbursed for amounts paid thereunder out of
amounts otherwise payable on the Subordinate Securities.
LETTER OF CREDIT
As to any series of Securities to be covered by a Letter of Credit, a bank
(the "Letter of Credit Bank") will deliver to the Trustee an irrevocable Letter
of Credit. The Master Servicer or Trustee will exercise its best reasonable
efforts to keep or cause to be kept the Letter of Credit in full force and
effect, unless coverage thereunder has been exhausted through payment of claims.
The Master Servicer will agree to pay the fees for the Letter of Credit on a
timely basis unless, as described in the related Prospectus Supplement, the
payment of such fees is otherwise provided for.
The Master Servicer or the Trustee will make or cause to be made draws on
the Letter of Credit Bank under each Letter of Credit. Subject to such
differences as will be described in the related Prospectus Supplement, Letters
of Credit may cover all or any of the following amounts:
(i) to the extent of any Defaulted Mortgage Amount, for any
Mortgage Loan that became a Liquidated Loan during the related Prepayment
Period (other than Mortgage Loans as to which amounts paid or payable under
any related Hazard Insurance Instrument, including the Letter of Credit as
described in (ii) below, are not sufficient either to restore the Mortgaged
Property or to pay the outstanding principal balance of the Mortgage Loan
plus accrued interest), an amount which, together with all Liquidation
Proceeds, Insurance Proceeds, and other collections on such Liquidated Loan
(net of amounts payable or reimbursable therefrom to the Master Servicer
for related unpaid servicing fees and unreimbursed servicing expenses),
will equal the sum of (A) the unpaid principal balance of such Liquidated
Loan (plus accrued interest at the applicable Net Interest Rate) plus (B)
the amount of related servicing expenses, if any, not reimbursed to the
Master Servicer from Liquidation Proceeds, Insurance Proceeds and other
collections on such Liquidation Loan (which shall be paid to the Master
Servicer);
(ii) to the extent of any Special Hazard Amount, as to each
Mortgage Loan that is delinquent and as to which the Mortgaged Property has
suffered damage (other than physical damage caused by hostile or warlike
action in time of war or peace, by any weapons of war, by any insurrection
or rebellion, or by any nuclear reaction or nuclear radiation or nuclear
contamination whether controlled or uncontrolled, or by any action taken by
any governmental authority in response to any of the foregoing) and for
which any amounts paid or payable under the related primary hazard
insurance policy or any Special Hazard Insurance Policy are not sufficient
to pay either of the following amounts, an amount which, together with all
Insurance Proceeds paid or payable under the related primary hazard
insurance policy or any Special Hazard Insurance Policy (net, if such
proceeds are not to be applied to restore such Mortgaged Property, of all
amounts payable or reimbursable therefrom to the Master Servicer for
related unpaid servicing fees and unreimbursed servicing expenses), will be
equal to the lesser of (A) the amount required to restore such Mortgaged
Property and (B) the sum of (1) the unpaid principal balance of such
Mortgage Loan (plus accrued interest at the applicable Net Interest Rate)
plus (2) the amount of related servicing expenses, if any, not reimbursed
to the Master Servicer from Insurance Proceeds paid under the related
primary hazard insurance policy or any Special Hazard Insurance Policy; and
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(iii) to the extent of any Bankruptcy Amount, with respect to any
Mortgage Loan that has been subject to bankruptcy proceedings as described
above, the amount of any debt service reduction or Deficient Valuation.
If the related Prospectus Supplement so provides, at such time as the
Letter of Credit Bank makes a payment as described above with respect to a
Liquidated Loan, or a payment of the full amount owing on a Mortgage Loan as to
which the Mortgaged Property has been damaged (as described in (ii)(B) above),
the Liquidated Loan will be removed from the related Trust Fund in accordance
with the terms set forth in the related Prospectus Supplement and will no longer
be subject to the Agreement. Unless otherwise provided in the related Prospectus
Supplement, Mortgage Loans that have been subject to bankruptcy proceedings as
described above, or as to which payment under the Letter of Credit has been made
for the purpose of restoring the related Mortgaged Property (as described in
(ii)(A) above), will remain part of the related Trust Fund. Any Defaulted
Mortgage Amount, Special Hazard Amount and Bankruptcy Amount covered by any
Letter of Credit will each be reduced to the extent of related unreimbursed
draws thereunder.
In the event that the Letter of Credit Bank ceases to be a duly organized
commercial bank, or its debt obligations are rated lower than the highest rating
on any class of the Securities on the date of issuance by the Rating Agency or
Agencies, the Master Servicer or Trustee will use its best reasonable efforts to
obtain or cause to be obtained, as to each Letter of Credit, a substitute Letter
of Credit issued by a commercial bank that meets such requirements and providing
the same coverage; provided, however, that, unless otherwise provided in the
related Prospectus Supplement, if the fees charged or collateral required by
such successor Letter of Credit Bank shall be more than the fees charged or
collateral required by such predecessor Letter of Credit Bank, each component of
coverage thereunder may be reduced proportionately to such a level as results in
such fees and collateral being not more than the fees then charged and
collateral then required by such predecessor Letter of Credit Bank.
MORTGAGE POOL INSURANCE POLICY
As to any series of Securities to be covered by a Mortgage Pool Insurance
Policy with respect to any Defaulted Mortgage Amount, the Master Servicer will
exercise its best reasonable efforts to maintain or cause to be maintained the
Mortgage Pool Insurance Policy in full force and effect, unless coverage
thereunder has been exhausted through payment of claims. The Master Servicer
will agree to pay the premiums for each Mortgage Pool Insurance Policy on a
timely basis unless, as described in the related Prospectus Supplement, the
payment of such fees is otherwise provided.
The Master Servicer will present or cause to be presented claims to the
insurer under each Mortgage Pool Insurance Policy. Mortgage Pool Insurance
Policies, however, are not blanket policies against loss, since claims
thereunder may be made only upon satisfaction of certain conditions, as
described below and, if applicable, in the related Prospectus Supplement.
Mortgage Pool Insurance Policies do not cover losses arising out of the
matters excluded from coverage under the primary mortgage insurance policy, or
losses due to a failure to pay or denial of a claim under a primary mortgage
insurance policy, irrespective of the reason therefor.
Mortgage Pool Insurance Policies in general provide that no claim may
validly be presented thereunder with respect to a Mortgage Loan unless (i) an
acceptable primary mortgage insurance policy, if the initial Loan-to-Value Ratio
of the Mortgage Loan exceeded 80%, has been kept in force until such
Loan-to-Value Ratio is reduced to 80%; (ii) premiums on the primary hazard
insurance policy have been paid by the insured and real estate taxes and
foreclosure, protection and preservation expenses have been advanced by or on
behalf of the insured, as approved by the insurer; (iii) if there has been
physical loss or damage to the Mortgaged Property, it has been restored to its
physical condition at the time the Mortgage Loan became insured under the
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Mortgage Pool Insurance Policy, subject to reasonable wear and tear; and (iv)
the insured has acquired good and merchantable title to the Mortgaged Property,
free and clear of all liens and encumbrances, except permitted encumbrances,
including any right of redemption by or on behalf of the mortgagor, and if
required by the insurer, has sold the property with the approval of the insurer.
Assuming the satisfaction of these conditions, the insurer has the option
to either (i) acquire the property securing the defaulted Mortgage Loan for a
payment equal to the principal balance thereof plus accrued and unpaid interest
at the Interest Rate to the date of acquisition and certain expenses described
above advanced by or on behalf of the insured, on condition that the insurer
must be provided with good and merchantable title to the Mortgaged Property
(unless the property has been conveyed pursuant to the terms of the applicable
primary mortgage insurance policy) or (ii) pay the amount by which the sum of
the principal balance of the defaulted Mortgage Loan and accrued and unpaid
interest at the Interest Rate to the date of the payment of the claim and such
expenses exceed the proceeds received from a sale of the Mortgaged Property
which the insurer has approved. In both (i) and (ii), the amount of payment
under a Mortgage Pool Insurance Policy will be reduced by the amount of such
loss paid under the primary mortgage insurance policy.
Unless earlier directed by the insurer, a claim under a Mortgage Pool
Insurance Policy must be filed (i) in the case when a primary mortgage insurance
policy is in force, within a specified number of days (typically, 60 days) after
the claim for loss has been settled or paid thereunder, or after acquisition by
the insured or a sale of the property approved by the insurer, whichever is
later, or (ii) in the case when a primary mortgage insurance policy is not in
force, within a specified number of days (typically, 60 days) after acquisition
by the insured or a sale of the property approved by the insurer. A claim must
be paid within a specified period (typically, 30 days) after the claim is made
by the insured.
Unless otherwise specified in the Prospectus Supplement relating to a
series of Securities, the amount of coverage under each Mortgage Pool Insurance
Policy will be reduced over the life of the Securities of any series by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the insurer upon disposition of all acquired properties. The amount
of claims paid includes certain expenses incurred by the Master Servicer as well
as accrued interest on delinquent Mortgage Loans to the date of payment of the
claim. See "Certain Legal Aspects of Mortgage Loans--Foreclosure on Mortgages"
and "--Repossession with respect to Contracts". Accordingly, if aggregate net
claims paid under a Mortgage Pool Insurance Policy reach the applicable policy
limit, coverage thereunder will be exhausted and any further losses will be
borne by Securityholders of the related series.
In the event that an insurer under a Mortgage Pool Insurance Policy ceases
to be a Qualified Insurer (such term being defined to mean a private mortgage
guaranty insurance company duly qualified as such under applicable laws and
approved as an insurer by FHLMC, FNMA, or any successor entity, and having a
claims-paying ability acceptable to the Rating Agency or Agencies), the Master
Servicer will use its best reasonable efforts to obtain or cause to be obtained
from another Qualified Insurer a replacement insurance policy comparable to the
Mortgage Pool Insurance Policy with a total coverage equal to the then
outstanding coverage of such Mortgage Pool Insurance Policy; provided, however,
that, unless otherwise provided in the related Prospectus Supplement, if the
cost of the replacement policy is greater than the cost of such Mortgage Pool
Insurance Policy, the coverage of the replacement policy may be reduced to the
level such that its premium rate does not exceed the premium rate on such
Mortgage Pool Insurance Policy. However, in the event that the insurer ceases to
be a Qualified Insurer solely because it ceases to be approved as an insurer by
FHLMC, FNMA, or any successor entity, the Master Servicer will review, or cause
to be reviewed, the financial condition of the insurer with a view towards
etermining whether recoveries under the Mortgage Pool Insurance Policy are
jeopardized for reasons related to the financial condition of the insurer. If
the Master Servicer
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determines that recoveries are so jeopardized, it will exercise its best
reasonable efforts to obtain from another Qualified Insurer a replacement policy
as described above, subject to the same cost limitation.
Because each Mortgage Pool Insurance Policy will require that the property
subject to a defaulted Mortgage Loan be restored to its original condition prior
to claiming against the insurer, such policy will not provide coverage against
hazard losses. As set forth below, the primary hazard insurance policies
covering the Mortgage Loans typically exclude from coverage physical damage
resulting from a number of causes and, even when the damage is covered, may
afford recoveries that are significantly less than the full replacement cost of
such losses. Further, a special hazard insurance policy (or a Letter of Credit
to the extent of the Special Hazard Amount) will not cover all risks, and the
coverage thereunder will be limited in amount. Certain hazard risks will, as a
result, be uninsured and will therefore be borne by Securityholders.
SPECIAL HAZARD INSURANCE POLICY
As to any series of Securities to be covered by an Insurance Instrument
that does not cover any Special Hazard Amount, unless otherwise provided in the
related Prospectus Supplement, the Master Servicer will exercise its best
reasonable efforts to maintain or cause to be maintained a Special Hazard
Insurance Policy in full force and effect covering the Special Hazard Amount,
unless coverage thereunder has been exhausted through payment of claims;
provided, however, that the Master Servicer is under no obligation to maintain
such policy in the event that any Insurance Instrument covering such series as
to any Defaulted Mortgage Amount is no longer in effect. The Master Servicer
will agree to pay the premiums on each Special Hazard Insurance Policy on a
timely basis unless, as described in the related Prospectus Supplement, payment
of such premiums is otherwise provided for.
Each Special Hazard Insurance Policy will, subject to the limitations
described below, protect holders of Securities of the related series from (i)
loss by reason of damage to Mortgaged Properties caused by certain hazards
(including earthquakes and mudflows) not insured against under the primary
hazard insurance policies or a flood insurance policy if the property is in a
designated flood area and (ii) loss from partial damage caused by reason of the
application of the co-insurance clause contained in the primary hazard insurance
policies. Special Hazard Insurance Policies will not cover losses occasioned by
normal wear and tear, war, civil insurrection, certain governmental actions,
errors in design, nuclear or chemical reaction or contamination, faulty
workmanship or materials (except under certain circumstances), flood (if the
property is located in a designated flood area) and certain other risks.
Subject to the foregoing limitations, each Special Hazard Insurance Policy
will provide that, when there has been damage to property securing a defaulted
Mortgage Loan acquired by the insured and to the extent the damage is not
covered by the related primary hazard insurance policy or flood insurance
policy, the insurer will pay the lesser of (i) the cost of repair to the
property and (ii) upon transfer of the property to the insurer, the unpaid
principal balance of such Mortgage Loan at the time of acquisition of the
property by foreclosure, deed in lieu of foreclosure or repossession, plus
accrued interest to the date of claim settlement and certain expenses incurred
by or on behalf of the Master Servicer with respect to the property. The amount
of coverage under the Special Hazard Insurance Policy will be reduced by the sum
of (a) the unpaid principal balance plus accrued interest and certain expenses
paid by the insurer, less any net proceeds realized by the insurer from the sale
of the property, plus (b) any amount paid as the cost of repair of the property.
Restoration of the property with the proceeds described under clause (i) of
the immediately preceding paragraph will satisfy the condition under a Credit
Insurance Instrument that the property be restored before a claim thereunder may
be validly presented with respect to the defaulted Mortgage Loan secured by such
property. The payment described under clause (ii) of the immediately preceding
paragraph will render unnecessary presentation of a claim in respect of
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such Mortgage Loan under a Credit Insurance Instrument as to any Defaulted
Mortgage Amount. Therefore, so long as the Credit Insurance Instrument remains
in effect, the payment by the insurer of either of the above alternative amounts
will not affect the total insurance proceeds paid to Securityholders, but will
affect the relative amounts of coverage remaining under any Special Hazard
Insurance Policy and any Credit Insurance Instrument.
The sale of a Mortgaged Property must be approved by the insurer under any
Special Hazard Insurance Policy and funds received by the insured in excess of
the unpaid principal balance of the Mortgage Loan plus interest thereon to the
date of sale plus certain expenses incurred by or on behalf of the Master
Servicer with respect to the property (not to exceed the amount actually paid by
the insurer) must be refunded to such insurer and, to that extent, coverage
under the Special Hazard Insurance Policy will be restored. If aggregate claim
payments under a Special Hazard Insurance Policy reach the policy limit,
coverage thereunder will be exhausted and any further losses will be borne by
Securityholders.
A claim under a Special Hazard Insurance Policy generally must be filed
within a specified number of days (typically, 60 days) after the insured has
acquired good and merchantable title to the property, and a claim payment is
payable within a specified number of days (typically, 30 days) after a claim is
accepted by the insurer. Special Hazard Insurance Policies provide that no claim
may be paid unless primary hazard insurance policy premiums, flood insurance
premiums (if the property is located in a federally designated flood area) and,
as approved by the insurer, real estate property taxes, property protection and
preservation expenses and foreclosure or repossession costs have been paid by or
on behalf of the insured, and unless the insured has maintained the primary
hazard insurance policy and, if the property is located in a federally
designated flood area, flood insurance, as required by the Special Hazard
Insurance Policy.
If a Special Hazard Insurance Policy is cancelled or terminated for any
reason (other than the exhaustion of total policy coverage), the Master Servicer
will use its best reasonable efforts to obtain or cause to be obtained from
another Insurer a replacement policy comparable to such Special Hazard Insurance
Policy with a total coverage that is equal to the then existing coverage of such
Special Hazard Insurance Policy; provided, however, that, unless otherwise
provided in the related Prospectus Supplement, if the cost of the replacement
policy is greater than the cost of such Special Hazard Insurance Policy, the
coverage of the replacement policy may be reduced to a level such that its
premium rate does not exceed the premium rate on such Special Hazard Insurance
Policy.
Since each Special Hazard Insurance Policy is designed to permit full
recoveries as to any Defaulted Mortgage Amount under a Credit Insurance
Instrument in circumstances in which such recoveries would otherwise be
unavailable because property has been damaged by a cause not insured against by
a primary hazard insurance policy and thus would not be restored, each Agreement
provides that, if the related Credit Insurance Instrument shall have lapsed or
terminated or been exhausted through payment of claims, the Master Servicer will
be under no further obligation to maintain the Special Hazard Insurance Policy.
BANKRUPTCY BOND
As to any series of Securities to be covered by a Bankruptcy Bond with
respect to any Bankruptcy Amount, the Master Servicer will exercise its best
reasonable efforts to maintain or cause to be maintained the Bankruptcy Bond in
full force and effect, unless coverage thereunder has been exhausted through
payment of claims. The Master Servicer will pay or cause to be paid the premiums
for each Bankruptcy Bond on a timely basis, unless, as described in the related
Prospectus Supplement, payment of such premiums is otherwise provided for.
Subject to the limit of the dollar amount of coverage provided, each Bankruptcy
Bond will cover certain losses resulting from an extension of the maturity of a
Mortgage Loan, or a reduction by the bankruptcy court of the principal balance
of or the Interest Rate on a Mortgage Loan, and the unpaid interest on the
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amount of a principal reduction during the pendency of a proceeding under the
Bankruptcy Code. See "Certain Legal Aspects of Mortgage Loans--Foreclosure on
Mortgages" and "--Repossession with respect to Contracts".
FINANCIAL GUARANTEE INSURANCE
Financial guarantee insurance ("Financial Guarantee Insurance"), if any,
with respect to a series of Securities will be provided by one or more insurance
companies. Such Financial Guarantee Insurance will guarantee, with respect to
one or more classes of Securities of the related series, timely distributions of
interest and full distributions of principal on the basis of a schedule of
principal distributions set forth in or determined in the manner specified in
the related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Financial Guarantee Insurance will also guarantee against any
payment made to a Securityholder that is subsequently recovered as a "voidable
preference" payment under federal bankruptcy law. A copy of the Financial
Guarantee Insurance policy for a series, if any, will be filed with the
Commission as an exhibit to a Current Report on Form 8-K to be filed with the
Commission within 15 days of issuance of the Securities of the related series.
RESERVE FUND
If so provided in the related Prospectus Supplement, the Depositor will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash, one or more irrevocable letters of credit or one or more
Permitted Investments in specified amounts, or any other instrument satisfactory
to the Rating Agency or Agencies, which will be applied and maintained in the
manner and under the conditions specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, to the extent described in the
Prospectus Supplement for a Senior/Subordinate Series, a Reserve Fund may be
funded through application of all or a portion of amounts otherwise payable on
the Subordinate Securities. Amounts in a Reserve Fund may be distributed to
Securityholders, or applied to reimburse the Master Servicer for outstanding
advances, or may be used for other purposes, in the manner and to the extent
specified in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, any such Reserve Fund will not be deemed to be
part of the related Trust Fund.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, the Master Servicer or any
other person named in the related Prospectus Supplement.
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include certain other agreements, such
as interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements designed to reduce the
effects of interest rate or currency exchange rate fluctuations on the Trust
Fund Assets on one or more classes of Securities. The principal terms of any
such guaranteed investment contract or other agreement (any such agreement a
"Cash Flow Agreement"), and the identity of the Cash Flow Agreement obligor,
will be described in the Prospectus Supplement for a series of Securities.
DESCRIPTION OF PRIMARY INSURANCE POLICIES
Each Mortgage Loan will be covered by a primary hazard insurance policy
and, if required as described below, a primary mortgage insurance policy.
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PRIMARY MORTGAGE INSURANCE POLICIES
As set forth under "Description of the Securities--Realization Upon
Defaulted Mortgage Loans", the Master Servicer will maintain or cause to be
maintained with respect to each Mortgage Loan, other than a Multifamily Loan, a
primary mortgage insurance policy in accordance with the underwriting standards
described herein and in the related Prospectus Supplement. Although the terms
and conditions of primary mortgage insurance policies differ, each primary
mortgage insurance policy will generally cover losses up to an amount equal to
the excess of the unpaid principal amount of a defaulted Mortgage Loan (plus
accrued and unpaid interest thereon and certain approved expenses) over a
specified percentage of the Value of the related Mortgaged Property.
As conditions precedent to the filing or payment of a claim under a primary
mortgage insurance policy, the insured will typically be required, in the event
of default by the borrower, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
insurer, real estate taxes, protection and preservation expenses and foreclosure
and related costs; (ii) in the event of any physical loss or damage to the
Mortgaged Property, have the Mortgaged Property restored to at least its
condition at the effective date of theprimary mortgage insurance policy
(ordinary wear and tear excepted); and (iii) tender to the insurer good and
merchantable title to, and possession of, the Mortgaged Property.
PRIMARY HAZARD INSURANCE POLICIES
Each Agreement will require the Master Servicer to cause the borrower on
each Mortgage Loan to maintain a primary hazard insurance policy providing for
coverage of the standard form of fire insurance policy with extended coverage
customary in the state in which the Mortgaged Property is located. Unless
otherwise specified in the related Prospectus Supplement, such coverage will be
in general in an amount equal to the lesser of the principal balance owing on
such Mortgage Loan and the amount necessary to fully compensate for any damage
or loss to the improvements on the Mortgaged Property on a replacement cost
basis, but in either case not less than the amount necessary to avoid the
application of any co-insurance clause contained in the hazard insurance policy.
The ability of the Master Servicer to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any primary hazard insurance policy and under any flood insurance
policy referred to below, or upon the extent to which information in this regard
is furnished by borrowers. All amounts collected by the Master Servicer under
any such policy (except for amounts to be applied to the restoration or repair
of the Mortgaged Property or released to the borrower in accordance with the
Master Servicer's normal servicing procedures, subject to the terms and
conditions of the related Mortgage and Mortgage Note) will be deposited in the
Certificate Account. The Agreement provides that the Master Servicer may satisfy
its obligation to cause each borrower to maintain such a hazard insurance policy
by the Master Servicer's maintaining a blanket policy insuring against hazard
losses on the Mortgage Loans. If such blanket policy contains a deductible
clause, the Master Servicer will deposit in the Certificate Account all sums
that would have been deposited therein but for such clause. The Master Servicer
also is required to maintain a fidelity bond and errors and omissions policy
with respect to its officers and employees that provides coverage against losses
that may be sustained as a result of an officer's or employee's misappropriation
of funds or errors and omissions in failing to maintain insurance, subject to
certain limitations as to amount of coverage, deductible amounts, conditions,
exclusions and exceptions.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different
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insurers under different state laws in accordance with different applicable
state forms, and therefore will not contain identical terms and conditions, the
basic terms thereof are dictated by respective state laws, and most such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. When a
Mortgaged Property is located at origination in a federally designated flood
area, each Agreement requires the Master Servicer to cause the borrower to
acquire and maintain flood insurance in an amount equal in general to the lesser
of (i) the amount necessary to fully compensate for any damage or loss to the
improvements which are part of the Mortgaged Property on a replacement cost
basis and (ii) the maximum amount of insurance available under the federal flood
insurance program, whether or not the area is participating in the program.
The hazard insurance policies covering the Mortgaged Properties typically
contain a co-insurance clause that in effect requires the insured at all times
to carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause generally provides that the insurer's
liability in the event of partial loss does not exceed the lesser of (i) the
replacement cost of the improvements less physical depreciation and (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
The Master Servicer will not require that a hazard or flood insurance
policy be maintained for any Cooperative Loan. Generally, the Cooperative is
responsible for maintenance of hazard insurance for the property owned by the
Cooperative, and the tenant-stockholders of that Cooperative do not maintain
individual hazard insurance policies. To the extent, however, that a Cooperative
and the related borrower on a Cooperative Note do not maintain such insurance or
do not maintain adequate coverage or any insurance proceeds are not applied to
the restoration of the damaged property, damage to such borrower's Cooperative
apartment or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Note.
Since the amount of hazard insurance the Master Servicer will cause to be
maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, in the event of partial loss hazard
insurance proceeds may be insufficient to restore fully the damaged property.
Under the terms of the Mortgage Loans, borrowers are required to present claims
to insurers under hazard insurance policies maintained on the Mortgaged
Properties. The Master Servicer, on behalf of the Trustee and Securityholders,
is obligated to present or cause to be presented claims under any blanket
insurance policy insuring against hazard losses on Mortgaged Properties.
However, the ability of the Master Servicer to present or cause to be presented
such claims is dependent upon the extent to which information in this regard is
furnished to the Master Servicer by borrowers.
FHA INSURANCE
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under The Housing Act and the United
States Housing Act of 1937, as amended.
There are two primary FHA insurance programs that are available for
multifamily mortgage loans. Sections 221(d)(3) and (d)(4) of the Housing Act
allow the Department of Housing and Urban Development ("HUD") to insure mortgage
loans that are secured by newly constructed and substantially rehabilitated
multifamily rental projects. Section 244 of the Housing Act provides for
co-insurance of such mortgage loans made under Sections 221(d)(3) and (d)(4) by
HUD/FHA and
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a HUD-approved co-insurer. Generally the term of such a mortgage loan may be up
to 40 years and the ratio of the loan amount to property replacement cost can be
up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans made
for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan to value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Presently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be obligated to purchase any such debenture
issued in satisfaction of a defaulted FHA insured Mortgage Loan serviced by it
for an amount equal to the principal amount of any such debenture.
The Master Servicer will be required to take such steps as are reasonably
necessary to keep FHA insurance in full force and effect.
VA GUARANTEES
The VA is an Executive Branch Department of the United States, headed by
the Secretary of Veterans Affairs. VA currently administers a variety of federal
assistance programs on behalf of eligible veterans and their dependents and
beneficiaries. VA administers a loan guaranty program pursuant to which VA
guarantees a portion of loans made to eligible veterans.
Under the VA loan guaranty program, a VA Loan may be made to any eligible
veteran by an approved private sector mortgage lender. VA guarantees payment to
the holder of that loan of a fixed percentage of the loan indebtedness, up to a
maximum dollar amount, in the event of default by the veteran borrower. When a
delinquency is reported to VA and no realistic alternative to foreclosure is
developed by the loan holder or through VA's supplemental servicing of the loan,
VA determines, through an economic analysis, whether VA will (a) authorize the
holder to convey the property securing the VA Loan to the Secretary of Veterans
Affairs following termination or (b) pay the loan guaranty amount to the holder.
The decision as to disposition of properties securing defaulted VA Loans is made
on a case-by-case basis using the procedures set forth in 38 U.S.C. Section
3732(c), as amended.
The Master Servicer will be required to take such steps as are reasonably
necessary to keep the VA guarantees in full force and effect.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of loans secured by residential properties. Because such legal aspects
are governed in part by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Mortgage Loans. See "The Trust Funds--The Mortgage Loans".
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GENERAL
All of the Mortgage Loans, except as described below, are loans to
homeowners and all of the Single-Family Loans and Multifamily Loans are
evidenced by notes or bonds and secured by instruments which may be mortgages,
deeds of trust, security deeds or deeds to secure debt, depending upon the type
of security instrument customary to grant a security interest in real property
in the state in which the Single-Family Property or Multifamily Property, as the
case may be, is located. If specified in the Prospectus Supplement relating to a
series of Securities, a Trust Fund may also contain (i) Cooperative Loans
evidenced by promissory notes secured by security interests in shares issued by
private cooperative housing corporations and in the related proprietary leases
or occupancy agreements granting exclusive rights to occupy specific dwelling
units in the related buildings or (ii) Contracts evidencing both (a) the
obligation of the obligor to repay the loan evidenced thereby and (b) the grant
of a security interest in the related Manufactured Home to secure repayment of
such loan. Any of the foregoing types of encumbrance will create a lien upon, or
grant a title interest in, the subject property, the priority of which will
depend on the terms of the particular security instrument as well as the order
of recordation or filing of the instrument in the appropriate public office.
Such a lien is not prior to the lien for real estate taxes and assessments.
SINGLE-FAMILY LOANS AND MULTIFAMILY LOANS
The Single-Family Loans and Multifamily Loans will be secured by either
mortgages, deeds of trust, security deeds or deeds to secure debt depending upon
the type of security instrument customary to grant a security interest according
to the prevailing practice in the state in which the property subject to a
Single-Family Loan or Multifamily Loan is located. The filing of a mortgage or a
deed of trust creates a lien upon or conveys title to the real property
encumbered by such instrument and represents the security for the repayment of
an obligation that is customarily evidenced by a promissory note. It is not
prior to the lien for real estate taxes and assessments. Priority with respect
to mortgages and deeds of trust depends on their terms and generally on the
order of recording with the applicable state, county or municipal office. There
are two parties to a mortgage, the mortgagor, who is the borrower/homeowner or
the land trustee (as described below), and the mortgagee, who is the lender.
Under the mortgage instrument, the mortgagor delivers to the mortgagee a note or
bond and the mortgage. (In the case of a land trust, title to the property is
held by a land trustee under a land trust agreement, while the
borrower/homeowner is the beneficiary of the land trust; at origination of a
mortgage loan, the borrower executes a separate undertaking to make payments on
the mortgage note.) Although a deed of trust is similar to a mortgage, a deed of
trust normally has three parties, the trustor (similar to a mortgagor), who may
or may not be the borrower, the beneficiary (similar to a mortgagee), who is the
lender, and the trustee, a third-party grantee. Under a deed of trust, the
trustor grants the property, irrevocably until the debt is paid, in trust,
generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The mortgagee's
authority under a mortgage and the trustee's authority under a deed of trust,
security deed or deed to secure debt are governed by the law of the state in
which the real property is located, the express provisions of the mortgage, deed
of trust, security deed or deed to secure debt and, in some cases, the
directions of the beneficiary.
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LEASES AND RENTS
Mortgages and deeds of trust which encumber Multifamily Property often
contain an assignment of rents and leases, pursuant to which the borrower
assigns its right, title and interest as landlord under each lease and the
income derived therefrom to the lender, while retaining a license to collect the
rents for so long as there is no default. If the borrower defaults, the license
terminates and the lender is entitled to collect the rents. Local law may
require that the lender take possession of the property and appoint a receiver
before becoming entitled to collect the rents.
Even after a foreclosure or the enforcement of an assignment of rents and
leases, the potential rent payments from the property may not be sufficient to
service the mortgage debt. For instance, the net income that would otherwise be
generated from the property may be insufficient to service the mortgage debt if
the leases on the property are at below-market rents, or as the result of
excessive maintenance, repair or other obligations inherited by the lender as
landlord. In the event of a borrower's default, the amount of rent the lender is
able to collect from the tenants can significantly affect the value of the
lender's security interest.
COOPERATIVE LOANS
The Cooperative owns or has a leasehold interest in all the real property
and owns in fee or leases the building and all separate dwelling units therein.
The Cooperative is directly responsible for project management and, in most
cases, payment of real estate taxes, other governmental impositions and hazard
and liability insurance. If there is a blanket mortgage on the cooperative
apartment building and/or underlying land, as is generally the case, or an
underlying lease of the land, as is the case in some instances, the Cooperative,
as project mortgagor, or lessee, as the case may be, is also responsible for
meeting these blanket mortgage or rental obligations. A blanket mortgage is
ordinarily incurred by the Cooperative in connection with either the
construction or purchase of the Cooperative's apartment building or the
obtaining of capital by the Cooperative. The interests of the occupants under
proprietary leases or occupancy agreements as to which the Cooperative is the
landlord are generally subordinate to the interests of the holder of the blanket
mortgage and to the interest of the holder of a land lease. If the Cooperative
is unable to meet the payment obligations (i) arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements or (ii) arising under its land lease, the holder of the landlord's
interest under the land lease could terminate it and all subordinate proprietary
leases and occupancy agreements. Also, the blanket mortgage on a Cooperative may
provide financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at final
maturity. The inability of the Cooperative to refinance this mortgage and its
consequent inability to make such final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either event,
foreclosure by the holder of the blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender that financed the purchase by an individual
tenant-stockholder of Cooperative shares or, in the case of the Trust Fund, the
collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata
share of the Cooperative's payments for its blanket mortgage, real property
taxes, maintenance expenses and other capital or ordinary expenses. An ownership
interest in a
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Cooperative and accompanying occupancy rights is financed through a Cooperative
share loan evidenced by a promissory note and secured by an assignment of and a
security interest in the occupancy agreement or proprietary lease and a security
interest in the related Cooperative shares. The lender generally takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the Cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of Cooperative shares. See "Foreclosure on Cooperative
Shares" below.
CONTRACTS
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the state or
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for manufactured homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC which has been adopted by all states. Such financing statements are
effective for five years and must be renewed at the end of each five years. The
certificate of title laws adopted by the majority of states provide that
ownership of motor vehicles and manufactured housing shall be evidenced by a
certificate of title issued by the motor vehicles department (or a similar
entity) of such state. In the states that have enacted certificate of title
laws, a security interest in a unit of manufactured housing, so long as it is
not attached to land in so permanent a fashion as to become a fixture, is
generally perfected by the recording of such interest on the certificate of
title to the unit in the appropriate motor vehicle registration office or by
delivery of the required documents and payment of a fee to such office,
depending on state law.
The Master Servicer will be required under the related Agreement to effect
such notation or delivery of the required documents and fees, and to obtain
possession of the certificate of title, as appropriate under the laws of the
state in which any Manufactured Home is registered. In the event the Master
Servicer fails, due to clerical errors or otherwise, to effect such notation or
delivery, or files the security interest under the wrong law (for example, under
a motor vehicle title statute rather than under the UCC, in a few states), the
Trustee may not have a first priority security interest in the Manufactured Home
securing a Contract. As manufactured homes have become larger and often have
been attached to their sites without any apparent intention by the borrowers to
move them, courts in many states have held that manufactured homes may, under
certain circumstances, become subject to real estate title and recording laws.
As a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the home
under applicable state real estate law. In order to perfect a security interest
in a manufactured home under real estate laws, the holder of the security
interest must file either a "fixture filing" under the provisions of the UCC or
a real estate mortgage under the real estate laws of the state where the home is
located. These filings must be made in the real estate records office of the
county where the home is located. Generally, Contracts will contain provisions
prohibiting the obligor from permanently attaching the Manufactured Home to its
site. So long as the obligor does not violate this agreement, a security
interest in the Manufactured Home will be governed by the certificate of title
laws or the UCC, and the notation of the security interest on the certificate of
title or the filing of a UCC financing statement will be effective to maintain
the priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to its site, other parties could
obtain an interest in the Manufactured Home that is prior to the security
interest originally retained by the seller and transferred to the Depositor.
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The Depositor will assign or cause to be assigned a security interest in
the Manufactured Homes to the Trustee, on behalf of the Securityholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Depositor,
the Master Servicer nor the Trustee will amend the certificates of title to
identify the Trustee, on behalf of the Securityholders, as the new secured party
and, accordingly, the Depositor or the Mortgage Loan Seller will continue to be
named as the secured party on the certificates of title relating to the
Manufactured Homes. In most states, such assignment is an effective conveyance
of such security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to the Depositor's
rights as the secured party. However, in some states there exists a risk that,
in the absence of an amendment to the certificate of title, such assignment of
the security interest might not be held effective against creditors of the
Depositor or Mortgage Loan Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Depositor on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Trustee against the rights of subsequent purchasers of
a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the Depositor
has failed to perfect or cause to be perfected the security interest assigned to
the Trust Fund, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the Trustee, on
behalf of the Securityholders, as the new secured party on the certificate of
title that, through fraud or negligence, the security interest of the Trustee
could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and re-register
the Manufactured Home in such state, and if the Depositor did not take steps to
re-perfect its security interest in such state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a Manufactured Home;
accordingly, the Depositor must surrender possession if it holds the certificate
of title to such Manufactured Home or, in the case of Manufactured Homes
registered in states that provide for notation of lien, the Depositor would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the Depositor would have the
opportunity to re- perfect its security interest in the Manufactured Home in the
state of relocation. In states that do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under each related Agreement, the Master Servicer will be obligated to
take such steps, at the Master Servicer's expense, as are necessary to maintain
perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Depositor will obtain the representation of the Mortgage Loan Seller that it has
no knowledge of any such liens with respect to any Manufactured Home securing a
Contract. However, such liens could arise at any time during the term of a
Contract. No notice will be given to the Trustee or Securityholders in the event
such a lien arises.
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FORECLOSURE ON MORTGAGES
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust, which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In some states, the trustee must record a
notice of default and send a copy to the borrower-trustor and to any person who
has recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any junior lienholder. The
trustor, borrower, or any person having a junior encumbrance on the real estate,
may, during a reinstatement period, cure the default by paying the entire amount
in arrears plus the costs and expenses incurred in enforcing the obligation.
Generally, state law controls the amount of foreclosure expenses and costs,
including attorneys' fees, that may be recovered by a lender. If the deed of
trust is not reinstated, a notice of sale must be posted in a public place and,
in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property, recorded and sent to all parties having an
interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage and in the mortgaged
property. It is regulated by statutes and rules and subject throughout to the
court's equitable powers. Generally, a mortgagor is bound by the terms of the
mortgage note and the mortgage as made and cannot be relieved from its own
default. However, since a foreclosure action is equitable in nature and is
addressed to a court of equity, the court may relieve a mortgagor of a default
and deny the mortgagee foreclosure on proof that the mortgagor's default was
neither willful nor in bad faith and that the mortgagee's action was such as to
establish a waiver, or fraud, bad faith, oppressive or unconscionable conduct as
to warrant a court of equity to refuse affirmative relief to the mortgagee.
Under certain circumstances a court of equity may relieve the mortgagor from an
entirely technical default where such default was not willful.
A foreclosure action or sale pursuant to a power of sale is subject to most
of the delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring up to several years to complete. Moreover,
recent judicial decisions suggest that a non-collusive, regularly conducted
foreclosure sale or sale pursuant to a power of sale may be challenged as a
fraudulent conveyance, regardless of the parties' intent, if a court determines
that the sale was for less than fair consideration and such sale occurred while
the mortgagor was insolvent and within one year (or within the state statute of
limitations if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law) of the filing of bankruptcy. Similarly, a suit
against the debtor on the mortgage note may take several years.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is a public sale.
However, because of the difficulty potential third party purchasers at the sale
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee for an amount equal to the principal amount of the mortgage or deed of
trust plus accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burdens of ownership, including obtaining
casualty insurance, paying taxes and making such repairs at its own expense as
are necessary to render the property suitable for sale. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss may be reduced by the receipt of
any mortgage insurance proceeds.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale
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or undertake the obligation to make payments on the senior mortgages in the
event the mortgagor is in default thereunder, in either event adding the amounts
expended to the balance due on the junior loan, and may be subrogated to the
rights of the senior mortgagees. In addition, in the event that the foreclosure
of a junior mortgage triggers the enforcement of a "due-on-sale" clause in a
senior mortgage, the junior mortgagee may be required to pay the full amount of
the senior mortgages to the senior mortgagees. Accordingly, with respect to
those Mortgage Loans which are junior mortgage loans, if the lender purchases
the property, the lender's title will be subject to all senior liens and claims
and certain governmental liens. The proceeds received by the referee or trustee
from the sale are applied first to the costs, fees and expenses of sale and then
in satisfaction of the indebtedness secured by the mortgage or deed of trust
under which the sale was conducted. Any remaining proceeds are generally payable
to the holders of junior mortgages or deeds of trust and other liens and claims
in order of their priority, whether or not the borrower is in default. Any
additional proceeds are generally payable to the mortgagor or trustor. The
payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgagee or may require the institution of
separate legal proceeds.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
a lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower's failure to adequately maintain the property or
the borrower's execution of a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily-prescribed minimums. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protection to the borrower.
FORECLOSURE ON COOPERATIVE SHARES
The Cooperative shares and proprietary lease or occupancy agreement owned
by the tenant- stockholder and pledged to the lender are, in almost all cases,
subject to restrictions on transfer as set forth in the Cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease or
occupancy agreement, and may be cancelled by the Cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by such
tenant- stockholder, including mechanics' liens against the Cooperative
apartment building incurred by such tenant-stockholder. Typically, rent and
other obligations and charges arising under a proprietary lease or occupancy
agreement that are owed to the Cooperative are made liens upon the shares to
which the proprietary lease or occupancy agreement relates. In addition, the
proprietary lease or occupancy agreement generally permits the Cooperative to
terminate such lease or agreement in the event the tenant-stockholder fails to
make payments or defaults in the performance of covenants required thereunder.
Typically, the lender and the Cooperative enter into a recognition agreement
that, together with any lender protection provisions contained in the
proprietary lease, establishes the rights and obligations of both parties in the
event of a default by the tenant-stockholder on its obligations under the
proprietary lease or occupancy agreement. A default by the tenant-stockholder
under the proprietary lease or occupancy agreement will usually constitute a
default under the security agreement between the lender and the
tenant-stockholder.
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The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the Cooperative
apartment, subject, however, to the Cooperative's right to sums due under such
proprietary lease or occupancy agreement or that have become liens on the shares
relating to the proprietary lease or occupancy agreement. The total amount owed
to the Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the Cooperative Loan and accrued and unpaid
interest thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
Under the laws applicable in most states, foreclosure on the Cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to those shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner.
Whether a foreclosure sale has been conducted in a "commercially reasonable"
manner will depend on the facts in each case. In determining commercial
reasonableness, a court will look to the notice given the debtor and the method,
manner, time, place and terms of the foreclosure. Generally, a sale conducted
according to the usual practice of banks selling similar collateral will be
considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti- Deficiency Legislation and
Other Limitations on Lenders" below.
REPOSSESSION WITH RESPECT TO CONTRACTS
Repossession of manufactured housing is governed by state law. A few states
have enacted legislation that requires that the debtor be given an opportunity
to cure its default (typically 30 days to bring the account current) before
repossession can commence. So long as a manufactured home has not become so
attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in the
event of a default by the obligor will generally be governed by the UCC (except
in Louisiana). Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing. While the UCC as adopted by the various
states may vary in certain small particulars, the general repossession procedure
established by the UCC is as follows:
(i) Except in those states where the debtor must receive notice of
the right to cure a default, repossession can commence immediately upon
default without prior notice. Repossession may be effected either through
self-help (peaceable retaking without court order), voluntary repossession
or through judicial process (repossession pursuant to court- issued writ of
replevin). The self-help and/or voluntary repossession methods are more
commonly employed, and are accomplished simply by retaking possession of
the manufactured home. In cases in which the debtor objects or raises a
defense to repossession, a court order must be obtained from the
appropriate state court, and the manufactured home
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must then be repossessed in accordance with that order. Whether the method
employed is self- help, voluntary repossession or judicial repossession,
the repossession can be accomplished either by an actual physical removal
of the manufactured home to a secure location for refurbishment and resale
or by removing the occupants and their belongings from the manufactured
home and maintaining possession of the manufactured home on the location
where the occupants were residing. Various factors may affect whether the
manufactured home is physically removed or left on location, such as the
nature and term of the lease of the site on which it is located and the
condition of the unit. In many cases, leaving the manufactured home on
location is preferable, in the event that the home is already set up,
because the expenses of retaking and redelivery will be saved. However, in
those cases where the home is left on location, expenses for site rentals
will usually be incurred.
(ii) Once repossession has been achieved, preparation for the
subsequent disposition of the manufactured home can commence. The
disposition may be by public or private sale provided the method, manner,
time, place and terms of the sale are commercially reasonable.
(iii) Sale proceeds are to be applied first to repossession expenses
(expenses incurred in retaking, storage, preparing for sale to include
refurbishing costs and selling) and then to satisfaction of the
indebtedness. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale do not cover the full
amount of the indebtedness, the remainder may be sought from the debtor in
the form of a deficiency judgment in those states that do not prohibit or
limit such judgments. The deficiency judgment is a personal judgment
against the debtor for the shortfall. Occasionally, after resale of a
manufactured home and payment of all expenses and indebtedness, there is a
surplus of funds. In that case, the UCC requires the party suing for the
deficiency judgment to remit the surplus to the debtor. Because the
defaulting owner of a manufactured home generally has very little capital
or income available following repossession, a deficiency judgment may not
be sought in many cases or, if obtained, will be settled at a significant
discount in light of the defaulting owner's strained financial condition.
LOUISIANA LAW
Any contract secured by a manufactured home located in Louisiana will be
governed by Louisiana law rather than Article 9 of the UCC. Louisiana laws
provide similar mechanisms for perfection and enforcement of security interests
in manufactured housing used as collateral for an installment sale contract or
installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently affixed
to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the
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lender obtained an appraisal of the manufactured home prior to the sale and the
property was sold for at least two-thirds of its appraised value.
RIGHTS OF REDEMPTION WITH RESPECT TO SINGLE-FAMILY PROPERTIES AND MULTIFAMILY
PROPERTIES
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and certain foreclosed junior lienors are
given a statutory period in which to redeem the property from the foreclosure
sale. The right of redemption should be distinguished from the equity of
redemption, which is a nonstatutory right that must be exercised prior to the
foreclosure sale. In some states, redemption may occur only upon payment of the
entire principal balance of the loan, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The right of redemption would defeat the title of any purchaser
acquired at a public sale. Consequently, the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership and maintenance of the property until the redemption period has
expired. In some states, there is no right to redeem property after a trustee's
sale under a deed of trust.
NOTICE OF SALE; REDEMPTION RIGHTS WITH RESPECT TO MANUFACTURED HOMES
While state laws do not usually require notice to be given to debtors prior
to repossession, many states do require delivery of a notice of default and of
the debtor's right to cure defaults before repossession. The law in most states
also requires that the debtor be given notice of sale prior to the resale of the
home so that the owner may redeem at or before resale. In addition, the sale
must comply with the requirements of the UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon collateral and/or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, the filing of a
petition acts as a stay against the enforcement of remedies of collection of a
debt. Moreover, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 13 rehabilitative plan to cure a monetary default
with respect to a mortgage loan on a debtor's residence by paying arrearages
within a reasonable time period and reinstating the original mortgage loan
payment schedule even though the lender accelerated the mortgage loan and final
judgment of a foreclosure had been entered in state court (provided no sale of
the property had yet occurred) prior to the filing of the debtor's Chapter 13
petition. Some courts with federal bankruptcy
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jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a mortgage loan default by
paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified if
the borrower has filed a petition under Chapter 13. These courts have suggested
that such modifications may include reducing the amount of each monthly payment,
changing the rate of interest, altering the repayment schedule and reducing the
lender's security interest to the value of the residence, thus leaving the
lender a general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan. Federal bankruptcy law and
limited case law indicate that the foregoing modifications could not be applied
to the terms of a loan secured by property that is the principal residence of
the debtor. In all cases, the secured creditor is entitled to the value of its
security plus post-petition interest, attorneys' fees and costs to the extent
the value of the security exceeds the debt.
The Bankruptcy Reform Act of 1994 established the National Bankruptcy
Review Commission ("NBRC") for purposes of analyzing the nation's bankruptcy
laws and making recommendations to Congress for legislative changes to the
bankruptcy laws. A similar commission was involved in developing the Bankruptcy
Code. The NBRC delivered its report to Congress, the President of the United
States and the Chief Justice of the Supreme Court on October 20, 1997. Among
other topics, high leverage loans were addressed in the NBRC's report. Despite
certain ambiguities, the NBRC's report appears to recommend that Congress amend
Bankruptcy Code section 1322(b)(2) by treating a claim secured only by a junior
security interest in a debtor's principal residence as protected only to the
extent that the claim was secured when the security interest was made if the
value of the property securing the junior security interest is less than such
amount. However, the express language of the report implies that a claim secured
only by a junior security interest in a debtor's principal residence may not be
modified to reduce such claim below the appraised value of the property at the
time the security interest was made. A strong dissent by certain members of the
NBRC recommends that the protections of Bankruptcy Code section 1322(b)(2) be
extended to creditors principally secured by the debtor's principal residence.
Additionally, the NBRC's report recommends that a creditor's secured claim in
real property should be determined by the property's fair market value, less
hypothetical costs of sale. The standard advocated by this recommendation would
not apply to mortgages on the primary residence of a Chapter 11 or 13 debtor who
retains the residence if such mortgages are protected from modification such as
those senior mortgages not subject to modification pursuant to Bankruptcy Code
Sections 1322(b)(2) and 1123(b)(5). The final NBRC report may ultimately lead to
substantive changes to the existing Bankruptcy Code, such as reducing
outstanding loan balances to the appraised value of a debtor's principal
residence at the time the security interest in the property was taken, which
could affect the Mortgage Loans and the enforcement of rights therein.
Certain tax liens arising under the Code, may in certain circumstances
provide priority over the lien of a mortgage or deed of trust. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of single family mortgage loans by numerous
federal and some state consumer protection laws. These laws include the Federal
Truth-in-Lending Act, Regulation "Z", Real Estate Settlement Procedures Act,
Regulation "X", Equal Credit Opportunity Act, Regulation "B", Fair Credit
Billing Act, Fair Credit Housing Act, Fair Credit Reporting Act and related
statutes. These federal laws impose specific statutory liabilities upon lenders
who originate mortgage loans and who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the mortgage loans.
In particular, the originators' failure to comply with certain requirements of
the Federal Truth-in-Lending Act, as implemented by Regulation Z, could subject
both originators and assignees of such obligations to monetary penalties and
could result in obligors' rescinding loans against either originators or
assignees.
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In addition, certain of the Mortgage Loans are also subject to the Home
Ownership and Equity Protection Act of 1994 (the "Homeownership Act") (such
mortgage loans, "High Cost Loans"), if such Mortgage Loans were originated on or
after October 1, 1995, are not mortgage loans made to finance the purchase of
the mortgaged property and have interest rates or origination costs in excess of
certain prescribed levels. The Homeownership Act requires certain additional
disclosures, specifies the timing of such disclosures and limits or prohibits
inclusion of certain provisions in mortgages subject to the Homeownership Act.
Remedies available to the mortgagor include monetary penalties, as well as
recission rights if the appropriate disclosures were not given as required or if
the particular mortgage includes provisions prohibited by law. The Homeownership
Act also provides that any purchaser or assignee of a mortgage covered by the
Homeownership Act is subject to all of the claims and defenses to loan payment,
whether under the Federal Truth-in-Lending Act, as amended by the Homeownership
Act or other law, which the borrower could assert against the original lender
unless the purchaser or assignee did not know and could not with reasonable
diligence have determined that the Mortgage Loan was subject to the provisions
of the Homeownership Act. The maximum damages that may be recovered under the
Homeownership Act from an assignee is the remaining amount of indebtedness plus
the total amount paid by the borrower in connection with the Mortgage Loan.
FOR COOPERATIVE LOANS
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are junior to senior mortgages or deeds of trust which are not part
of the Trust Fund. The rights of the Securityholders as the holders of a junior
deed of trust or a junior mortgage are subordinate in lien priority and in
payment priority to those of the holder of the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or beneficiary to receive and
apply hazard insurance and condemnation proceeds and, upon default of the
mortgagor, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage or the sale
pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's
lien will be extinguished unless the junior lienholder satisfies the defaulted
senior loan or asserts its subordinate interest in a property in foreclosure
proceedings. See "--Foreclosure on Mortgages" herein.
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a senior mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity Act,
Regulation "B", the Fair Credit Reporting Act, the
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Real Estate Settlement Procedures Act, Regulation "X", the Fair Housing Act and
related statutes. These laws can impose specific statutory liabilities upon
creditors who fail to comply with their provisions. In some cases, this
liability may affect an assignee's ability to enforce a contract. In particular,
the originators' failure to comply with certain requirements of the Federal
Truth-in- Lending Act, as implemented by Regulation Z, could subject both
originators and assignees of such obligations to monetary penalties and could
result in obligors' rescinding the Contracts against either the originators or
assignees. Further if such Contracts are deemed High Cost Loans within the
meaning of the Homeownership Act, they would be subject to the same provisions
of the Homeownership Act as Mortgage Loans as described in "--Anti-Deficiency
Legislation and Other Limitations on Lenders" above.
Manufactured housing contracts often contain provisions obligating the
obligor to pay late charges if payments are not timely made. In certain cases,
federal and state law may specifically limit the amount of late charges that may
be collected. Unless otherwise provided in the related Prospectus Supplement,
under the Agreement, late charges will be retained by the Master Servicer as
additional servicing compensation, and any inability to collect these amounts
will not affect payments to Securityholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses which the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due thereunder.
Most of the Contracts in a Trust Fund will be subject to the requirements
of the FTC Rule. Accordingly, the Trustee, as holder of the Contracts, will be
subject to any claims or defenses that the purchaser of the related manufactured
home may assert against the seller of the manufactured home, subject to a
maximum liability equal to the amounts paid by the obligor on the Contract. If
an obligor is successful in asserting any such claim or defense, and if the
Mortgage Loan Seller had or should have had knowledge of such claim or defense,
the Master Servicer will have the right to require the Mortgage Loan Seller to
repurchase the Contract because of a breach of its Mortgage Loan Seller's
representation and warranty that no claims or defenses exist that would affect
the obligor's obligation to make the required payments under the Contract. The
Mortgage Loan Seller would then have the right to require the originating dealer
to repurchase the Contract from it and might also have the right to recover from
the dealer for any losses suffered by the Mortgage Loan Seller with respect to
which the dealer would have been primarily liable to the obligor.
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a lender to
realize upon collateral and/or enforce a deficiency judgment. For example,
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in a Chapter 13 proceeding under the federal bankruptcy law, a court may prevent
a lender from repossessing a home, and, as part of the rehabilitation plan,
reduce the amount of the secured indebtedness to the market value of the home at
the time of bankruptcy (as determined by the court), leaving the party providing
financing as a general unsecured creditor for the remainder of the indebtedness.
A bankruptcy court may also reduce the monthly payments due under a contract or
change the rate of interest and time of repayment of the indebtedness.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, all the related
Mortgage Loans will contain due-on-sale clauses. These clauses permit the lender
to accelerate the maturity of the loan if the borrower sells, transfers, or
conveys the property without the prior consent of the lender. The enforceability
of these clauses has been impaired in various ways in certain states by statute
or decisional law. The ability of lenders and their assignees and transferees to
enforce due-on-sale clauses was addressed by the Garn-St Germain Depository
Institutions Act of 1982 (the "Garn-St Germain Act"), which was enacted on
October 15, 1982. This legislation, subject to certain exceptions, preempts
state constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses. The Garn-St Germain Act does "encourage" lenders to permit
assumptions of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
SINGLE-FAMILY LOANS AND MULTIFAMILY LOANS
Exempted from this preemption pursuant to the Garn-St Germain Act are
mortgage loans (originated other than by federal savings and loan associations
and federal savings banks) that were made or assumed during the period beginning
on the date a state, by statute or final appellate court decision having
statewide effect, prohibited the exercise of due-on-sale clauses and ending on
October 15, 1982 ("Window Period Loans"). However, this exception applies only
to transfers of property underlying Window Period Loans occurring between
October 15, 1982 and October 15, 1985 and does not restrict enforcement of a
due-on-sale clause in connection with current transfers of property underlying
Window Period Loans unless the property underlying such Window Period Loan is
located in one of the five "window period states" identified below. Due-on-sale
clauses contained in mortgage loans originated by federal savings and loan
associations or federal savings banks are fully enforceable pursuant to
regulations of the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision, which preempt state law restrictions on the enforcement of
due-on-sale clauses. Mortgage Loans originated by such institutions are
therefore not deemed to be Window Period Loans.
With the expiration of the exemption for Window Period Loans on October 15,
1985, due-on-sale clauses have become generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period", which ended in all cases not
later than October 15, 1982, and (ii) originated by lenders other than national
banks, federal savings institutions and federal credit unions. FHLMC has taken
the position in its published mortgage servicing standards that, out of a total
of eleven "window period states", five states (Arizona, Michigan, Minnesota, New
Mexico and Utah) have enacted statutes extending, on various terms and for
varying periods, the prohibition on enforcement of due-on-sale clauses with
respect to certain categories of Window Period Loans. The Garn-St Germain Act
also sets forth nine specific instances in which a mortgage lender covered by
the Garn-St Germain Act (including federal savings and loan associations and
federal savings banks) may not exercise a due-on-sale clause, notwithstanding
the fact that a transfer of the property may have occurred. These include
intra-family transfers, certain transfers by operation of law, leases of fewer
than three years and the creation of a junior encumbrance. Regulations
promulgated under the Garn-St Germain Act
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also prohibit the imposition of a prepayment penalty upon the acceleration of a
loan pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a Mortgage Loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the Mortgage Loans related to a series and the number of such Mortgage
Loans which may be outstanding until maturity.
TRANSFER OF MANUFACTURED HOMES
Generally, manufactured housing contracts contain provisions prohibiting
the sale or transfer of the related manufactured homes without the consent of
the obligee on the contract and permitting the acceleration of the maturity of
such contracts by the obligee on the contract upon any such sale or transfer
that is not consented to. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will, to the extent it has knowledge of such
conveyance or proposed conveyance, exercise or cause to be exercised its rights
to accelerate the maturity of the related Contracts through enforcement of
due-on-sale clauses, subject to applicable state law. In certain cases, the
transfer may be made by a delinquent obligor in order to avoid a repossession
proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the due-on-sale clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of due-on-sale
clauses applicable to the Manufactured Homes. Consequently, in some cases the
Master Servicer may be prohibited from enforcing a due-on-sale clause in respect
of certain Manufactured Homes.
PREPAYMENT CHARGES AND PREPAYMENTS
Generally, Mortgage Loans may be prepaid in full or in part without
penalty. Generally, Multifamily Loans may contain provisions limiting
prepayments on such loans, including prohibiting prepayment for a specified
period after origination, prohibiting partial prepayments entirely or requiring
the payment of a prepayment penalty upon prepayment in full or in part. The
regulations of the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision, prohibit the imposition of a prepayment penalty or
equivalent fee for or in connection with the acceleration of a loan by exercise
of a due-on-sale clause. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage to a refinancing lender.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
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APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision that expressly
rejects application of the federal law. In addition, even where Title V is not
so rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor has been advised by counsel that a court interpreting Title V
would hold that mortgage loans originated on or after January 1, 1980 are
subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no Mortgage
Loans originated after the date of such state action will be eligible for
inclusion in a Trust Fund if such Mortgage Loans bear interest or provide for
discount points or charges in excess of permitted levels. No Mortgage Loan
originated prior to January 1, 1980 will bear interest or provide for discount
points or charges in excess of permitted levels.
Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the Trust Fund.
ALTERNATIVE MORTGAGE INSTRUMENTS
ARM Loans originated by non-federally chartered lenders have historically
been subject to a variety of restrictions. Such restrictions differed from state
to state, resulting in difficulties in determining whether a particular
alternative mortgage instrument originated by a state-chartered lender complied
with applicable law. These difficulties were simplified substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act ("Title VIII").
Title VIII provides that, notwithstanding any state law to the contrary, (i)
state-chartered banks may originate "alternative mortgage instruments"
(including ARM Loans) in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks, (ii) state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions and (iii) all other
non-federally chartered housing creditors, including, without limitation,
state-chartered savings and loan associations, savings banks and mutual savings
banks and mortgage banking companies may
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originate alternative mortgage instruments in accordance with the regulations
promulgated by the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision with respect to origination of alternative mortgage
instruments by federal savings and loan associations. Title VIII further
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
The Depositor has been advised by its counsel that it is their opinion that
a court interpreting Title VIII would hold that ARM Loans that were originated
by state-chartered lenders before the date of enactment of any state law or
constitutional provision rejecting applicability of Title VIII would not be
subject to state laws imposing restrictions or prohibitions on the ability of
state-chartered lenders to originate alternative mortgage instruments.
All of the ARM Loans that were originated by a state-chartered lender after
the enactment of a state law or constitutional provision rejecting the
applicability of Title VIII complied with applicable state law. All of the ARM
Loans that were originated by federally chartered lenders or that were
originated by state-chartered lenders prior to enactment of a state law or
constitutional provision rejecting the applicability of Title VIII were
originated in compliance with all applicable federal regulations.
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including such components of manufactured housing as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. The Depositor is aware of a limited number
of cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any Contract secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Contract and may be
unable to collect amounts still due under the Contract. The successful assertion
of such claim constitutes a breach of a representation or warranty of the
Mortgage Loan Seller, and the Securityholders would suffer a loss only to the
extent that (i) the Mortgage Loan Seller breached its obligation to repurchase
the Contract in the event an obligor is successful in asserting such a claim,
and (ii) the Mortgage Loan Seller, the Depositor or the Trustee were
unsuccessful in asserting any claim of contribution or subrogation on behalf of
the Securityholders against the manufacturer or other persons who were directly
liable to the plaintiff for the damages. Typical products liability insurance
policies held by manufacturers and component suppliers of manufactured homes may
not cover liabilities arising from formaldehyde in manufactured housing, with
the result that recoveries from such manufacturers, suppliers or other persons
may be limited to their corporate assets without the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a borrower who enters military service after the
origination of such borrower's Mortgage Loan (including a borrower who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
borrowers who are members of the Army, Navy, Air Force, Marines, National Guard,
Reserves, Coast Guard, and officers of the U.S. Public Health Service assigned
to duty with the military. Because the Relief Act applies to borrowers who enter
military service (including reservists who are called to active duty) after
origination of the related
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Mortgage Loan, no information can be provided as to the number of loans that may
be affected by the Relief Act. Application of the Relief Act would adversely
affect, for an indeterminate period of time, the ability of the Master Servicer
to collect full amounts of interest on certain of the Mortgage Loans. Any
shortfalls in interest collections resulting from the application of the Relief
Act would result in a reduction of the amounts distributable to the holders of
the related series of Securities, and would not be covered by advances or,
unless otherwise specified in the related Prospectus Supplement, any form of
Credit Support provided in connection with such Securities. In addition, the
Relief Act imposes limitations that would impair the ability of the Master
Servicer to foreclose on an affected Single-Family Loan or enforce rights under
a Contract during the borrower's period of active duty status, and, under
certain circumstances, during an additional three month period thereafter. Thus,
in the event that such a Mortgage Loan goes into default, there may be delays
and losses occasioned thereby.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility. What constitutes sufficient participation in the management of a
property securing a loan or the business of a borrower to render the exemption
unavailable to a lender has been a matter of interpretation by the courts.
CERCLA has been interpreted to impose liability on a secured party, even absent
foreclosure, where the party participated in the financial management of the
borrower's business to a degree indicating a capacity to influence waste
disposal decisions. However, court interpretations of the secured creditor
exemption have been inconsistent. In addition, when lenders foreclose and
thereupon become owners of collateral property, courts are inconsistent as to
whether such ownership renders the secured creditor exemption unavailable. Other
federal and state laws in certain circumstances may impose liability on a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property on which
contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. Such cleanup costs may be substantial. It is possible that
such cleanup costs could become a liability of a Trust Fund and reduce the
amounts otherwise distributable to the holders of the related series of
Securities. Moreover, certain federal statutes and certain states by statute
impose a lien for any cleanup costs incurred by such state on the property that
is the subject of such cleanup costs (an "environmental lien"). All subsequent
liens on such property generally are subordinated to such an environmental lien
and, in some states, even prior recorded liens are subordinated to environmental
liens. In the latter states, the security interest of the Trust in a related
parcel of real property that is subject to such an environmental lien could be
adversely affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged property
prior to the origination of the mortgage loan or prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Accordingly, the Master Servicer has
not made and will not make such evaluations prior to the origination of the
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Mortgage Loans. Neither the Master Servicer nor any replacement Servicer will be
required by any Agreement to undertake any such evaluations prior to foreclosure
or accepting a deed-in-lieu of foreclosure. The Master Servicer does not make
any representations or warranties or assume any liability with respect to the
absence or effect of contaminants on any related real property or any casualty
resulting from the presence or effect of contaminants. However, the Master
Servicer will not be obligated to foreclose on related real property or accept a
deed-in-lieu of foreclosure if it knows or reasonably believes that there are
material contaminated conditions on such property. A failure so to foreclose may
reduce the amounts otherwise available to Securityholders of the related Series.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property", including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchase with the proceeds of, illegal drug or RICO
activities.
NEGATIVE AMORTIZATION LOANS
A recent case decided by the United States Court of Appeals, First Circuit,
held that state restrictions on the compounding of interest are not preempted by
the provisions of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("DIDMC") and as a result, a mortgage loan that provided for
negative amortization violated New Hampshire's requirement that first mortgage
loans provide for computation of interest on a simple interest basis. The
holding was limited to the effect of DIDMC on state laws regarding the
compounding of interest and the court did not address the applicability of the
Alternative Mortgage Transaction Parity Act of 1982, which authorizes lender to
make residential mortgage loans that provide for negative amortization. The
First Circuit's decision is binding authority only on Federal District Courts in
Maine, New Hampshire, Massachusetts, Rhode Island and Puerto Rico.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the material federal income tax
consequences of the purchase, ownership and disposition of the Certificates
offered hereunder and does not purport to discuss all federal income tax
consequences that may be applicable to particular categories of investors, some
of which (such as banks, insurance companies and foreign investors) may be
subject to special rules. In addition, the following discussion represents an
interpretation of the law at the time of this Prospectus, and does not represent
an opinion of Thacher Proffitt & Wood, counsel to the Depositor, except with
respect to the first paragraph under "--REMICs--Classification of REMICs", the
first paragraph under "--REMICs--Tiered REMIC Structures", the first paragraph
under "--Notes", the first paragraph under --Grantor Trust Funds--Classification
of Grantor Trust Funds", the first paragraph under "--Partnership Trust
Funds--Classification of Partnership Trust Funds" and the first paragraph under
"--Partnership
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Trust Funds--Taxation of Debt Certificateholders--Treatment of the Debt
Certificates as Indebtedness" herein.
Further, the authorities on which this discussion, and the opinions
referred to below, are based are subject to change or differing interpretations,
which could apply retroactively. Taxpayers and preparers of tax returns
(including those filed by any REMIC or other issuer) should be aware that under
applicable Treasury regulations a provider of advice on specific issues of law
is not considered an income tax return preparer unless the advice (i) is given
with respect to events that have occurred at the time the advice is rendered and
is not given with respect to the consequences of contemplated actions, and (ii)
is directly relevant to the determination of an entry on a tax return.
Accordingly, it is recommended that taxpayers consult their own tax advisors and
tax return preparers regarding the preparation of any item on a tax return, even
where the anticipated tax treatment has been discussed herein. In addition to
the federal income tax consequences described herein, potential investors should
consider the state and local tax consequences, if any, of the purchase,
ownership and disposition of the Certificates. See "State and Other Tax
Consequences." It is recommended that Certificateholders consult their own tax
advisors concerning the federal, state, local or other tax consequences to them
of the purchase, ownership and disposition of the Certificates offered
hereunder.
The following discussion addresses securities of four general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, that the Trustee will elect to have treated as a real estate
mortgage investment conduit ("REMIC") under Sections 860A through 860G (the
"REMIC Provisions") of the Internal Revenue Code of 1986 (the "Code"), (ii)
certificates ("Grantor Trust Certificates") representing interests in a Trust
Fund ("Grantor Trust Fund") as to which no such election will be made, (iii)
certificates ("Partnership Certificates") representing interests in a Trust Fund
("Partnership Trust Fund") which is treated as a partnership for federal income
tax purposes, and (iv) certificates ("Debt Certificates") representing
indebtedness of a Partnership Trust Fund for federal income tax purposes. The
Prospectus Supplement for each series of Certificates will indicate which of the
foregoing treatments will apply to such series and, if a REMIC election (or
elections) will be made for the related Trust Fund, will identify all "regular
interests" and "residual interests" in the REMIC. For purposes of this tax
discussion, (i) references to a "Certificateholder" or a "holder" are to the
beneficial owner of a Certificate and (ii) unless indicated otherwise in the
applicable Prospectus Supplement, references to "Mortgage Loans" include Agency
Securities, Private Mortgage-Backed Securities and Funding Agreements.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code and
in the Treasury regulations issued thereunder (the "OID Regulations"), and in
part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the "REMIC Regulations"). The OID Regulations do not adequately address certain
issues relevant to, and in some instances provide that they are not applicable
to, securities such as the Certificates.
REMICS
CLASSIFICATION OF REMICS
Upon the issuance of each series of REMIC Certificates, Thacher Proffitt &
Wood, counsel to the Depositor, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement, the related Trust Fund (or each applicable portion thereof)
will qualify as a REMIC and the REMIC Certificates offered with respect thereto
will be considered to evidence ownership of "regular interests" ("REMIC Regular
Certificates") or "residual interests" ("REMIC Residual Certificates") in that
REMIC within the meaning of the REMIC Provisions.
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If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC will
include provisions designed to maintain the Trust Fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any Trust Fund as
a REMIC will be inadvertently terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES
In general, the REMIC Certificates will be "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
underlying such Certificates would be so treated. Moreover, if 95% or more of
the assets of the REMIC qualify for any of the foregoing treatments at all times
during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and income
allocated to the class of REMIC Residual Certificates will be interest described
in Section 856(c)(3)(B) of the Code to the extent that such Certificates are
treated as "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code. In addition, the REMIC Regular Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3) of the Code. The
determination as to the percentage of the REMIC's assets that constitute assets
described in the foregoing sections of the Code will be made with respect to
each calendar quarter based on the average adjusted basis of each category of
the assets held by the REMIC during such calendar quarter. The REMIC will report
those determinations to Certificateholders in the manner and at the times
required by applicable Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and any property acquired by foreclosure held pending sale, and may include
amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the Mortgage Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the Mortgage Loans for purposes of all of
the foregoing sections. In addition, in some instances Mortgage Loans may not be
treated entirely as assets described in the foregoing sections of the Code. If
so, the related Prospectus Supplement will describe the Mortgage Loans that may
not be so treated. The REMIC Regulations do provide, however, that cash received
from payments on Mortgage Loans held pending distribution is considered part of
the Mortgage Loans for purposes of Section 856(c)(4)(A) of the Code.
Furthermore, foreclosure property will qualify as "real estate assets" under
Section 856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES
For certain series of REMIC Certificates, two or more separate elections
may be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
series of REMIC Certificates, Thacher Proffitt & Wood, counsel to the Depositor,
will deliver its opinion generally to the effect that, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the Tiered REMICs
will each qualify as a REMIC and the REMIC Certificates issued by the Tiered
REMICs, respectively, will be
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considered to evidence ownership of REMIC Regular Certificates or REMIC Residual
Certificates in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code, and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
GENERAL
Except as otherwise stated in this discussion, REMIC Regular Certificates
will be treated for federal income tax purposes as debt instruments issued by
the REMIC and not as ownership interests in the REMIC or its assets. Moreover,
holders of REMIC Regular Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to REMIC
Regular Certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with the "constant yield" method described below, in advance of the
receipt of the cash attributable to such income. In addition, Section 1272(a)(6)
of the Code provides special rules applicable to REMIC Regular Certificates and
certain other debt instruments issued with original issue discount. Regulations
have not been issued under that section.
The Code requires that a reasonable prepayment assumption be used with
respect to Mortgage Loans held by a REMIC in computing the accrual of original
issue discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986 (the
"Committee Report") indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Depositor, nor the Master Servicer
will make any representation that the Mortgage Loans will in fact prepay at a
rate conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for such class will be the fair market
value of such class on the Closing Date. Under the OID Regulations, the stated
redemption price of a REMIC Regular Certificate is equal to the total of all
payments to be made on such Certificate other than "qualified stated interest."
"Qualified stated interest" is interest that is unconditionally payable at least
annually (during the entire term of the instrument) at a single fixed rate, or
at a "qualified floating rate," an "objective rate," a combination
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of a single fixed rate and one or more "qualified floating rates" or one
"qualified inverse floating rate," or a combination of "qualified floating
rates" that does not operate in a manner that accelerates or defers interest
payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the Internal Revenue Service
(the "IRS").
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined below) for original issue discount is each monthly period that ends on
the day prior to each Distribution Date, in some cases, as a consequence of this
"long first accrual period," some or all interest payments may be required to be
included in the stated redemption price of the REMIC Regular Certificate and
accounted for as original issue discount. Because interest on REMIC Regular
Certificates must in any event be accounted for under an accrual method,
applying this analysis would result in only a slight difference in the timing of
the inclusion in income of the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns to the
Certificateholders and the IRS will be based on the position that the portion of
the purchase price paid for the interest accrued with respect to periods prior
to the Closing Date is treated as part of the overall cost of such REMIC Regular
Certificate (and not as a separate asset the cost of which is recovered entirely
out of interest received on the next Distribution Date) and that portion of the
interest paid on the first Distribution Date in excess of interest accrued for a
number of days corresponding to the number of days from the Closing Date to the
first Distribution Date should be included in the stated redemption price of
such REMIC Regular Certificate. However, the OID Regulations state that all or
some portion of such accrued interest may be treated as a separate asset the
cost of which is recovered entirely out of interest paid on the first
Distribution Date. It is unclear how an election to do so would be made under
the OID Regulations and whether such an election could be made unilaterally by a
Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of such REMIC Regular Certificate. Under the OID Regulations, original
issue discount of only a de minimis amount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each payment of stated principal
is made, based on the product of the total amount of such de minimis original
issue discount and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "Taxation
of Owners of
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REMIC Regular Certificates--Market Discount" for a description of such election
under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to the day prior to each Distribution Date and begins on the first day following
the immediately preceding accrual period (or in the case of the first such
period, begins on the Closing Date), a calculation will be made of the portion
of the original issue discount that accrued during such accrual period. The
portion of original issue discount that accrues in any accrual period will equal
the excess, if any, of (i) the sum of (A) the present value, as of the end of
the accrual period, of all of the distributions remaining to be made on the
REMIC Regular Certificate, if any, in future periods and (B) the distributions
made on such REMIC Regular Certificate during the accrual period of amounts
included in the stated redemption price, over (ii) the adjusted issue price of
such REMIC Regular Certificate at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence will be calculated (i) assuming that distributions on the REMIC Regular
Certificate will be received in future periods based on the Mortgage Loans being
prepaid at a rate equal to the Prepayment Assumption, (ii) using a discount rate
equal to the original yield to maturity of the Certificate and (iii) taking into
account events (including actual prepayments) that have occurred before the
close of the accrual period. For these purposes, the original yield to maturity
of the Certificate will be calculated based on its issue price and assuming that
distributions on the Certificate will be made in all accrual periods based on
the Mortgage Loans being prepaid at a rate equal to the Prepayment Assumption.
The adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of such Certificate, increased by the
aggregate amount of original issue discount that accrued with respect to such
Certificate in prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods of
amounts included in the stated redemption price. The original issue discount
accruing during any accrual period, computed as described above, will be
allocated ratably to each day during the accrual period to determine the daily
portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price," in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day.
MARKET DISCOUNT
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount, that is, in the case of a REMIC Regular Certificate issued without
original issue discount, at a purchase price less than its remaining stated
principal amount, or in the case of a REMIC Regular Certificate
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issued with original issue discount, at a purchase price less than its adjusted
issue price will recognize gain upon receipt of each distribution representing
stated redemption price. In particular, under Section 1276 of the Code such a
Certificateholder generally will be required to allocate the portion of each
such distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent. A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) in income as interest,
and to amortize premium, based on a constant yield method. If such an election
were made with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "Taxation of Owners of REMIC
Regular Certificates--Premium" below. Each of these elections to accrue
interest, discount and premium with respect to a Certificate on a constant yield
method or as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
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To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
PREMIUM
A REMIC Regular Certificate purchased at a cost (excluding any portion of
such cost attributable to accrued qualified stated interest) greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of such a REMIC Regular Certificate may elect under Section
171 of the Code to amortize such premium under the constant yield method over
the life of the Certificate. If made, such an election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related debt instrument, rather than as a separate interest deduction. The
OID Regulations also permit Certificateholders to elect to include all interest,
discount and premium in income based on a constant yield method, further
treating the Certificateholder as having made the election to amortize premium
generally. See "Taxation of Owners of REMIC Regular Certificates--Market
Discount" above. The Committee Report states that the same rules that apply to
accrual of market discount (which rules will require use of a Prepayment
Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether such Certificates have original issue
discount) will also apply in amortizing bond premium under Section 171 of the
Code.
REALIZED LOSSES
Under Section 166 of the Code, both corporate holders of the REMIC Regular
Certificates and noncorporate holders of the REMIC Regular Certificates that
acquire such Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their Certificates become wholly or partially worthless as the
result of one or more realized losses on the Mortgage Loans. However, it appears
that a noncorporate holder that does not acquire a REMIC Regular Certificate in
connection with a trade or business will not be entitled to deduct a loss under
Section 166 of the Code until such holder's Certificate becomes wholly worthless
(i.e., until its outstanding principal balance has been reduced to zero) and
that the loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular
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Certificate could exceed the amount of economic income actually realized by the
holder in such period. Although the holder of a REMIC Regular Certificate
eventually will recognize a loss or reduction in income attributable to
previously accrued and included income that as the result of a realized loss
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL
Although a REMIC is a separate entity for federal income tax purposes, a
REMIC generally is not subject to entity-level taxation, except with regard to
prohibited transactions and certain other transactions. See "--Prohibited
Transactions Tax and Other Possible REMIC Taxes" below. Rather, the taxable
income or net loss of a REMIC is generally taken into account by the holder of
the REMIC Residual Certificates. Accordingly, the REMIC Residual Certificates
will be subject to tax rules that differ significantly from those that would
apply if the REMIC Residual Certificates were treated for federal income tax
purposes as direct ownership interests in the Mortgage Loans or as debt
instruments issued by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
regard to the timing or amount of cash distributions by the REMIC. Ordinary
income derived from REMIC Residual Certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Code on the deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations, however,
do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
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The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions," and
"noneconomic" residual interests discussed below. The fact that the tax
liability associated with the income allocated to REMIC Residual
Certificateholders may exceed the cash distributions received by such REMIC
Residual Certificateholders for the corresponding period may significantly
adversely affect such REMIC Residual Certificateholders' after-tax rate of
return. Such disparity between income and distributions may not be offset by
corresponding losses or reductions of income attributable to the REMIC Residual
Certificateholder until subsequent tax years and, then, may not be completely
offset due to changes in the Code, tax rates or character of the income or loss.
TAXABLE INCOME OF THE REMIC
The taxable income of the REMIC will equal the income from the Mortgage
Loans and other assets of the REMIC plus any cancellation of indebtedness income
due to the allocation of realized losses to REMIC Regular Certificates, less the
deductions allowed to the REMIC for interest (including original issue discount
and reduced by any premium on issuance) on the REMIC Regular Certificates (and
any other class of REMIC Certificates constituting "regular interests" in the
REMIC not offered hereby), amortization of any premium on the Mortgage Loans,
bad debt losses with respect to the Mortgage Loans and, except as described
below, for servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount."
The issue price of a REMIC Certificate received in exchange for an interest in
the Mortgage Loans or other property will equal the fair market value of such
interests in the Mortgage Loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold, the
Trustee may be required to estimate the fair market value of such interests in
order to determine the basis of the REMIC in the Mortgage Loans and other
property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant yield basis. See "--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Mortgage Loans
with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described above for accruing original issue
discount on the REMIC Regular Certificates. It is anticipated that each REMIC
will elect under Section 171 of the Code to
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amortize any premium on the Mortgage Loans. Premium on any Mortgage Loan to
which such election applies may be amortized under a constant yield method,
presumably taking into account a Prepayment Assumption. Further, such an
election would not apply to any Mortgage Loan originated on or before September
27, 1985. Instead, premium on such a Mortgage Loan should be allocated among the
principal payments thereon and be deductible by the REMIC as those payments
become due or upon the prepayment of such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount," except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess "Issue Premium"), the net
amount of interest deductions that are allowed the REMIC in each taxable year
with respect to the REMIC Regular Certificates of such class will be reduced by
an amount equal to the portion of the Issue Premium that is considered to be
amortized or repaid in that year. Although the matter is not entirely certain,
it is likely that Issue Premium would be amortized under a constant yield method
in a manner analogous to the method of accruing original issue discount
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of a REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions Tax and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income) will not be applied at the REMIC level so that the REMIC will be allowed
deductions for servicing, administrative and other non-interest expenses in
determining its taxable income. All such expenses will be allocated as a
separate item to the holders of REMIC Certificates, subject to the limitation of
Section 67 of the Code. See "--Possible Pass-Through of Miscellaneous Itemized
Deductions" below. If the deductions allowed to the REMIC exceed its gross
income for a calendar quarter, such excess will be the net loss for the REMIC
for that calendar quarter.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS
The adjusted basis of a REMIC Residual Certificate will be equal to the
amount paid for such REMIC Residual Certificate, increased by amounts included
in the income of the REMIC Residual Certificateholder and decreased (but not
below zero) by distributions made, and by net losses allocated, to such REMIC
Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not currently deductible by reason of this limitation
may be carried forward indefinitely to future calendar quarters and, subject to
the same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability
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of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the REMIC. However, such bases increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may
not amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder, see "--Taxation of Owners of REMIC
Residual Certificates--General" above.
EXCESS INCLUSIONS
Any "excess inclusions" with respect to a REMIC Residual Certificate will
be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, excess inclusions (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated
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business taxable income" to an otherwise tax-exempt organization and (iii) will
not be eligible for any rate reduction or exemption under any applicable tax
treaty with respect to the 30% United States withholding tax imposed on
distributions to REMIC Residual Certificateholders that are foreign investors.
See, however, "--Foreign Investors in REMIC Certificates," below.
Furthermore, for purposes of the alternative minimum tax, excess inclusions
will not be permitted to be offset by the alternative tax net operating loss
deduction and alternative minimum taxable income may not be less than the
taxpayer's excess inclusions. The latter rule has the effect of preventing
nonrefundable tax credits from reducing the taxpayer's income tax to an amount
lower than the alternative minimum tax on excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If such transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on such "noneconomic" REMIC Residual Certificate. The REMIC Regulations
provide that a REMIC Residual Certificate is noneconomic unless, based on the
Prepayment Assumption and on any required or permitted clean up calls, or
required liquidation provided for in the REMIC's organizational documents, (1)
the present value of the expected future distributions (discounted using the
"applicable Federal rate" for obligations whose term ends on the close of the
last quarter in which excess inclusions are expected to accrue with respect to
the REMIC Residual Certificate, which rate is computed and published monthly by
the IRS) on the REMIC Residual Certificate equals at least the present value of
the expected tax on the anticipated excess inclusions, and (2) the transferor
reasonably expects that the transferee will receive distributions with respect
to the REMIC Residual Certificate at or after the time the taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy the accrued
taxes. Accordingly, all transfers of REMIC Residual Certificates that may
constitute noneconomic residual interests will be subject to certain
restrictions under the terms of the related Pooling and Servicing Agreement that
are intended to reduce the possibility of any such transfer being disregarded.
Such restrictions will require each party to a transfer to provide an affidavit
that no purpose of such transfer is to impede the assessment or collection of
tax, including certain representations as to the financial condition of the
prospective transferee, as to which the transferor is also required to make a
reasonable investigation to determine such transferee's historic payment of its
debts and ability to continue to pay its debts as they come due in the future.
Prior to purchasing a REMIC Residual Certificate, prospective purchasers should
consider the possibility that a purported transfer of such REMIC Residual
Certificate by such a purchaser to another purchaser at some future date may be
disregarded in accordance with the above-described rules which would result in
the retention of tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered
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"noneconomic" will be based upon certain assumptions, and the Depositor will
make no representation that a REMIC Residual Certificate will not be considered
"noneconomic" for purposes of the above-described rules. See "--Foreign
Investors in REMIC Certificates--REMIC Residual Certificates" below for
additional restrictions applicable to transfers of certain REMIC Residual
Certificates to foreign persons.
MARK-TO-MARKET RULES
On December 24, 1996, the IRS released final regulations (the "Mark-to-
Market Regulations") relating to the requirement that a securities dealer mark
to market securities held for sale to customers. This mark-to-market requirement
applies to all securities owned by a dealer, except to the extent that the
dealer has specifically identified a security as held for investment. The
Mark-to- Market Regulations provide that for purposes of this mark-to-market
requirement, a REMIC Residual Certificate issued after January 4, 1995 is not
treated as a security and thus may not be marked to market. Prospective
purchasers of a REMIC Residual Certificate should consult their tax advisors
regarding the possible application of the mark-to-market requirement to REMIC
Residual Certificates.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS
Fees and expenses of a REMIC generally will be allocated to the holders of
the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of such fees and expenses should be allocated to
the holders of the related REMIC Regular Certificates. Except as stated in the
related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate two percent of a taxpayer's adjusted gross
income. In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by REMIC Certificateholders that
are subject to the limitations of either Section 67 or Section 68 of the Code
may be substantial. Furthermore, in determining the alternative minimum taxable
income of such a holder of a REMIC Certificate that is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should carefully
consult with their own tax advisors prior to making an investment in such
Certificates.
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SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the selling Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Certificate. The adjusted basis of
a REMIC Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to such REMIC Regular Certificate (including
original issue discount and market discount income) and reduced (but not below
zero) by distributions on such REMIC Regular Certificate received by such
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described under "--Taxation of Owners
of REMIC Residual Certificates--Basis Rules, Net Losses and Distributions."
Except as provided in the following four paragraphs, any such gain or loss will
be capital gain or loss, provided such REMIC Certificate is held as a capital
asset (generally, property held for investment) within the meaning of Section
1221 of the Code.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the "applicable Federal
rate" (generally, a rate based on an average of current yields on Treasury
securities having a maturity comparable to that of the Certificate based on the
application of the Prepayment Assumption to such Certificate, which rate is
computed and published monthly by the IRS), determined as of the date of
purchase of such REMIC Regular Certificate, over (ii) the amount of ordinary
income actually includible in the seller's income prior to such sale. In
addition, gain recognized on the sale of a REMIC Regular Certificate by a seller
who purchased such REMIC Regular Certificate at a market discount will be
taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period such REMIC Certificate was held by such
holder, reduced by any market discount included in income under the rules
described above under "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" and "--Premium."
REMIC Certificates will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other residual
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interest in a REMIC or any similar interest in a "taxable mortgage pool" (as
defined in Section 7701(i) of the Code) during the period beginning six months
before, and ending six months after, the date of such sale, such sale will be
subject to the "wash sale" rules of Section 1091 of the Code. In that event, any
loss realized by the REMIC Residual Certificateholder on the sale will not be
deductible, but instead will be added to such REMIC Residual Certificateholder's
adjusted basis in the newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (a "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions a prohibited transaction means the
disposition of a Mortgage Loan, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the REMIC Certificates. It is not anticipated that any REMIC
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would be
subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property," determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer or Trustee in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling and Servicing Agreement and in respect of
compliance with applicable laws and regulations. Any such tax not borne by the
Master Servicer or the Trustee will be charged against the related Trust Fund
resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) of the total anticipated excess inclusions
with respect to such REMIC Residual Certificate for periods after the transfer
and (ii) the highest marginal federal income tax rate applicable to
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corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents. Such a tax generally would
be imposed on the transferor of the REMIC Residual Certificate, except that
where such transfer is through an agent for a disqualified organization, the tax
would instead be imposed on such agent. However, a transferor of a REMIC
Residual Certificate would in no event be liable for such tax with respect to a
transfer if the transferee furnishes to the transferor an affidavit that the
transferee is not a disqualified organization and, as of the time of the
transfer, the transferor does not have actual knowledge that such affidavit is
false. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in such
entity are not held by disqualified organizations and (ii) information necessary
for the application of the tax described herein will be made available.
Restrictions on the transfer of REMIC Residual Certificates and certain other
provisions that are intended to meet this requirement will be included in the
Pooling and Servicing Agreement, and will be discussed more fully in any
Prospectus Supplement relating to the offering of any REMIC Residual
Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (ii) a statement under penalties of perjury that such record
holder is not a disqualified organization. For taxable years beginning after
December 31, 1997, notwithstanding the preceding two sentences, in the case of a
REMIC Residual Certificate held by an "electing large partnership," all
interests in such partnership shall be treated as held by disqualified
organizations (without regard to whether the record holders of the partnership
furnish statements described in the preceding sentence) and the amount that
would be subject to tax under the second preceding sentence is excluded from the
gross income of the partnership (in lieu of a deduction in the amount of such
tax generally allowed to pass-through entities).
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
TERMINATION
A REMIC will terminate immediately after the Distribution Date following
receipt by the REMIC of the final payment in respect of the Mortgage Loans or
upon a sale of the REMIC's assets following the adoption by the REMIC of a plan
of complete liquidation. The last distribution on a REMIC Regular Certificate
will be treated as a payment in retirement of a debt instrument. In the case of
a REMIC Residual Certificate, if the last distribution on such REMIC Residual
Certificate
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is less than the REMIC Residual Certificateholder's adjusted basis
in such Certificate, such REMIC Residual Certificateholder should (but may not)
be treated as realizing a loss equal to the amount of such difference, and such
loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
Solely for purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and REMIC Residual Certificateholders will be
treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Trustee will file REMIC federal income tax returns on behalf of
the related REMIC, and under the terms of the related Agreement, will be
irrevocably appointed by the holders of the largest percentage interest in the
related REMIC Residual Certificates as their agent to perform all of the duties
of the "tax matters person" with respect to the REMIC in all respects.
The Trustee, as the tax matters person or as agent for the tax matters
person, subject to certain notice requirements and various restrictions and
limitations, generally will have the authority to act on behalf of the REMIC and
the REMIC Residual Certificateholders in connection with the administrative and
judicial review of items of income, deduction, gain or loss of the REMIC, as
well as the REMIC's classification. REMIC Residual Certificateholders generally
will be required to report such REMIC items consistently with their treatment on
the REMIC's tax return and may in some circumstances be bound by a settlement
agreement between the Trustee, as the tax matters person or as agent for the tax
matters person, and the IRS concerning any such REMIC item. Adjustments made to
the REMIC tax return may require a REMIC Residual Certificateholder to make
corresponding adjustments on its return, and an audit of the REMIC's tax return,
or the adjustments resulting from such an audit, could result in an audit of a
REMIC Residual Certificateholder's return. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
the REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other non-individuals will be provided interest
and original issue discount income information and the information set forth in
the following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC Regular Certificate issued with original issue discount to
disclose on its face the amount of original issue discount and the issue date,
and requiring such information to be reported to the IRS. Reporting with respect
to the REMIC Residual Certificates, including income, excess inclusions,
investment expenses and relevant information regarding qualification of the
REMIC's assets will be made as required under the Treasury regulations,
generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount."
Unless otherwise specified in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the Trustee.
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BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES
Payments of interest and principal, as well as payments of proceeds from
the sale of REMIC Certificates, may be subject to the "backup withholding tax"
under Section 3406 of the Code at a rate of 31% if recipients of such payments
fail to furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax. Furthermore,
certain penalties may be imposed by the IRS on a recipient of payments that is
required to supply information but that does not do so in the proper manner.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new regulations (the "New Withholding
Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Withholding
Regulations attempt to unify certification requirements and modify reliance
standards. The New Withholding Regulations will generally be effective for
payments made after December 31, 1999, subject to certain transition rules.
Prospective investors are urged to consult their tax advisors regarding the New
Withholding Regulations.
FOREIGN INVESTORS IN REMIC CERTIFICATES
A REMIC Regular Certificateholder that is not a "United States person" (as
defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not, unless otherwise disclosed in the
related Prospectus Supplement, be subject to United States federal income or
withholding tax in respect of a distribution on a REMIC Regular Certificate,
provided that the holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States person and providing the name and
address of such Certificateholder). For these purposes, "United States person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in, or under the laws of, the United States or
any political subdivision thereof (except, in the case of a partnership, to the
extent provided in regulations), or an estate whose income is subject to United
States federal income tax regardless of its source, or a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. To the extent
prescribed in regulations by the Secretary of the Treasury, which regulations
have not yet been issued, a trust which was in existence on August 20, 1996
(other than a trust treated as owned by the grantor under subpart E of part I of
subchapter J of chapter 1 of the Code), and which was treated as a United States
person on August 19, 1996, may elect to continue to be treated as a United
States person notwithstanding the previous sentence. It is possible that the IRS
may assert that the foregoing tax exemption should not apply with respect to a
REMIC Regular Certificate held by a REMIC Residual Certificateholder that owns
directly or indirectly a 10% or greater interest in the REMIC Residual
Certificates. If the holder does not qualify for exemption, distributions of
interest, including distributions in respect of accrued original issue discount,
to such holder may be subject to a tax rate of 30%, subject to reduction under
any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
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Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States persons will
be prohibited under the related
Pooling and Servicing Agreement.
NOTES
On or prior to the date of the related Prospectus Supplement with respect
to the proposed issuance of each series of Notes, Thacher Proffitt & Wood,
counsel to the Depositor, will deliver its opinion to the effect that, assuming
compliance with all provisions of the Indenture, Owner Trust Agreement and
certain related documents and upon issuance of the Notes, for federal income tax
purposes (i) the Notes will be treated as indebtedness and (ii) the Issuer, as
created pursuant to the terms and conditions of the Owner Trust Agreement, will
not be characterized as an association (or publicly traded partnership) taxable
as a corporation or as a taxable mortgage pool. The following discussion is
based in part upon the OID Regulations. The OID Regulations do not adequately
address certain issues relevant to, and in some instances provide that they are
not applicable to, securities such as the Notes. For purposes of this tax
discussion, references to a "Noteholder" or a "holder" are to the beneficial
owner of a Note.
STATUS AS REAL PROPERTY LOANS
Notes held by a domestic building and loan association will not constitute
"loans . . . secured by an interest in real property" within the meaning of Code
section 7701(a)(19)(C)(v); and (ii) Notes held by a real estate investment trust
will not constitute "real estate assets" within the meaning of Code section
856(c)(4)(A) and interest on Notes will not be considered "interest on
obligations secured by mortgages on real property" within the meaning of Code
section 856(c)(3)(B).
TAXATION OF NOTEHOLDERS
Notes generally will be subject to the same rules of taxation as REMIC
Regular Certificates issued by a REMIC, as described above, except that (i)
income reportable on the Notes is not required to be reported under the accrual
method unless the holder otherwise used the accrual method and (ii) the special
rule treating a portion of the gain on sale or exchange of a REMIC Regular
Certificate as ordinary income is inapplicable to the Notes. See "--REMICs
- --Taxation of Owners of REMIC Regular Certificates" and "-- Sales of REMIC
Certificates."
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
On or prior to the date of the related Prospectus Supplement with respect
to the proposed issuance of each series of Grantor Trust Certificates, Thacher
Proffitt & Wood, counsel to the Depositor, will deliver its opinion to the
effect that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement and upon issuance of such Grantor Trust Certificates, the
related Grantor Trust Fund will be classified as a grantor trust under subpart
E, part I of subchapter J of the Code and not as a partnership or an association
taxable as a corporation.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate." A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees and any Spread) and interest paid to the
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holders of Grantor Trust Fractional Interest Certificates issued with respect to
such Grantor Trust Fund will be referred to as a "Grantor Trust Strip
Certificate." A Grantor Trust Strip Certificate may also evidence a nominal
ownership interest in the principal of the Mortgage Loans constituting the
related Grantor Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
In the case of Grantor Trust Fractional Interest Certificates, unless
otherwise disclosed in the related Prospectus Supplement and subject to the
discussion below with respect to Buydown Mortgage Loans, counsel to the
Depositor will deliver an opinion that, in general, Grantor Trust Fractional
Interest Certificates will represent interests in (i) "loans . . . secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code; (ii) "obligation[s] (including any participation or Certificate of
beneficial ownership therein) which . . .[are] principally secured by an
interest in real property" within the meaning of Section 860G(a)(3) of the Code;
and (iii) "real estate assets" within the meaning of Section 856(c)(4)(A) of the
Code, in each case to the extent the Mortgage Loans qualify for such treatment.
In addition, counsel to the Depositor will deliver an opinion that interest on
Grantor Trust Fractional Interest Certificates will to the same extent be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Section 856(c)(3)(B) of the
Code.
The assets constituting certain Grantor Trust Funds may include Buydown
Mortgage Loans. The characterization of an investment in Buydown Mortgage Loans
will depend upon the precise terms of the related Buydown Agreement, but to the
extent that such Buydown Mortgage Loans are secured by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. No directly applicable precedents exist
with respect to the federal income tax treatment or the characterization of
investments in Buydown Mortgage Loans. Accordingly, holders of Grantor Trust
Certificates should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Grantor Trust Fund that includes Buydown Mortgage Loans.
GRANTOR TRUST STRIP CERTIFICATES
Even if Grantor Trust Strip Certificates evidence an interest in a Grantor
Trust Fund consisting of Mortgage Loans that are "loans . . . secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code, and "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code, and the interest on which is "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code, it is unclear whether the Grantor Trust Strip Certificates, and the income
therefrom, will be so characterized. However, the policies underlying such
sections (namely, to encourage or require investments in mortgage loans by
thrift institutions and real estate investment trusts) may suggest that such
characterization is appropriate. Counsel to the Depositor will not deliver any
opinion on these questions. Prospective purchasers to which such
characterization of an investment in Grantor Trust Strip Certificates is
material should consult their tax advisors regarding whether the Grantor Trust
Strip Certificates, and the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which . . .[are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
Holders of a particular series of Grantor Trust Fractional Interest
Certificates generally will be required to report on their federal income tax
returns their shares of the entire income from the
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Mortgage Loans (including amounts used to pay reasonable servicing fees and
other expenses) and will be entitled to deduct their shares of any such
reasonable servicing fees and other expenses. Because of stripped interests,
market or original issue discount, or premium, the amount includible in income
on account of a Grantor Trust Fractional Interest Certificate may differ
significantly from the amount distributable thereon representing interest on the
Mortgage Loans. Under Section 67 of the Code, an individual, estate or trust
holding a Grantor Trust Fractional Interest Certificate directly or through
certain pass-through entities will be allowed a deduction for such reasonable
servicing fees and expenses only to the extent that the aggregate of such
holder's miscellaneous itemized deductions exceeds two percent of such holder's
adjusted gross income. In addition, Section 68 of the Code provides that the
amount of itemized deductions otherwise allowable for an individual whose
adjusted gross income exceeds a specified amount will be reduced by the lesser
of (i) 3% of the excess of the individual's adjusted gross income over such
amount or (ii) 80% of the amount of itemized deductions otherwise allowable for
the taxable year. The amount of additional taxable income reportable by holders
of Grantor Trust Fractional Interest Certificates who are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Further, Certificateholders (other than corporations) subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining such
holder's alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple classes of Grantor Trust
Certificates (including Grantor Trust Strip Certificates) are issued, such fees
and expenses should be allocated among the classes of Grantor Trust Certificates
using a method that recognizes that each such class benefits from the related
services. In the absence of statutory or administrative clarification as to the
method to be used, it currently is intended to base information returns or
reports to the IRS and Certificateholders on a method that allocates such
expenses among classes of Grantor Trust Certificates with respect to each period
based on the distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates or
(ii) the Depositor or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on the Mortgage Loans. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees for various
types of mortgages the IRS has established certain "safe harbors." The servicing
fees paid with respect to the Mortgage Loans for certain series of Grantor Trust
Certificates may be higher than the "safe harbors" and, accordingly, may not
constitute reasonable servicing compensation. The related Prospectus Supplement
will include information regarding servicing fees paid to the Master Servicer,
any subservicer or their respective affiliates necessary to determine whether
the preceding "safe harbor" rules apply.
IF STRIPPED BOND RULES APPLY
If the stripped bond rules apply, each Grantor Trust Fractional Interest
Certificate will be treated as having been issued with "original issue discount"
within the meaning of Section 1273(a) of the Code, subject, however, to the
discussion below regarding the treatment of certain stripped bonds as market
discount bonds and the discussion regarding de minimis market discount. See
"--Taxation of Owners of Grantor Trust Fractional Interest Certificates-Market
Discount" below. Under the stripped bond rules, the holder of a Grantor Trust
Fractional Interest Certificate (whether a cash or accrual method taxpayer) will
be required to report interest income from its Grantor Trust Fractional Interest
Certificate for each month in an amount equal to the income that accrues on such
Certificate in that month calculated under a constant yield method, in
accordance with the rules of the Code relating to original issue discount.
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The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified stated
interest," if any, as well as such Certificate's share of reasonable servicing
fees and other expenses. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates-If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest." In general, the amount of such income that accrues
in any month would equal the product of such holder's adjusted basis in such
Grantor Trust Fractional Interest Certificate at the beginning of such month
(see "Sales of Grantor Trust Certificates") and the yield of such Grantor Trust
Fractional Interest Certificate to such holder. Such yield would be computed at
the rate (compounded based on the regular interval between payment dates) that,
if used to discount the holder's share of future payments on the Mortgage Loans,
would cause the present value of those future payments to equal the price at
which the holder purchased such Certificate. In computing yield under the
stripped bond rules, a Certificateholder's share of future payments on the
Mortgage Loans will not include any payments made in respect of any ownership
interest in the Mortgage Loans retained by the Depositor, the Master Servicer,
any subservicer or their respective affiliates, but will include such
Certificateholder's share of any reasonable servicing fees and other expenses.
To the extent the Grantor Trust Fractional Interest Certificates represent
an interest in any pool of debt instruments the yield on which may be affected
by reason of prepayments, for taxable years beginning after August 5, 1997,
Section 1272(a)(6) of the Code requires (i) the use of a reasonable prepayment
assumption in accruing original issue discount and (ii) adjustments in the
accrual of original issue discount when prepayments do not conform to the
prepayment assumption. It is unclear whether those provisions would be
applicable to the Grantor Trust Fractional Interest Certificates that do not
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, or for taxable years beginning prior to
August 5, 1997, whether use of a reasonable prepayment assumption may be
required or permitted without reliance on these rules. It is also uncertain, if
a prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any holder, at the
time of purchase of the Grantor Trust Fractional Interest Certificate by that
holder. Certificateholders are advised to consult their own tax advisors
concerning reporting original issue discount with respect to Grantor Trust
Fractional Interest Certificates and, in particular, whether a prepayment
assumption should be used in reporting original issue discount.
In the case of a Grantor Trust Fractional Interest Certificate acquired at
a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or loss
equal to the difference between the portion of the prepaid principal amount of
the Mortgage Loan that is allocable to such Certificate and the portion of the
adjusted basis of such Certificate that is allocable to such Certificateholder's
interest in the Mortgage Loan. If a prepayment assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue
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discount on REMIC Regular Certificates. See "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Original Issue Discount." It is unclear whether any
other adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments.
It is currently intended to base information reports or returns to the IRS
and Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Depositor nor the Trustee will make any representation that the
Mortgage Loans will in fact prepay at a rate conforming to such Prepayment
Assumption or any other rate and Certificateholders should bear in mind that the
use of a representative initial offering price will mean that such information
returns or reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial Certificateholders of each series
who bought at that price.
Under Treasury regulation Section 1.1286-1, certain stripped bonds are to
be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the Mortgage Loans, the related Prospectus Supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the Mortgage Loans, then such original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "--Taxation of Owners of Grantor
Trust Fractional Interest Certificates-If Stripped Bond Rules Do Not Apply" and
"--Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY
Subject to the discussion below on original issue discount, if the stripped
bond rules do not apply to a Grantor Trust Fractional Interest Certificate, the
Certificateholder will be required to report its share of the interest income on
the Mortgage Loans in accordance with such Certificateholder's normal method of
accounting. The original issue discount rules will apply to a Grantor Trust
Fractional Interest Certificate to the extent it evidences an interest in
Mortgage Loans issued with original issue discount.
The original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of such Mortgage Loans and their
issue price. Under the OID Regulations, the stated redemption price is equal to
the total of all payments to be made on such Mortgage Loan other than "qualified
stated interest." "Qualified stated interest" is interest that is
unconditionally payable at least annually at a single fixed rate, or at a
"qualified floating rate," an "objective rate," a combination of a single fixed
rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on such
Mortgage Loan. In general, the issue price of a Mortgage Loan will be the amount
received by the borrower from the lender under the terms of the Mortgage Loan,
less any "points" paid by the borrower, and the stated
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redemption price of a Mortgage Loan will equal its principal amount, unless the
Mortgage Loan provides for an initial below-market rate of interest or the
acceleration or the deferral of interest payments. The determination as to
whether original issue discount will be considered to be de minimis will be
calculated using the same test described in the REMIC discussion. See --Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount" above.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Mortgage Loans by the Master
Servicer or the Trustee in preparing information returns to the
Certificateholders and the IRS.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. Section
1272(a)(6) of the Code requires that a prepayment assumption be made in
computing yield with respect to any pool of debt instruments the yield on which
may be affected by reason of prepayments. Accordingly, for certificates backed
by such pools, it is intended to base information reports and returns to the IRS
and Certificateholders for taxable years beginning after August 5, 1997, on the
use of a prepayment assumption. However, in the case of certificates not backed
by such pools or with respect to taxable years beginning prior to August 5,
1997, it currently is not intended to base such reports and returns on the use
of a prepayment assumption. Certificateholders are advised to consult their own
tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related Prospectus
Supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to Mortgage Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will also
be required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage Loans
held in the related Trust Fund, approximately in proportion to the ratio such
excess bears to such Certificate's allocable portion of the aggregate original
issue discount remaining to be accrued on such Mortgage Loans. The adjusted
issue price of a Mortgage Loan on any given day equals the sum of (i) the
adjusted issue price (or, in the case of the first accrual period, the issue
price) of such Mortgage Loan at the beginning of the accrual period that
includes such day and (ii) the daily portions of original issue discount for all
days during such accrual period prior to such day. The adjusted issue price of a
Mortgage Loan at the beginning of any accrual period will equal the issue price
of such Mortgage Loan, increased by the aggregate amount of original issue
discount with respect to such Mortgage Loan that accrued in prior accrual
periods, and reduced by the amount of any payments made on such Mortgage Loan in
prior accrual periods of amounts included in its stated redemption price.
In addition to its regular reports, the Master Servicer or the Trustee,
except as provided in the related Prospectus Supplement, will provide to any
holder of a Grantor Trust Fractional Interest Certificate such information as
such holder may reasonably request from time to time with respect to original
issue discount accruing on Grantor Trust Fractional Interest Certificates. See
"Grantor Trust Reporting" below.
MARKET DISCOUNT
If the stripped bond rules do not apply to the Grantor Trust Fractional
Interest Certificate, a Certificateholder may be subject to the market discount
rules of Sections 1276 through 1278 of the
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Code to the extent an interest in a Mortgage Loan is considered to have been
purchased at a "market discount," that is, in the case of a Mortgage Loan issued
without original issue discount, at a purchase price less than its remaining
stated redemption price (as defined above, or in the case of a Mortgage Loan
issued with original issue discount, at a purchase price less than its adjusted
issue price (as defined above). If market discount is in excess of a de minimis
amount (as described below), the holder generally will be required to include in
income in each month the amount of such discount that has accrued (under the
rules described in the next paragraph) through such month that has not
previously been included in income, but limited, in the case of the portion of
such discount that is allocable to any Mortgage Loan, to the payment of stated
redemption price on such Mortgage Loan that is received by (or, in the case of
accrual basis Certificateholders, due to) the Trust Fund in that month. A
Certificateholder may elect to include market discount in income currently as it
accrues (under a constant yield method based on the yield of the Certificate to
such holder) rather than including it on a deferred basis in accordance with the
foregoing under rules similar to those described in "--Taxation of Owners of
REMIC Regular Certificates--Market Discount" above.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report will apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
Certificateholder's option: (i) on the basis of a constant yield method, (ii) in
the case of a Mortgage Loan issued without original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the Mortgage Loan as of the beginning of the accrual period, or
(iii) in the case of a Mortgage Loan issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
original issue discount accrued in the accrual period bears to the total
original issue discount remaining at the beginning of the accrual period. The
prepayment assumption, if any, used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. The effect
of using a prepayment assumption could be to accelerate the reporting of such
discount income. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a Mortgage Loan purchased at a discount in the
secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans may be considered to be de
minimis and, if so, will be includible in income under de minimis rules similar
to those described in "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above, with the exception that it is less
likely that a prepayment assumption will be used for purposes of such rules with
respect to the Mortgage Loans.
Further, under the rules described in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount," above, any discount that is not
original issue discount and exceeds a de minimis amount may require the deferral
of interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues.
PREMIUM
If a Certificateholder is treated as acquiring the underlying Mortgage
Loans at a premium, that is, at a price in excess of their remaining stated
redemption price, such Certificateholder may elect
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under Section 171 of the Code to amortize using a constant yield method the
portion of such premium allocable to Mortgage Loans originated after September
27, 1985. Amortizable premium is treated as an offset to interest income on the
related debt instrument, rather than as a separate interest deduction. However,
premium allocable to Mortgage Loans originated before September 28, 1985 or to
Mortgage Loans for which an amortization election is not made, should be
allocated among the payments of stated redemption price on the Mortgage Loan and
be allowed as a deduction as such payments are made (or, for a Certificateholder
using the accrual method of accounting, when such payments of stated redemption
price are due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss, equal to the difference between
the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a prepayment assumption
is used to amortize such premium, it appears that such a loss would be
unavailable. Instead, if a prepayment assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption used, and the actual rate of prepayments.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES
The "stripped coupon" rules of Section 1286 of the Code will apply to the
Grantor Trust Strip Certificates. Except as described above in "--Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules
Apply," no regulations or published rulings under Section 1286 of the Code have
been issued and some uncertainty exists as to how it will be applied to
securities such as the Grantor Trust Strip Certificates. Accordingly, holders of
Grantor Trust Strip Certificates should consult their own tax advisors
concerning the method to be used in reporting income or loss with respect to
such Certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "Possible Application of Contingent Payment Rules" and assumes
that the holder of a Grantor Trust Strip Certificate will not own any Grantor
Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Grantor
Trust Strip Certificate at the beginning of such month and the yield of such
Grantor Trust Strip Certificate to such holder. Such yield would be calculated
based on the price paid for that Grantor Trust Strip Certificate by its holder
and the payments remaining to be made thereon at the time of the purchase, plus
an allocable portion of the servicing fees and expenses to be paid with respect
to the Mortgage Loans. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates-If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be made
in the amount and rate of accrual of such discount when prepayments do not
conform to such prepayment assumption. To the extent the Grantor
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Trust Strip Certificates represent an interest in any pool of debt instruments
the yield on which may be affected by reason of prepayments, those provisions
will apply to the Grantor Trust Strip Certificates for taxable years beginning
after August 5, 1997. It is unclear whether those provisions would be applicable
to the Grantor Trust Strip Certificates that do not represent an interest in any
such pool or for taxable years beginning prior to August 5, 1997, or whether use
of a prepayment assumption may be required or permitted in the absence of such
provisions. It is also uncertain, if a prepayment assumption is used, whether
the assumed prepayment rate would be determined based on conditions at the time
of the first sale of the Grantor Trust Strip Certificate or, with respect to any
subsequent holder, at the time of purchase of the Grantor Trust Strip
Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. It currently is intended to base
information returns or reports to the IRS and Certificateholders on the
Prepayment Assumption disclosed in the related Prospectus Supplement and on a
constant yield computed using a representative initial offering price for each
class of Certificates. However, neither the Depositor nor the Trustee will make
any representation that the Mortgage Loans will in fact prepay at a rate
conforming to the Prepayment Assumption or at any other rate and
Certificateholders should bear in mind that the use of a representative initial
offering price will mean that such information returns or reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders of each series who bought at that price.
Prospective purchasers of the Grantor Trust Strip Certificates should consult
their own tax advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Mortgage Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete Mortgage Loans, or if the Prepayment
Assumption is not used, then when a Mortgage Loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the Grantor Trust Strip Certificate that
is allocable to such Mortgage Loan.
POSSIBLE APPLICATION OF CONTINGENT PAYMENT RULES
The coupon stripping rules' general treatment of stripped coupons is to
regard them as newly issued debt instruments in the hands of each purchaser. To
the extent that payments on the Grantor Trust Strip Certificates would cease if
the Mortgage Loans were prepaid in full, the Grantor Trust Strip Certificates
could be considered to be debt instruments providing for contingent payments.
Under the OID Regulations, debt instruments providing for contingent payments
are not subject to the same rules as debt instruments providing for
noncontingent payments. Regulations were promulgated on June 14, 1996, regarding
contingent payment debt instruments (the "Contingent Payment Regulations"), but
it appears that Grantor Trust Strip Certificates, to the extent subject to
Section 1272(a)(6) of the Code as described above due to their similarity to
other mortgage-backed securities (such as REMIC regular interests and debt
instruments subject to Section 1272(a)(6) of the Code) that are expressly
excepted from the application of the Contingent Payment Regulations, are or may
be excepted from such regulations. Like the OID Regulations, the Contingent
Payment Regulations do not specifically address securities, such as the Grantor
Trust Strip Certificates, that are subject to the stripped bond rules of Section
1286 of the Code.
If the contingent payment rules under the Contingent Payment Regulations
were to apply, the holder of a Grantor Trust Strip Certificate would be required
to apply the "noncontingent bond method". Under the "noncontingent bond method",
the issuer of a Grantor Trust Strip Certificate
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determines a projected payment schedule on which interest will accrue. Holders
of Grantor Trust Strip Certificates are bound by the issuer's projected payment
schedule. The projected payment schedule consists of all noncontingent payments
and a projected amount for each contingent payment based on the projected yield
(as described below) of the Grantor Trust Strip Certificate.
The projected amount of each payment is determined so that the projected
payment schedule reflects the projected yield. The projected amount of each
payment must reasonably reflect the relative expected values of the payments to
be received by the holders of a Grantor Trust Strip Certificate. The projected
yield referred to above is a reasonable rate, not less than the "applicable
Federal rate" that, as of the issue date, reflects general market conditions,
the credit quality of the issuer, and the terms and conditions of the Mortgage
Loans. The holder of a Grantor Trust Strip Certificate would be required to
include as interest income in each month the adjusted issue price of the Grantor
Trust Strip Certificate at the beginning of the period multiplied by the
projected yield, and would add to, or subtract from, such income any variation
between the payment actually received in such month and payment originally
projected to be made in such month.
Assuming that a prepayment assumption were used, if the Contingent Payment
Regulations or their principles were applied to Grantor Trust Strip
Certificates, the amount of income reported with respect thereto would be
substantially similar to that described under "Taxation of Owners of Grantor
Trust Strip Certificates". Certificateholders should consult their tax advisors
concerning the possible application of the contingent payment rules to the
Grantor Trust Strip Certificates.
SALES OF GRANTOR TRUST CERTIFICATES
Any gain or loss equal to the difference between the amount realized on the
sale or exchange of a Grantor Trust Certificate and its adjusted basis,
recognized on such sale or exchange of a Grantor Trust Certificate by an
investor who holds such Grantor Trust Certificate as a capital asset, will be
capital gain or loss, except to the extent of accrued and unrecognized market
discount, which will be treated as ordinary income, and (in the case of banks
and other financial institutions) except as provided under Section 582(c) of the
Code. The adjusted basis of a Grantor Trust Certificate generally will equal its
cost, increased by any income reported by the seller (including original issue
discount and market discount income) and reduced (but not below zero) by any
previously reported losses, any amortized premium and by any distributions with
respect to such Grantor Trust Certificate.
Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in certain circumstances. Gain attributable
to accrued and unrecognized market discount will be treated as ordinary income,
as will gain or loss recognized by banks and other financial institutions
subject to Section 582(c) of the Code. Furthermore, a portion of any gain that
might otherwise be capital gain may be treated as ordinary income to the extent
that the Grantor Trust Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the taxpayer's
net investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction. Finally, a
taxpayer may elect to have net capital gain taxed at ordinary income rates
rather than capital gains rates in order to include such net capital gain in
total net investment income for that taxable year, for purposes of the rule that
limits the deduction of interest on indebtedness incurred to purchase or carry
property held for investment to a taxpayer's net investment income.
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GRANTOR TRUST REPORTING
Except as set forth in the related Prospectus Supplement, the Master
Servicer or the Trustee will furnish to each holder of a Grantor Trust
Fractional Interest Certificate with each distribution a statement setting forth
the amount of such distribution allocable to principal on the underlying
Mortgage Loans and to interest thereon at the related Pass-Through Rate. In
addition, the Master Servicer or the Trustee will furnish, within a reasonable
time after the end of each calendar year, to each holder of a Grantor Trust
Certificate who was such a holder at any time during such year, information
regarding the amount of servicing compensation received by the Master Servicer
and sub-servicer (if any) and such other customary factual information as the
Master Servicer or the Trustee deems necessary or desirable to enable holders of
Grantor Trust Certificates to prepare their tax returns and will furnish
comparable information to the IRS as and when required by law to do so. Because
the rules for accruing discount and amortizing premium with respect to the
Grantor Trust Certificates are uncertain in various respects, there is no
assurance the IRS will agree with the Trust Fund's information reports of such
items of income and expense. Moreover, such information reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders that bought their Certificates at the
representative initial offering price used in preparing such reports.
Except as disclosed in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the Master Servicer or the Trustee.
BACKUP WITHHOLDING
In general, the rules described in "--REMICS--Backup Withholding with
Respect to REMIC Certificates" will also apply to Grantor Trust Certificates.
FOREIGN INVESTORS
In general, the discussion with respect to REMIC Regular Certificates in
"REMICS--Foreign Investors in REMIC Certificates--REMIC Regular Certificates"
applies to Grantor Trust Certificates except that Grantor Trust Certificates
will, except as disclosed in the related Prospectus Supplement, be eligible for
exemption from U.S. withholding tax, subject to the conditions described in such
discussion, only to the extent the related Mortgage Loans were originated after
July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
Certificateholder's trade or business in the United States, such Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
non-resident alien individual.
PARTNERSHIP TRUST FUNDS
CLASSIFICATION OF PARTNERSHIP TRUST FUNDS
With respect to each series of Partnership Certificates or Debt
Certificates, Thacher Proffitt & Wood, counsel to the Depositor, will deliver
its opinion that the Trust Fund will not be a taxable mortgage pool or an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the related Pooling and Servicing Agreement and related documents
will be complied with, and on counsel's conclusions that (1) the Trust Fund will
not have certain characteristics necessary for a business trust to be classified
as an association taxable as a corporation and (2) the nature of the income
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of the Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income on the
related Mortgage Loans, possibly reduced by its interest expense on the Debt
Certificates. Any such corporate income tax could materially reduce cash
available to make payments on the Debt Certificates and distributions on the
Partnership Certificates and Certificateholders could be liable for any such tax
that is unpaid by the Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN PARTNERSHIP CERTIFICATES AND DEBT
CERTIFICATES.
For federal income tax purposes, (i) Partnership Certificates and Debt
Certificates held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans ... secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v); (ii) interest on
Debt Certificates held by a real estate investment trust will not be treated as
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B), and Debt
Certificates held by a real estate investment trust will not constitute "real
estate assets" or "Government securities" within the meaning of Code Section
856(c)(4)(A), but Partnership Certificates held by a real estate investment
trust will qualify under those sections based on the real estate investments
trust's proportionate interest in the assets of the Partnership Trust Fund based
on capital accounts; and (iii) Partnership Certificates and Debt Certificates
held by a regulated investment company will not constitute "Government
securities" within the meaning of Code Section 851(b)(4)(A)(i).
TAXATION OF DEBT CERTIFICATEHOLDERS
TREATMENT OF THE DEBT CERTIFICATES AS INDEBTEDNESS.
The Depositor will agree, and the Certificateholders will agree by their
purchase of Debt Certificates, to treat the Debt Certificates as debt for
federal income tax purposes. No regulations, published rulings, or judicial
decisions exist that discuss the characterization for federal income tax
purposes of securities with terms substantially the same as the Debt
Certificates. However, with respect to each series of Debt Certificates, Thacher
Proffitt & Wood, counsel to the Depositor, will deliver its opinion that the
Debt Certificates will be classified as indebtedness for federal income tax
purposes. The discussion below assumes this characterization of the Debt
Certificates is correct.
If, contrary to the opinion of counsel, the IRS successfully asserted that
the Debt Certificates were not debt for federal income tax purposes, the Debt
Certificates might be treated as equity interests in the Partnership Trust. If
so, the Partnership Trust Fund might be taxable as a corporation with the
adverse consequences described above (and the taxable corporation would not be
able to deduct interest on the Debt Certificates).
Debt Certificates generally will be subject to the same rules of taxation
as REMIC Regular Certificates issued by a REMIC, as described above, except that
(i) income reportable on Debt Certificates is not required to be reported under
the accrual method unless the holder otherwise uses the accrual method and (ii)
the special rule treating a portion of the gain on sale or exchange of a REMIC
Regular Certificate as ordinary income is inapplicable to Debt Certificates. See
"-- REMICs -- Taxation of Owners of REMIC Regular Certificates" and "--Sales of
REMIC Certificates."
TAXATION OF OWNERS OF PARTNERSHIP CERTIFICATES
TREATMENT OF THE PARTNERSHIP TRUST FUND AS A PARTNERSHIP.
If so specified in the applicable Prospectus Supplement, the Depositor will
agree, and the Certificateholders will agree by their purchase of Certificates,
to treat the Partnership Trust Fund
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as a partnership for purposes of federal and state income tax, franchise tax and
any other tax measured in whole or in part by income, with the assets of the
partnership being the assets held by the Partnership Trust Fund, the partners of
the partnership being the Certificateholders (including the Depositor), and the
Debt Certificates (if any) being debt of the partnership. However, the proper
characterization of the arrangement involving the Partnership Trust Fund, the
Partnership Certificates, the Debt Certificates, and the Depositor is not clear,
because there is no authority on transactions closely comparable to that
contemplated herein.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Certificates have certain
features characteristic of debt, the Partnership Certificates might be
considered debt of the Depositor or the Partnership Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Partnership Certificates as equity in a partnership, described below. The
following discussion assumes that the Partnership Certificates represent equity
interests in a partnership.
PARTNERSHIP TAXATION.
As a partnership, the Partnership Trust Fund will not be subject to federal
income tax. Rather, each Certificateholder will be required to separately take
into account such holder's allocated share of income, gains, losses, deductions
and credits of the Partnership Trust Fund. It is anticipated that the
Partnership Trust Fund's income will consist primarily of interest earned on the
Mortgage Loans (including appropriate adjustments for market discount, original
issue discount and bond premium) as described above under "-- Grantor Trust
Funds -- Taxation of Owners of Grantor Trust Fractional Interest Certificates -
If Stripped Bond Ruled Do Not Apply--", "-- Market Discount" and "--Premium")
and any gain upon collection or disposition of Mortgage Loans. The Partnership
Trust Fund's deductions will consist primarily of interest accruing with respect
to the Debt Certificates, servicing and other fees, and losses or deductions
upon collection or disposition of Debt Certificates.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Pooling and Servicing Agreement and related documents). The Pooling and
Servicing Agreement will provide, in general, that the Certificateholders will
be allocated taxable income of the Partnership Trust Fund for each Due Period
equal to the sum of (i) the interest that accrues on the Partnership
Certificates in accordance with their terms for such Due Period, including
interest accruing at the applicable pass-through rate for such Due Period and
interest on amounts previously due on the Partnership Certificates but not yet
distributed; (ii) any Partnership Trust Fund income attributable to discount on
the Mortgage Loans that corresponds to any excess of the principal amount of the
Partnership Certificates over their initial issue price; and (iii) any other
amounts of income payable to the Certificateholders for such Due Period. Such
allocation will be reduced by any amortization by the Partnership Trust Fund of
premium on Mortgage Loans that corresponds to any excess of the issue price of
Partnership Certificates over their principal amount. All remaining taxable
income of the Partnership Trust Fund will be allocated to the Depositor. Based
on the economic arrangement of the parties, this approach for allocating
Partnership Trust Fund income should be permissible under applicable Treasury
regulations, although no assurance can be given that the IRS would not require a
greater amount of income to be allocated to Certificateholders. Moreover, even
under the foregoing method of allocation, Certificateholders may be allocated
income equal to the entire pass-through rate plus the other items described
above even though the Trust Fund might not have sufficient cash to make current
cash distributions of such amount. Thus, cash basis holders will in effect be
required to report income from the Partnership Certificates on the accrual basis
and Certificateholders may become liable for taxes on Partnership Trust Fund
income even if they have not received cash from the Partnership Trust Fund to
pay such taxes.
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All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of the
Master Servicer but not interest expense) allocable to an individual, estate or
trust Certificateholder would be miscellaneous itemized deductions subject to
the limitations described above under "--Grantor Trust Funds -- Taxation of
Owners of Grantor Trust Fractional Interest Certificates." Accordingly, such
deductions might be disallowed to the individual in whole or in part and might
result in such holder being taxed on an amount of income that exceeds the amount
of cash actually distributed to such holder over the life of the Partnership
Trust Fund.
Discount income or premium amortization with respect to each Mortgage Loan
would be calculated in a manner similar to the description above under "--
Grantor Trust Funds -- Taxation of Owners of Grantor Trust Fractional Interest
Certificates - If Stripped Bond Rules Do Not Apply." Notwithstanding such
description, it is intended that the Partnership Trust Fund will make all tax
calculations relating to income and allocations to Certificateholders on an
aggregate basis with respect to all Mortgage Loans held by the Partnership Trust
Fund rather than on a Mortgage Loan-by-Mortgage Loan basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Partnership Trust Fund might be required to incur additional expense, but it is
believed that there would not be a material adverse effect on
Certificateholders.
DISCOUNT AND PREMIUM.
Unless indicated otherwise in the applicable Prospectus Supplement, it is
not anticipated that the Mortgage Loans will have been issued with original
issue discount and, therefore, the Partnership Trust Fund should not have
original issue discount income. However, the purchase price paid by the
Partnership Trust Fund for the Mortgage Loans may be greater or less than the
remaining principal balance of the Mortgage Loans at the time of purchase. If
so, the Mortgage Loans will have been acquired at a premium or discount, as the
case may be. See "--Grantor Trust Funds -- Taxation of Owners of Grantor Trust
Fractional Interest Certificates -- Market Discount" and "Premium." (As
indicated above, the Partnership Trust Fund will make this calculation on an
aggregate basis, but might be required to recompute it on a Mortgage
Loan-by-Mortgage Loan basis).
If the Partnership Trust Fund acquires the Mortgage Loans at a market
discount or premium, the Partnership Trust Fund will elect to include any such
discount in income currently as it accrues over the life of the Mortgage Loans
or to offset any such premium against interest income on the Mortgage Loans. As
indicated above, a portion of such market discount income or premium deduction
may be allocated to Certificateholders.
SECTION 708 TERMINATION.
Under Section 708 of the Code, the Partnership Trust Fund will be deemed to
terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, the Partnership Trust Fund will
be considered to distribute its assets to the partners, who would then be
treated as recontributing those assets to the Partnership Trust Fund, as a new
partnership. The Partnership Trust Fund will not comply with certain technical
requirements that might apply when such a constructive termination occurs. As a
result, the Partnership Trust Fund may be subject to certain tax penalties and
may incur additional expenses if it is required to comply with those
requirements. Furthermore, the Partnership Trust Fund might not be able to
comply due to lack of data. Under proposed Treasury regulations, the foregoing
treatment would be replaced by a new regime under which a 50% or greater
transfer, as described above, would cause a deemed contribution of the assets of
a Partnership Trust Fund (the "old partnership") to a new Partnership
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Trust Fund (the "new partnership") in exchange for interests in the new
partnership. Such interests would be deemed distributed to the partners of the
old partnership in liquidation thereof, which would not constitute a sale or
exchange. It is not known when or whether such proposed Treasury regulations
will be adopted in final (or temporary) form.
DISPOSITION OF CERTIFICATES.
Generally, capital gain or loss will be recognized on a sale of Partnership
Certificates in an amount equal to the difference between the amount realized
and the seller's tax basis in the Partnership Certificates sold. A
Certificateholder's tax basis in an Partnership Certificate will generally equal
the holder's cost increased by the holder's share of Partnership Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Partnership Certificate. In addition, both the tax basis in the
Partnership Certificates and the amount realized on a sale of an Partnership
Certificate would include the holder's share of the Debt Certificates and other
liabilities of the Partnership Trust Fund. A holder acquiring Partnership
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Partnership Certificates, and, upon sale or other
disposition of some of the Partnership Certificates, allocate a portion of such
aggregate tax basis to the Partnership Certificates sold (rather than
maintaining a separate tax basis in each Partnership Certificate for purposes of
computing gain or loss on a sale of that Partnership Certificate).
Any gain on the sale of an Partnership Certificate attributable to the
holder's share of unrecognized accrued market discount on the Mortgage Loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Partnership Certificates that exceeds the
aggregate cash distributions with respect thereto, such excess will generally
give rise to a capital loss upon the retirement of the Partnership Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES.
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will be
apportioned among the Certificateholders in proportion to the principal amount
of Partnership Certificates owned by them as of the close of the last day of
such Due Period. As a result, a holder purchasing Partnership Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
The use of such a Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the Certificateholders.
The Depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
SECTION 731 DISTRIBUTIONS.
In the case of any distribution to a Certificateholder, no gain will be
recognized to that Certificateholder to the extent that the amount of any money
distributed with respect to such Certificate exceeds the adjusted basis of such
Certificateholder's interest in the Certificate. To the extent that the amount
of money distributed exceeds such Certificateholder's adjusted basis, gain will
be currently recognized. In the case of any distribution to a Certificateholder,
no loss will be
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recognized except upon a distribution in liquidation of a Certificateholder's
interest. Any gain or loss recognized by a Certificateholder will be capital
gain or loss.
SECTION 754 ELECTION.
In the event that a Certificateholder sells its Partnership Certificates at
a profit (loss), the purchasing Certificateholder will have a higher (lower)
basis in the Partnership Certificates than the selling Certificateholder had.
The tax basis of the Partnership Trust Fund's assets would not be adjusted to
reflect that higher (or lower) basis unless the Partnership Trust Fund were to
file an election under Section 754 of the Code. In order to avoid the
administrative complexities that would be involved in keeping accurate
accounting records, as well as potentially onerous information reporting
requirements, the Partnership Trust Fund will not make such election. As a
result, Certificateholder might be allocated a greater or lesser amount of
Partnership Trust Fund income than would be appropriate based on their own
purchase price for Partnership Certificates.
ADMINISTRATIVE MATTERS.
The Trustee is required to keep or have kept complete and accurate books of
the Partnership Trust Fund. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Partnership Trust Fund and will report each Certificateholder's
allocable share of items of Partnership Trust Fund income and expense to holders
and the IRS on Schedule K-1. The Trustee will provide the Schedule K-1
information to nominees that fail to provide the Partnership Trust Fund with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Partnership
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Partnership Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Certificates as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership
Certificates so held. Such information includes (i) the name, address and
taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly-owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Partnership Certificates that were held, bought or sold on behalf of such person
throughout the year. In addition, brokers and financial institutions that hold
Partnership Certificates through a nominee are required to furnish directly to
the Trustee information as to themselves and their ownership of Partnership
Certificates. A clearing agency registered under Section 17A of the Exchange Act
is not required to furnish any such information statement to the Partnership
Trust Fund. The information referred to above for any calendar year must be
furnished to the Partnership Trust Fund on or before the following January 31.
Nominees, brokers and financial institutions that fail to provide the
Partnership Trust Fund with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in the Pooling
and Servicing Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may be
precluded from separately litigating a proposed adjustment to the items of the
Partnership Trust
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Fund. An adjustment could also result in an audit of a Certificateholder's
returns and adjustments of items not related to the income and losses of the
Partnership Trust Fund.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS.
It is not clear whether the Partnership Trust Fund would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to non-U.S. persons, because there is no clear
authority dealing with that issue under facts substantially similar to those
described herein. Although it is not expected that the Partnership Trust Fund
would be engaged in a trade or business in the United States for such purposes,
the Partnership Trust Fund will withhold as if it were so engaged in order to
protect the Partnership Trust Fund from possible adverse consequences of a
failure to withhold. The Partnership Trust Fund expects to withhold on the
portion of its taxable income that is allocable to foreign Certificateholders
pursuant to Section 1446 of the Code, as if such income were effectively
connected to a U.S. trade or business, at a rate of 35% for foreign holders that
are taxable as corporations and 39.6% for all other foreign holders. Amounts
withheld will be deemed distributed to the foreign certificateholders.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Partnership Trust Fund to change
its withholding procedures. In determining a holder's withholding status, the
Partnership Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Partnership Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit that
number to the Partnership Trust Fund on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign holder generally would be entitled to
file with the IRS a claim for refund with respect to taxes withheld by the
Partnership Trust Fund, taking the position that no taxes were due because the
Partnership Trust Fund was not engaged in a U.S. trade or business. However,
interest payment made (or accrued) to a Certificateholder who is a foreign
person generally will be considered guaranteed payments to the extent such
payments are determined without regard to the income of the Partnership Trust
Fund. If these interest payments are properly characterized as guaranteed
payments, then the interest will not be considered "portfolio interest." As a
result, Certificateholders who are foreign persons will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
BACKUP WITHHOLDING.
Distributions made on the Partnership Certificates and proceeds from the
sale of the Partnership Certificates will be subject to a "backup" withholding
tax of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A CERTIFICATEHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF REMIC CERTIFICATES, GRANTOR TRUST CERTIFICATES, PARTNERSHIP
CERTIFICATES AND DEBT CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences", potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
Securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Securities offered
hereunder.
ERISA CONSIDERATIONS
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), impose certain fiduciary and prohibited transaction
restrictions on employee pension and welfare benefit plans subject to ERISA
("ERISA Plans") and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans and bank
collective investment funds and insurance company general and separate accounts
in which such ERISA Plans are invested. Section 4975 of the Code imposes
essentially the same prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code and on Individual
Retirement Accounts described in Section 408 of the Code (collectively, "Tax
Favored Plans"). ERISA and the Code prohibit a broad range of transactions
involving assets of ERISA Plans and Tax Favored Plans (collectively, "Plans")
and persons who have certain specified relationships to such Plans ("Parties in
Interest" within the meaning of ERISA or "Disqualified Persons" within the
meaning of the Code, collectively "Parties in Interest"), unless a statutory or
administrative exemption is available with respect to any such transaction.
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA) are not subject
to ERISA requirements. Accordingly, assets of such plans may be invested in the
Securities without regard to the ERISA considerations described below, subject
to the provisions of other applicable federal, state and local law. Any such
plan which is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
Certain transactions involving the Trust Fund might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan that
purchases the Securities, if the Mortgage Loans, Agency Securities, Private
Mortgage-Backed Securities, Funding Agreements and other assets included in a
Trust Fund are deemed to be assets of the Plan. The U.S. Department of Labor
(the "DOL") has promulgated regulations at 29 C.F.R. ss.2510.3-101 (the "DOL
Regulations") defining the term "Plan Assets" for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code. Under the DOL Regulations,
generally, when a Plan acquires an "equity interest" in another entity (such as
the Trust Fund), the underlying assets of that entity may be considered to be
Plan Assets unless certain exceptions apply. Exceptions contained in the DOL
Regulations provide that a Plan's assets will not include an undivided interest
in each asset of an entity in which such Plan makes an equity investment if: (1)
the entity is an operating company; (2) the equity investment made by the Plan
is either a "publicly-offered security" that is "widely held," both as defined
in the DOL Regulations, or a security issued by an investment company registered
under the Investment Company Act of 1940, as amended; or (3) Benefit Plan
Investors do not own 25% or more in value of any class of equity securities
issued by the entity. For this purpose, "Benefit Plan Investors" include Plans,
as well as any "employee benefit plan" (as defined in Section 3(3) or ERISA)
which is not subject to Title I of ERISA, such as governmental plans (as defined
in Section 3(32) of ERISA) and church plans (as defined in Section 3(33) of
ERISA) which have not made an election
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under Section 410(d) of the Code, and any entity whose underlying assets include
Plan Assets by reason of a Plan's investment in the entity. In addition, the DOL
Regulations provide that the term "equity interest" means any interest in an
entity other than an instrument which is treated as indebtedness under
applicable local law and which has no "substantial equity features". Under the
DOL Regulations, Plan Assets will be deemed to include an interest in the
instrument evidencing the equity interest of a Plan (such as a Certificate or a
Note with "substantial equity features"), and, because of the factual nature of
certain of the rules set forth in the DOL Regulations, Plan Assets may be deemed
to include an interest in the underlying assets of the entity in which a Plan
acquires an interest (such as the Trust Fund). Without regard to whether the
Notes are characterized as equity interests, the purchase, sale and holding of
Notes by or on behalf of a Plan could be considered to give rise to a prohibited
transaction if the Issuer, the Trustee or any of their respective affiliates is
or becomes a Party in Interest with respect to such Plan. Neither Plans nor
persons investing Plan Assets should acquire or hold Securities in reliance upon
the availability of any exception under the DOL Regulations.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. Any person who has discretionary authority or control with
respect to the management or disposition of Plan Assets and any person who
provides investment advice with respect to such Plan Assets for a fee is a
fiduciary of the investing Plan. If the Mortgage Loans, Agency Securities,
Private Mortgage-Backed Securities, Funding Agreements and other assets included
in the Trust Fund were to constitute Plan Assets, then any party exercising
management or discretionary control with respect to those Plan Assets may be
deemed to be a Plan "fiduciary," and thus subject to the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to any investing Plan. In
addition, the acquisition or holding of Securities by or on behalf of a Plan or
with Plan Assets, as well as the operation of the Trust Fund, may constitute or
involve a prohibited transaction under ERISA and the Code unless a statutory or
administrative exemption is available.
The DOL issued an individual exemption, Prohibited Transaction Exemption
91-23 (56 Fed. Reg. 15936, April 18, 1991) (the "Exemption"), to Salomon Smith
Barney Inc. (formerly known as Smith Barney Inc.), which generally exempts from
the application of the prohibited transaction provisions of Section 406 of
ERISA, and the excise taxes imposed on such prohibited transactions pursuant to
Section 4975(a) and (b) of the Code, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the initial
purchase, holding and subsequent resale of mortgage pass-through certificates
underwritten by an Underwriter (as hereinafter defined), provided that certain
conditions set forth in the Exemption are satisfied. For purposes of this
Section "ERISA Considerations", the term "Underwriter" shall include (a) Salomon
Smith Barney Inc., (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with Salomon
Smith Barney Inc. and (c) any member of the underwriting syndicate or selling
group of which a person described in (a) or (b) is a manager or co-manager with
respect to a class of Certificates.
The Exemption sets forth six general conditions which must be satisfied for
the Exemption to apply. First, the acquisition of Certificates by a Plan or with
Plan Assets must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
Exemption only applies to Certificates evidencing rights and interests that are
not subordinated to the rights and interests evidenced by other Certificates of
the same trust. Third, the Certificates at the time of acquisition by a Plan or
with Plan Assets must be rated in one of the three highest generic rating
categories by Standard & Poor's Structured Rating Group, Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc.
(collectively, the "Exemption Rating Agencies"). Fourth, the Trustee cannot be
an affiliate of any member of the "Restricted Group" which consists of any
Underwriter, the Depositor, the Trustee, the Master
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Servicer, any Sub-Servicer and any obligor with respect to assets included in
the Trust Fund constituting more than 5% of the aggregate unamortized principal
balance of the assets in the Trust Fund as of the date of initial issuance of
the Certificates. Fifth, the sum of all payments made to and retained by the
Underwriter(s) must represent not more than reasonable compensation for
underwriting the Certificates; the sum of all payments made to and retained by
the Depositor pursuant to the assignment of the assets to the related Trust Fund
must represent not more than the fair market value of such obligations; and the
sum of all payments made to and retained by the Master Servicer and any
Sub-Servicer must represent not more than reasonable compensation for such
person's services under the related Agreement and reimbursement of such person's
reasonable expenses in connection therewith. Sixth, the Exemption states that
the investing Plan or Plan Asset investor must be an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Commission under the Securities
Act of 1933, as amended.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) Certificates evidencing
interests in such other investment pools must have been rated in one of the
three highest generic categories of one of the Exemption Rating Agencies for at
least one year prior to the acquisition of the Certificates by or on behalf of a
Plan or with Plan Assets; and (iii) Certificates evidencing interests in such
other investment pools must have been purchased by investors other than Plans
for at least one year prior to any acquisition of the Certificates by or on
behalf of a Plan or with Plan Assets.
Any transferee of the Certificates will be deemed to have represented that
either (a) such transferee is not a Plan and is not purchasing such Certificates
by or on behalf of or with "Plan Assets" of any Plan or (b) the purchase of any
such Certificate by or on behalf of or with "Plan Assets" of any Plan is
permissible under applicable law, will not result in any non-exempt prohibited
transaction under ERISA or Section 4975 of the Code and will not subject the
Master Servicer, the Depositor or the Trustee to any obligation in addition to
those undertaken in the related Agreement. A fiduciary of a Plan or any person
investing Plan Assets to purchase a Certificate must make its own determination
that the conditions set forth above will be satisfied with respect to such
Certificate.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA, and the excise taxes imposed by Sections 4975(a) and (b) of the Code
by reason of Sections 4975(c)(1)(A) through (D) of the Code, in connection with
the direct or indirect sale, exchange or transfer of Certificates in the initial
issuance of such Certificates or the direct or indirect acquisition or
disposition in the secondary market of Certificates by a Plan or with Plan
Assets or the continued holding of a Certificate acquired by a Plan or with Plan
Assets pursuant to either of the foregoing. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for
the acquisition or holding of a Certificate on behalf of an "Excluded Plan" by
any person who has discretionary authority or renders investment advice with
respect to the assets of such Excluded Plan. For purposes of the Certificates,
an Excluded Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA, and the excise taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code, in
connection with (1) the direct or indirect sale, exchange or transfer of
Certificates in the initial issuance of Certificates between the Depositor or an
Underwriter and a Plan when the person who has discretionary authority or
renders investment advice with respect to the investment of Plan Assets in the
Certificates is (a) a mortgagor with respect to 5% or less of the fair market
value of the Trust Fund Assets or (b) an affiliate of such a person, (2) the
direct or indirect acquisition or disposition in the secondary market of
Certificates by a Plan or with Plan Assets and
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(3) the continued holding of Certificates acquired by a Plan or with Plan Assets
pursuant to either of the foregoing.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 of ERISA, and the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code for
transactions in connection with the servicing, management and operation of the
Trust Fund. The Depositor expects that the specific conditions of the Exemption
required for this purpose will be satisfied with respect to the Certificates so
that the Exemption would provide an exemption from the restrictions imposed by
Sections 406(a) and (b) of ERISA (as well as the excise taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code)
for transactions in connection with the servicing, management and operation of
the Trust Fund, provided that the general conditions of the Exemption are
satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the excise taxes imposed by Section
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code if such restrictions are deemed to otherwise apply merely because a
person is deemed to be a Party in Interest with respect to an investing Plan by
virtue of providing services to the Plan (or by virtue of having certain
specified relationships to such a person) solely as a result of the Plan's
ownership of Certificates.
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Exemption, which will extend exemptive relief to certain mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. With respect to the Certificates, the
amendment will generally allow Mortgage Loans supporting payments to
Certificateholders, and having a value equal to no more than 25% of the total
principal amount of the Certificates being offered by a Trust Fund, to be
transferred to such Trust Fund within a period no longer than 90 days or three
months following the Closing Date ("Pre-Funding Period") instead of requiring
that all such Mortgage Loans be either identified or transferred on or before
the Closing Date. In general, the relief applies to the purchase, sale and
holding of Certificates which otherwise qualify for the Exemption, provided that
the following general conditions are met:
(1) the ratio of the amount allocated to the Pre-Funding Account to the
total principal amount of the Certificates being offered ("Pre-Funding
Limit") must be less than or equal to: (i) 40% for transactions occurring
on or after January 1, 1992 but prior to May 23, 1997 and (ii) 25% for
transactions occurring on or after May 23, 1997;
(2) all additional Mortgage Loans transferred to the related Trust Fund
after the Closing Date ("Subsequent Mortgage Loans") must meet the same
terms and conditions for eligibility as the original Mortgage Loans used to
create the Trust Fund, which terms and conditions have been approved by one
of the Exemption Rating Agencies;
(3) the transfer of such Subsequent Mortgage Loans to the Trust Fund
during the Pre- Funding Period must not result in the Certificates to be
covered by the Exemptions receiving a lower credit rating from an Exemption
Rating Agency upon termination of the Pre-Funding Period than the rating
that was obtained at the time of the initial issuance of the Certificates
by the Trust Fund;
(4) solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "Average Interest Rate") for all of
the Mortgage Loans and Subsequent Mortgage Loans in the Trust Fund at the
end of the Pre-Funding Period must not be more than 100 basis points lower
than the Average Interest Rate for the Mortgage Loans which were
transferred to the Trust Fund on the Closing Date;
(5) for transactions occurring on or after May 23, 1997, either:
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(i) the characteristics of the Subsequent Mortgage Loans must be
monitored by an insurer or other credit support provider which is
independent of the Depositor; or
(ii) an independent accountant retained by the Depositor must
provide the Depositor with a letter (with copies provided to the Exemption
Rating Agency rating the Certificates, the Underwriter and the Trustee)
stating whether or not the characteristics of the Subsequent Mortgage Loans
conform to the characteristics described in the Prospectus or Prospectus
Supplement and/or Agreement. In preparing such letter, the independent
accountant must use the same type of procedures as were applicable to the
Mortgage Loans which were transferred to the Trust Fund as of the Closing
Date;
(6) the Pre-Funding Period must end no later than three months or 90
days after the Closing Date or earlier in certain circumstances if the
Pre-Funding Account falls below the minimum level specified in the
Agreement or an event of default occurs;
(7) amounts transferred to any Pre-Funding Account and/or capitalized
interest account used in connection with the pre-funding may be invested
only in investments which are permitted by the Exemption Rating Agencies
rating the Certificates and must:
(i) be direct obligations of, or obligations fully guaranteed as
to timely payment of principal and interest by, the United States or any
agency or instrumentality thereof (provided that such obligations are
backed by the full faith and credit of the United States); or
(ii) have been rated (or the obligor has been rated) in one of the
three highest generic rating categories by one of the Exemption Rating
Agencies ("ERISA Permitted Investments");
(8) the Prospectus or Prospectus Supplement must describe the duration
of the Pre- Funding Period;
(9) the Trustee (or any agent with which the Trustee contracts to
provide trust services) must be a substantial financial institution or
trust company experienced in trust activities and familiar with its duties,
responsibilities and liabilities with ERISA. The Trustee, as legal owner of
the Trust Fund, must enforce all the rights created in favor of
Certificateholders of the Trust Fund, including employee benefit plans
subject to ERISA.
In addition to the Exemption, a Plan fiduciary or other Plan Asset investor
should consider the availability of certain class exemptions granted by the DOL
("Class Exemptions"), which may provide relief from certain of the prohibited
transaction provisions of ERISA and the related excise tax provisions of the
Code, including Prohibited Transaction Class Exemption ("PTCE") 83-1, regarding
transactions involving mortgage pool investment trusts; PTCE 84-14, regarding
transactions effected by a "qualified professional asset manager"; PTCE 90-1,
regarding transactions by insurance company pooled separate accounts; PTCE
91-38, regarding investments by bank collective investment funds; PTCE 95-60,
regarding transactions by insurance company general accounts; and PTCE 96-23,
regarding transactions effected by an "in-house asset manager."
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Securities by an insurance company general account,
the Small Business Job Protection Act of 1996 added a new Section 401(c) to
ERISA, which provides certain exemptive relief from the provisions of Part 4 of
Title I of ERISA and Section 4975 of the Code, including the prohibited
transaction restrictions imposed by ERISA and the related excise taxes imposed
by the Code, for transactions involving an insurance company general account.
Pursuant to Section 401(c) of ERISA, the DOL is required to issue final
regulations ("401(c) Regulations") no later than December 31, 1997 which are to
provide guidance for the purpose of determining, in cases where insurance
policies supported by an insurer's general account are issued to or for the
benefit of a Plan on or before December 31, 1998, which general account assets
constitute Plan Assets. Section 401(c) of ERISA generally provides that, until
the date which is 18 months after the 401(c)
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Regulations become final, no person shall be subject to liability under Part 4
of Title I of ERISA and Section 4975 of the Code on the basis of a claim that
the assets of an insurance company general account constitute Plan Assets,
unless (i) as otherwise provided by the Secretary of Labor in the 401(c)
Regulations to prevent avoidance of the regulations or (ii) an action is brought
by the Secretary of Labor for certain breaches of fiduciary duty which would
also constitute a violation of federal or state criminal law. Any assets of an
insurance company general account which support insurance policies issued to a
Plan after December 31, 1998 or issued to Plans on or before December 31, 1998
for which the insurance company does not comply with the 401(c) Regulations may
be treated as Plan Assets. In addition, because Section 401(c) does not relate
to insurance company separate accounts, separate account assets are still
treated as Plan Assets of any Plan invested in such separate account. Insurance
companies contemplating the investment of general account assets in the
Securities should consult with their legal counsel with respect to the
applicability of Section 401(c) of ERISA, including the general account's
ability to continue to hold the Securities after the date which is 18 months
after the date the 401(c) Regulations become final.
REPRESENTATION FROM PLANS INVESTING IN NOTES WITH "SUBSTANTIAL EQUITY FEATURES"
OR CERTAIN SECURITIES
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not apply to the purchase, sale or
holding of certain Securities, such as Notes with "substantial equity features,"
Subordinate Securities, REMIC Residual Certificates, any Securities which are
not rated in one of the three highest generic rating categories by the Exemption
Rating Agencies, transfers of any such Securities to a Plan, to a trustee or
other person acting on behalf of any Plan, or to any other person investing Plan
Assets to effect such acquisition will not be registered by the Trustee unless
the transferee provides the Depositor, the Trustee and the Master Servicer with
an opinion of counsel satisfactory to the Depositor, the Trustee and the Master
Servicer, which opinion will not be at the expense of the Depositor, the Trustee
or the Master Servicer, that the purchase of such Securities by or on behalf of
such Plan is permissible under applicable law, will not constitute or result in
any non-exempt prohibited transaction under ERISA or Section 4975 of the Code
and will not subject the Depositor, the Trustee or the Master Servicer to any
obligation in addition to those undertaken in the related Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Securities by or
on behalf of such Plan is permissible under applicable law, will not constitute
or result in any non-exempt prohibited transaction under ERISA or Section 4975
of the Code and will not subject the Depositor, the Trustee or the Master
Servicer to any obligation in addition to those undertaken in the Agreement and
the following statements are correct: (i) the transferee is an insurance
company; (ii) the source of funds used to purchase such Securities is an
"insurance company general account" (as such term is defined in PTCE 95-60);
(iii) the conditions set forth in PTCE 95-60 have been satisfied; and (iv) there
is no Plan with respect to which the amount of such general account's reserves
and liabilities for contracts held by or on behalf of such Plan and all other
Plans maintained by the same employer (or any "affiliate" thereof, as defined in
PTCE 95-60) or by the same employee organization exceed 10% of the total of all
reserves and liabilities of such general account (as determined under PTCE
95-60) as of the date of the acquisition of such Securities.
An opinion of counsel or certification will not be required with respect to
the purchase of DTC registered Securities. Any purchaser of a DTC registered
Security will be deemed to have represented by such purchase that either (a)
such purchaser is not a Plan and is not purchasing such Securities on behalf of,
or with Plan Assets of, any Plan or (b) the purchase of any such Security by or
on behalf of, or with Plan Assets of, any Plan is permissible under applicable
law, will not result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code and will not subject the Depositor, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the related
Agreement.
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TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax-Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusion" of a REMIC allocated to a REMIC Residual Certificate and held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to federal
income tax. See "Federal Income Tax Consequences--REMICs--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions" above.
CONSULTATION WITH COUNSEL
There can be no assurance that any DOL exemption will apply with respect to
any particular Plan that acquires the Securities or, even if all the conditions
specified therein were satisfied, that any such exemption would apply to
transactions involving the Trust Fund. Prospective Plan investors should consult
with their legal counsel concerning the impact of ERISA and the Code and the
potential consequences to their specific circumstances prior to making an
investment in the Securities. Neither the Depositor, the Trustee, the Master
Servicer nor any of their respective affiliates will make any representation to
the effect that the Securities satisfy all legal requirements with respect to
the investment therein by Plans generally or any particular Plan or to the
effect that the Securities are an appropriate investment for Plans generally or
any particular Plan.
BEFORE PURCHASING THE SECURITIES, A FIDUCIARY OF A PLAN OR OTHER PLAN ASSET
INVESTOR SHOULD ITSELF CONFIRM THAT (A) ALL THE SPECIFIC AND GENERAL CONDITIONS
SET FORTH IN THE EXEMPTION, ONE OF THE CLASS EXEMPTIONS OR SECTION 401(C) OF
ERISA WOULD BE SATISFIED AND (B) IN THE CASE OF A SECURITY PURCHASED UNDER THE
EXEMPTION, THE SECURITY CONSTITUTES A "CERTIFICATE" FOR PURPOSES OF THE
EXEMPTION. IN ADDITION TO MAKING ITS OWN DETERMINATION AS TO THE AVAILABILITY OF
THE EXEMPTIVE RELIEF PROVIDED IN THE EXEMPTION, ONE OF THE CLASS EXEMPTIONS OR
SECTION 401(C) OF ERISA, THE PLAN FIDUCIARY SHOULD CONSIDER ITS GENERAL
FIDUCIARY OBLIGATIONS UNDER ERISA IN DETERMINING WHETHER TO PURCHASE THE
SECURITIES ON BEHALF OF A PLAN.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Securities will specify which
classes of Securities of such series, if any, will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Any class of Securities that is not rated in one of the two
highest rating categories by one or more nationally recognized statistical
rating agencies or that represents an interest in a Trust Fund that includes
junior Mortgage Loans will not constitute "mortgage related securities" for
purposes of SMMEA "Mortgage related securities" are legal investments to the
same extent that, under applicable law, obligations issued by or guaranteed as
to principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, insurance companies and pension funds created pursuant
to or existing under the laws of the United States or of any state, the
authorized investments of which are subject to state regulation). Under SMMEA,
if a state enacted legislation prior to October 3, 1991 specifically limiting
the legal investment authority of any such entities with respect to "mortgage
related securities", the Securities would constitute legal investments for
entities subject to such legislation only to the extent provided in such
legislation. SMMEA provides, however, that in no event will the enactment of any
such legislation affect the validity of any contractual commitment to purchase,
hold or invest in "mortgage related securities", or require the sale or other
disposition of such securities, so long as such
140
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contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
On April 23, 1998, the Federal Financial Institutions Examination Council
issued a revised supervisory policy statement (the "1998 Policy Statement")
applicable to all depository institutions, setting forth guidelines for
investments in "high-risk mortgage securities". The 1998 Policy Statement has
been adopted by the Federal Reserve Board, the Office of the Comptroller of the
Currency, the FDIC, the National Credit Union Administration (the "NCUA") and
the Office of Thrift Supervision (the "OTS") with an effective date of May 26,
1998. The 1998 Policy Statement rescinds a 1992 policy statement that had
required, prior to purchase, a depository institution to determine whether a
mortgage derivative product that it is considering acquiring is high-risk, and,
if so, that the proposed acquisition would reduce the institution's overall
interest rate risk. The 1998 Policy Statement eliminates former constraints on
investing in certain "high-risk" mortgage derivative products and substitutes
broader guidelines for evaluating and monitoring investment risk.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps," which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Securities. The OTS is, however, proposing to adopt revised requirements based
on the 1998 Policy Statement. In addition, the NCUA has issued regulations
governing federal credit union investments which prohibit investment in certain
specified types of securities, which may include certain classes of Securities.
Similar policy statements have been issued by regulators having jurisdiction
over other types of depository institutions.
Prospective investors in the Securities, including in particular the
classes of Securities that do not constitute "mortgage related securities" for
purposes of SMMEA should consider the matters discussed in the following
paragraph.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS IN DETERMINING WHETHER
AND TO WHAT EXTENT THE SECURITIES CONSTITUTE LEGAL INVESTMENTS FOR SUCH
INVESTORS OR ARE SUBJECT TO INVESTMENT, CAPITAL OR OTHER RESTRICTIONS, AND, IF
APPLICABLE, WHETHER SMMEA HAS BEEN OVERRIDDEN IN ANY JURISDICTION RELEVANT TO
SUCH INVESTOR.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the Supplements to this Prospectus
will be offered in series. The distribution of the Securities may be effected
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Salomon Smith
141
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Barney Inc. ("Salomon Smith Barney") acting as underwriter with other
underwriters, if any, named therein. In such event, the Prospectus Supplement
may also specify that the underwriters will not be obligated to pay for any
Securities agreed to be purchased by purchasers pursuant to purchase agreements
acceptable to the Depositor. In connection with the sale of the Securities,
underwriters may receive compensation from the Depositor or from purchasers of
the Securities in the form of discounts, concessions or commissions. The
Prospectus Supplement will describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that the Securities
will be distributed by Salomon Smith Barney acting as agent or in some cases as
principal with respect to Securities which it has previously purchased or agreed
to purchase. If Salomon Smith Barney acts as agent in the sale of Securities,
Salomon Smith Barney will receive a selling commission with respect to each
series of Securities, depending on market conditions, expressed as a percentage
of the aggregate principal balance of the related Mortgage Loans as of the
Cut-off Date. The exact percentage for each series of Securities will be
disclosed in the related Prospectus Supplement. To the extent that Salomon Smith
Barney elects to purchase Securities as principal, Salomon Smith Barney may
realize losses or profits based upon the difference between its purchase price
and the sales price. The Prospectus Supplement with respect to any series
offered other than through underwriters will contain information regarding the
nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Securities of such series.
The Depositor will indemnify Salomon Smith Barney and any underwriters
against certain civil liabilities, including liabilities under the Securities
Act of 1933, or will contribute to payments Salomon Smith Barney and any
underwriters may be required to make in respect thereof.
In the ordinary course of business, Salomon Smith Barney and the Depositor
may engage in various securities and financing transactions, including
repurchase agreements to provide interim financing of the Depositor's mortgage
loans pending the sale of such mortgage loans or interests therein, including
the Securities.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Securityholders should consult
with their legal advisors in this regard prior to any such reoffer or sale.
As to each series of Securities, only those classes rated in one of the
four highest rating categories by any Rating Agency will be offered hereby. Any
unrated class may be initially retained by the Depositor, and may be sold by the
Depositor at any time to one or more institutional investors.
LEGAL MATTERS
Certain legal matters in connection with the Securities will be passed upon
for the Depositor by Thacher Proffitt & Wood, New York, New York.
FINANCIAL INFORMATION
The Depositor has determined that its financial statements are not material
to the offering made hereby. Any prospective purchaser that desires to review
financial information concerning the Depositor will be provided by the Depositor
on request with a copy of the most recent financial statements of the Depositor.
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INDEX OF PRINCIPAL DEFINITIONS
Page(s) on Which
Term is Defined
in the
Term Prospectus
- ---- ----------------
1998 Policy Statement ...................................................141
401(c) Regulations ......................................................138
Accrual Securities ........................................................7
Accrued Certificate Interest .............................................55
Accrued Note Interest ....................................................55
Accrued Security Interest ................................................55
Agency Securities .........................................................1
Agreement ................................................................46
ARM Loans .............................................................8, 25
Available Distribution Amount ............................................54
Average Interest Rate ...................................................137
Bankruptcy Amount ........................................................70
BIF ......................................................................43
Buydown Account ......................................................17, 53
Buydown Funds ........................................................17, 28
Buydown Mortgage Loans ...............................................17, 28
Buydown Period .......................................................17, 28
Call Class .................................................. 12, 24, 39, 69
Call Price ...................................................... 13, 24, 69
Cash Flow Agreement ...............................................1, 11, 77
Certificate ..............................................................46
Certificate Account ..................................................10, 51
Certificate Principal Balance ............................................55
Certificate Register .....................................................54
Certificateholders ....................................................4, 59
Certificates ..............................................................5
Charter Act ..............................................................34
Class Exemptions ........................................................138
Clean-up Call.................................................... 12, 24, 69
Closing Date ............................................................101
Code ..............................................................7, 47, 99
Commission ................................................................4
Committee Report ........................................................101
Contingent Payment Regulations ..........................................125
Contracts ................................................................25
Contributions Tax .......................................................113
Cooperative ...........................................................8, 25
Cooperative Loans .....................................................8, 25
Cooperative Notes ........................................................30
Cooperative Unit .........................................................25
Credit Support .......................................................11, 47
Cut-off Date .............................................................11
Defaulted Mortgage Amount ................................................70
Deficient Valuation ......................................................56
Deleted Mortgage Loan ....................................................49
Depositor ................................................................25
Determination Date .......................................................54
Distribution Date ........................................................11
DOL .....................................................................134
DOL Regulations .........................................................134
DTC ......................................................................46
DTC Registered Securities ................................................46
Due Period ...............................................................54
Equity Certificates .......................................................5
ERISA ...............................................................15, 134
ERISA Permitted Investments .............................................138
ERISA Plans .............................................................134
143
<PAGE>
Page(s) on Which
Term is Defined
in the
Term Prospectus
- ---- ----------------
Event of Default .........................................................66
Excluded Plan ...........................................................136
Exemption ...........................................................15, 135
Exemption Rating Agencies ...............................................135
FDIC .....................................................................43
FHA .......................................................................9
FHA Loans ................................................................30
FHLMC .....................................................................1
FHLMC Act ................................................................32
FHLMC Certificates ........................................................9
Finance Company ..........................................................37
Financial Guarantee Insurance ............................................77
FNMA ......................................................................1
FNMA Certificates .........................................................9
FTC Rule .................................................................92
Funding Agreement .....................................................1, 37
Garn-St Germain Act ......................................................93
GNMA ......................................................................1
GNMA Certificates .........................................................9
GNMA Issuer ..............................................................31
Grantor Trust Certificates ...........................................13, 99
Grantor Trust Fractional Interest Certificate ...........................117
Grantor Trust Fractional Interest Certificates ...........................14
Grantor Trust Fund .......................................................99
Grantor Trust Strip Certificate .........................................118
Grantor Trust Strip Certificates .........................................14
Guaranty Agreement .......................................................31
High LTV Loans ...........................................................27
Holder-in-Due-Course .....................................................92
Housing Act ..............................................................30
HUD ......................................................................79
Indenture .................................................................5
Insurance Instruments ....................................................59
Insurance Proceeds .......................................................52
Interest Rate .........................................................8, 25
IRS .....................................................................102
Issue Premium ...........................................................108
Issuer ....................................................................5
Letter of Credit Bank ....................................................72
Liquidated Loan ..........................................................56
Liquidation Proceeds .....................................................52
Loan-to-Value Ratio ......................................................26
Lockout Period ...........................................................40
Manufacturer's Invoice Price .............................................27
Mark-to-Market Regulations ..............................................111
Master Servicer ...........................................................5
Mortgage Loan Seller .....................................................25
Mortgage Loans .........................................................1, 7
Mortgage Notes ...........................................................29
Mortgage Pool .............................................................7
Mortgaged Properties ..................................................8, 25
Mortgages ................................................................29
Multifamily Loans ........................................................25
Multifamily Properties ...................................................25
NCUA ....................................................................141
Net Interest Rate ........................................................48
New Withholding Regulations .............................................116
Nonrecoverable Advance ...................................................57
144
<PAGE>
Page(s) on Which
Term is Defined
in the
Term Prospectus
- ---- ----------------
Note Interest Rate ........................................................6
Note Principal Balance ...................................................55
Note Register ............................................................54
Noteholders ...........................................................4, 59
Notes .....................................................................5
OID Regulations ..........................................................99
Originator ...............................................................25
OTS .....................................................................141
Owner Trust Agreement .....................................................5
Owner Trustee .............................................................5
Parties in Interest .....................................................134
Pass-Through Rate .........................................................6
Permitted Investments ....................................................51
Plan .....................................................................15
Plan Assets .............................................................134
Plans ...................................................................134
PMBS Agreement ...........................................................36
PMBS Issuer ..............................................................36
PMBS Servicer ............................................................36
PMBS Trustee .............................................................36
Pre-Funding Account ......................................................56
Pre-Funding Limit .......................................................137
Pre-Funding Period ......................................................137
Prepayment Assumption ..............................................101, 121
Prepayment Period ........................................................39
Principal Balance .....................................................6, 55
Private Mortgage-Backed Securities ........................................1
Prohibited Transactions Tax .............................................113
PTCE ....................................................................138
PTCE 83-1 ...............................................................138
Purchase Price ...........................................................45
Rating Agency ............................................................47
Record Date ..............................................................54
Related Proceeds .........................................................57
Relief Act ...............................................................96
REMIC ....................................................................99
REMIC Certificates .......................................................99
REMIC Provisions .........................................................99
REMIC Regular Certificates ...........................................13, 99
REMIC Regulations ........................................................99
REMIC Residual Certificates ..........................................13, 99
Reserve Fund .............................................................77
Reserve Funds ............................................................71
Retained Interest ........................................................46
SAIF .....................................................................43
Sales of Grantor Trust Certificates .....................................120
Salomon Smith Barney ................................................15, 142
Scheduled Principal Balance ..............................................71
Securities .............................................................1, 5
Security Interest Rate ....................................................6
Security Register ........................................................54
Securityholders .......................................................4, 58
Senior Liens .............................................................26
Senior Percentage ........................................................56
Senior Securities .....................................................6, 47
Senior/Subordinate Series ................................................47
Servicing Default ........................................................66
Single Family Loans ......................................................25
145
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Page(s) on Which
Term is Defined
in the
Term Prospectus
- ---- ----------------
Single Family Properties .................................................25
SMMEA ...............................................................15, 140
Special Hazard Amount ....................................................70
Special Hazard Realized Losses ...........................................71
Special Hazard Subordination Amount ......................................71
Stated Principal Balance .................................................45
Strip Securities ......................................................6, 47
Stripped Interest ........................................................39
Sub-Servicer .............................................................60
Sub-Servicing Account ....................................................51
Sub-Servicing Agreement ..................................................61
Subordinate Securities ................................................6, 47
Subsequent Mortgage Loans ...............................................137
Substitute Mortgage Loan .................................................49
Tax Favored Plans .......................................................134
Tax-Exempt Investor .....................................................140
Tiered REMICs ...........................................................100
Title V ..................................................................95
Title VIII ...............................................................95
Trust Fund .............................................................1, 6
Trust Fund Asset ..........................................................6
Trust Fund Assets .........................................................1
Trustee ...................................................................5
UBTI ....................................................................140
Underwriter .............................................................135
VA Loans .................................................................30
Window Period Loans ......................................................93
146
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$569,286,424 (APPROXIMATE)
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
TRUST CERTIFICATES, SERIES 1999-1
PROSPECTUS SUPPLEMENT
DATED FEBRUARY 24, 1999
SALOMON SMITH BARNEY
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 May 25, 1999.
